FERC Drops Market Manipulation Charges Against National Fuel Marketing, Proposes New Rules on Affiliate Bidding

April 8, 2011

By John Burnes and Paul Korman

On April 7, 2011, the Federal Energy Regulatory Commission (FERC or Commission) approved a settlement between National Fuel Marketing Company, LLC, and its affiliates (NFM) and FERC’s Office of Enforcement (Enforcement) resolving the highly publicized Enforcement investigation of NFM and its participation in the open season on Cheyenne Plains Pipeline Company, LLC (Cheyenne Plains) in 2007. John Burnes and Paul Korman of Van Ness Feldman successfully represented NFM. The settlement with Enforcement drops the allegations of market manipulation.

This settlement completely absolves NFM from Enforcement’s allegations of violations of the Commission’s market manipulation rule (18 C.F.R. § 1c.1) regarding its participation as a bidder in the 2007 Cheyenne Plains open season, and resolves allegations of violations of the Commission’s shipper-must-have-title requirement. NFM agreed to pay a $290,000 civil penalty to resolve the shipper-must-have-title issue without admitting or denying that a violation occurred. This amount pales in comparison to the originally recommended civil penalty of $4.5 million for the alleged violations of the market manipulation rule and the shipper-must-have-title requirement. Since the initiation of Enforcement’s investigation, NFM has vehemently denied any wrongdoing, arguing that its actions were consistent with Commission policy and Cheyenne Plains’ tariff. Two FERC Commissioners agreed with NFM and strongly dissented from a FERC Order to Show Cause issued to NFM in 2009. After almost four years of defending itself against the market manipulation charge, NFM has been exonerated, and this proceeding has now been closed.

BACKGROUND

On March 6, 2007, Cheyenne Plains posted a notice of an open season and on March 13, 2007, NFM, among others, bid for the available capacity. According to Enforcement, shortly after the close of the 2007 Cheyenne Plains open season, the FERC Enforcement Hotline received several calls from other bidders complaining that Commission rules or requirements might have been violated. Enforcement opened investigations into several bidders in the open season including NFM and asserted that several companies had violated section 1c.1 of the Commission’s regulations, which prohibits the manipulation of natural gas markets, because of multiple affiliate bidding during the Cheyenne Plains open season. In January 2009, Tenaska Marketing Ventures, et al, ONEOK Partners, LP, et al, Klabzuba Oil & Gas, FLP, and Jefferson Energy Trading Co., Wizco Inc., and Golden Stone Resources, LLC, all bidders in the open season, agreed to pay civil penalties in the amount of $3,000,000, $4,500,000, $300,000 and $585,000, respectively. Two of those settlements required disgorgement of profits related to the open season.

NFM and Seminole Energy Services, LLC (Seminole), another bidder in the open season, did not settle and on January 15, 2009, a sharply divided Commission by a single vote issued two orders (Show Cause Orders) directing NFM and Seminole to show cause why they did not violate the Commission’s market manipulation rule through the submission of bids by multiple affiliates to obtain pipeline transportation capacity in an open season. The Show Cause Orders were issued over the strong dissents of Commissioners Moeller and Spitzer. In his dissent, Commissioner Moeller concluded that NFM did not have fair notice that multiple affiliate bidding could subsequently be considered as a violation of 18 C.F.R. § 1c.1, and stated that “those who are subject to Commission penalties need to know, in advance, what they must do to avoid a penalty” and this order “violates that principal of fundamental fairness and that is why I dissent.” Commissioner Moeller found “fundamental flaws” with Enforcement’s position and agreed with what NFM told Enforcement from the beginning of the investigation: NFM made bids that were consistent with FERC precedent and were lawful; they did not engage in any fraudulent activities, concealment, or misrepresentation; and they were not aware that Enforcement would attempt to re-determine the legitimacy of the bids after the fact.

In his dissent, Commissioner Spitzer emphasized the need for the Commission to exercise its enforcement authority in a “firm but fair” manner and the need for the Commission to issue “clear” orders, rules, regulations, and policies to ensure a meaningful enforcement program. Commissioner Spitzer determined that over the years the Commission had not been clear and had sent mixed messages to the industry about the propriety of multiple-affiliate bidding. He stated that the Commission should have used these proceedings to first provide guidance regarding multiple-affiliate bidding practices rather than to impose substantial civil penalties for conduct the industry could have reasonably concluded was not unlawful.

The Show Cause Order directed NFM to show cause why NFM should not be found to have violated section 1c.1 of the Commission’s regulations, why they have not violated the Commission’s shipper-must-have-title requirement, why they should not be assessed a $4,500,000 civil penalty, and why they should not be required to disgorge payments received from the other bidders who settled with enforcement for bidding for interstate transportation capacity on the Cheyenne Plains.

On February 17, 2009, NFM responded to the Show Cause Order and requested rehearing of the order. NFM vigorously defended its action including demonstrating that it had contacted Cheyenne Plains prior to submitting its bids to be certain that the bids were in compliance with Cheyenne Plains tariff. NFM also pointed to prior Commission decisions that explicitly approved the same type of bidding activity that NFM engaged in during the Cheyenne Plains open season.[1] With respect to the shipper-must-have-title allegations, NFM relied on the precise words of the Cheyenne Plains tariff which states that the shipper must have either title or “the right to ship” the gas.

SETTLEMENT

Two years after the issuance of the Show Cause Order and over four years after the investigation began, NFM and Enforcement have reached a settlement agreement.[2] The market manipulation claim has been dropped. NFM agreed to pay a $290,000 civil penalty for alleged violations of the Commission’s shipper-must-have-title requirement. NFM neither admits nor denies that a violation occurred. This is the smallest total penalty negotiated since FERC received its million-dollar-a-day civil penalty authority and is over $4 million dollars less than the originally recommended $4,500,000 civil penalty. The amount of the payment is approximately the same as the sum NFM received when parties who settled the Cheyenne Plains bidding allegations in January 2009 disgorged their profits to other shippers. As part of the settlement, NFM agreed to one year of compliance monitoring and agrees to withdraw its request for rehearing so that the Show Cause Order docket can be closed.

PROPOSED RULE

On the same day that the NFM and Seminole Settlement Orders were issued, the Commission issued a Notice of Proposed Rulemaking (NOPR) proposing to revise its regulations governing interstate natural gas pipelines to prohibit multiple affiliates of the same entity from bidding in an open season for pipeline capacity in which the pipeline may allocate capacity on a pro rata basis, unless each affiliate has an independent business reason for submitting a bid. In the NOPR, the Commission is also proposing that if more than one affiliate of the same entity participates in such an open season, then none of those affiliates may release any capacity obtained in that open season pursuant to a pro rata allocation to any affiliate, or otherwise allow any affiliate to obtain the use of the allowed capacity. This NOPR will clarify the Commission’s policy with regard to multiple affiliate bidding moving forward.

IMPLICATIONS OF THE SETTLEMENT

As the dissenting opinions of Commissioners Moeller and Spitzer recognized, the Order to Show Cause issued to NFM and the approvals of the settlements involving other participants in the Cheyenne Plains open season were premised on an interpretation of the market manipulation rule that was at odds with prior Commission precedent. Most importantly, both Commissioners concluded that neither NFM nor the industry had fair notice that multiple affiliate bidding in an open season could later be considered as a violation of 18 C.F.R.§ 1c.1. Enforcement created a new theory of liability that NFM could not have known before bidding in the open season. A fundamental principle of constitutional and administrative law requires that regulated entities must be given a reasonable opportunity to know in advance what is prohibited, so that they can act accordingly. NFM was not given this opportunity and both dissenting Commissioners recognized that the Commission should not impose penalties in the range of millions of dollars for conduct that reasonably could be viewed as consistent with Commission policy.

Commissioner Moeller issued a concurring statement with the NFM and Seminole Settlement Orders stating that his long-time policy has been that “those who are subject to Commission penalties need to know, in advance, what they must do to avoid a penalty.” As a regulatory agency and in the interest of furthering Commissioner Moeller’s policy and the Commission’s oft-stated objective of developing a “firm but fair” enforcement program, the Commission had a duty to clarify its policy with regard to multiple affiliate bidding. With all of the 2007 Cheyenne Plains open season investigations resolved, the Commission can now eliminate the uncertainty resulting from the conflicts among the prior precedent, the settlement with other bidders, and the dropping of the market manipulation claims against NFM and Seminole and clarify the Commission’s policy with regard to multiple affiliate bidding through the NOPR addressing multiple affiliate bidding. Vindication has come at great cost to NFM and Seminole, which have been forced to endure a lengthy and costly administrative process to defend themselves; however, their tenacity and willingness to challenge the findings in the Show Cause Orders has resulted in a positive outcome that will ultimately result in greater clarity of the Commission’s policy on multiple affiliate bidding so that moving forward, regulated entities will know what they must do to avoid civil penalties.


[1] For more than seventeen years the Commission has had an unambiguous policy regarding bidding by affiliates in a pipeline open season. This policy, set forth in Pacific Gas Transmission Co., plainly states that nothing prohibits “separate bids from a parent shipper and its affiliates, so long as each affiliate (which is a separate entity under law) submits one bid.” Pac. Gas Transmission Co., 56 FERC ¶ 61,192 (1991). In Trailblazer Pipeline Co., the Commission was presented with a clear opportunity to change that policy, and it did not do so. Trailblazer Pipeline Co., 101 FERC ¶ 61,405 (2002).

[2] Seminole also reached a settlement agreement whereby all market manipulation charges were dropped, and Seminole agreed to pay a $300,000 civil penalty and disgorge $271,315 in profits for alleged violations of the Commission’s prohibition on Buy/Sell arrangements.

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Van Ness Feldman has experience in all aspects of a federal energy compliance practice, from conducting regulatory compliance reviews, to helping clients develop compliance plans and training programs, to defending clients in FERC audits, investigations and enforcement actions. If you are interested in additional information regarding this settlement, or any other energy-related federal activity, please contact John Burnes, Paul Korman, or any member of the firm's Natural Gas Practice at (202) 298-1800.