FERC takes preliminary action in two major market manipulation cases

Washington, D.C., July 27, 2007 — The Federal Energy Regulatory Commission (FERC) for the first time used its new enforcement authority to prosecute market manipulation when it issued show cause orders that made preliminary findings of market manipulation and proposed civil penalties totaling $458 million in two investigations involving traders’ unlawful actions in natural gas markets.

FERC’s actions come under both the anti-manipulation authority of the Energy Policy Act of 2005 and its former market manipulation rule.

“Congress granted FERC the authority to prevent manipulation to protect both consumers and the integrity of these markets on which our economy depends,” FERC chairman Joseph T. Kelliher said. “Bad actors in the industry must recognize that manipulation, even in increasingly complex energy markets, can be detected. And when it is proven, they will be punished severely.”

The first case, brought under FERC’s new anti-manipulation rule, involves the Greenwich, Conn.-based hedge fund Amaranth LLC and traders Brian Hunter and Matthew Donohoe. The commission voted unanimously to give Amaranth and the traders 30 days to show why they should not be assessed civil penalties and disgorge profits totaling $291 million for manipulating the price of commission-jurisdictional transactions by trading in the NYMEX Natural Gas Futures Contract in February, March and April 2006.

In the second case, FERC voted unanimously to give Energy Transfer Partners LP (ETP), a Texas-based owner of pipeline assets and a natural gas trading affiliate, 30 days to show that it did not violate the commission’s former market behavior rule by manipulating the wholesale natural gas market at Houston Ship Channel on certain dates in 2003, 2004 and 2005. The Commission is proposing more than $167 million in total penalties and disgorgement of unjust profits.

“These cases are serious. It is alarming to read and hear the instant message and voice recording evidence of improper actions, some of which were authorized by senior managers. The commission is right to propose close to the maximum in penalties for actions that harmed millions of consumers and the natural gas markets they depend on for their energy needs,” Kelliher said.

Both companies’ manipulative actions sought to lower the price of natural gas for the profit of their physical and/or financial derivative positions, FERC said.

“For these two companies, failure to refute these findings will confirm that their actions harmed many wholesale market participants, creating losses that ultimately hurt natural gas customers across the country,” Kelliher added.

And while today’s actions propose serious sanctions against market manipulation, Kelliher said it is important to note that FERC is not opposed to legitimate risk-taking and trading.

FERC’s actions are related to similar actions by the Commodity Futures Trading Commission for violations of its statutes. The two federal agencies cooperated in the two investigations through their Memorandum of Understanding, though their individual actions fall under separate statutes.

For more specifics about the cases, visit FERC’s website here and scroll down the page to find FERC’s explanations of both companies actions.

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