The Federal Energy Regulatory Commission (FERC) announced on February 22 that its Office of Enforcement would examine wholesale natural gas and electricity market activity during last week’s extreme cold weather “to determine if any market participants engaged in market manipulation or other violations.” FERC’s brief press release explained that its examination is part of its existing surveillance program for market participant behaviors in the wholesale natural gas and electric markets.
Last week, we anticipated that either FERC, the Commodity Futures Trading Commission (CFTC), or both regulators would investigate the price spikes in the physical and futures markets for natural gas and electricity. On February 12, physical natural gas prices at all trading points in Texas and Oklahoma and on the Gulf Coast experienced price spikes that substantially exceeded their recent patterns or year-over-year tendencies. It is not uncommon for FERC to investigate pronounced instances of price volatility, including those following weather events, to ensure that market participants did not engage in instances of prohibited trading conduct or otherwise take advantage of severe weather in order to further a fraudulent scheme.
FERC’s jurisdiction extends to wholesale sales of natural gas and electricity as well as the transportation and transmission of natural gas and electricity, respectively, in interstate commerce. In connection with its jurisdictional oversight of wholesale and interstate energy markets, FERC’s current examination is likely to analyze and investigate any anomalous trading or transportation activity that might indicate a fraudulent, deceptive, or manipulative scheme or course of conduct.
The CFTC, which has similar rules, is yet to announce any investigations.
FERC’s investigations will almost certainly be nonpublic and preliminary in nature, during which time it can collect documentary evidence and interview witnesses to determine if any of its regulations were violated. Through a cooperative agreement with the CFTC, FERC has not only information from its own market surveillance program, but also information obtained by the CFTC – a fact to which FERC alluded at the end of its press release. To that end, the breadth, depth, and potential scope of FERC’s investigative activity is significant; individuals and companies can be held liable, and companies can be held liable for actions of their employees.
Companies transacting in the wholesale natural gas and electricity market, especially those who engaged in significant activity in the days surrounding February 12, must remain vigilant for and attentive to any outreach by regulators. Potentially affected companies should also assess their compliance programs to ensure they are designed to prevent or timely detect potential regulatory violations, and take immediate steps to rectify and gaps. Affected companies should remain cognizant that FERC looks favorably on self-reporting and cooperation, which can greatly reduce the penalties associated with findings of wrongdoing.