On August 5, 2013, the Federal Energy Regulation Commission issued an Order to Show Cause and Notice of Proposed Penalty against BP America, Inc., BP Corporation North America, Inc., BP America Production Company, and BP Energy Company (collectively BP). The Order directs BP to show cause why it should not be assessed a $28 million civil penalty and disgorge $800,000 in unjust profits. The Order to Show Cause concerns allegations that BP violated the Commission’s Anti-Manipulation Rule, 18 C.F.R. §1c.1 and section 4A of the Natural Gas Act. The Order to Show Cause follows the Commission’s Notice of Alleged Violation against BP, issued July 28, 2011.

The Commission’s Order to Show Cause references an attached Report and Recommendation by FERC Enforcement Staff alleging that BP manipulated the next-day fixed price gas market at Houston Ship Channel (HSC) from mid-September 2008 through November 30, 2008. Enforcement Staff’s report alleges that BP’s Southeast Gas Trading engaged in a trading strategy to benefit a pre-existing spread position that included short index swaps at HSC and long index swaps at Henry Hub. Due to the sharp decline in HSC gas prices in the wake of Hurricane Ike, BP’s spread position stood to make substantial profits if the spread between the HSC and Henry Hub remained consistently wide through the end of September. To ensure a profitable spread position, BP’s trading desk allegedly engaged in a trading strategy to suppress gas prices in the HSC market by selling next-day, fixed price gas. When the strategy proved successful, BP increased its HSC/Henry Hub spread positions for October and November 2008. During this time, BP also increased its purchases of physical gas at the nearby Katy hub to sell in the daily HSC market, with the alleged intent of suppressing the HSC prices. Enforcement Staff concluded that BP’s sales at HSC were not in line with supply and demand conditions but were rather executed as part of a fraudulent scheme to manipulate the spread between the HSC and Henry Hub Gas indices. The Order to Show Cause does not propose penalties against any individual traders.

Enforcement Staff discovered the alleged manipulation after receiving a recorded telephone phone call between a junior trader, Clayton Luskie, and another trader, Graydn Comfort, outlining the details of the trading practices. The recorded call was ultimately turned over to BP’s Internal Compliance Monitor, who in turn informed the Commodities Futures Trading Commission (CFTC). The CFTC subsequently notified Enforcement Staff. FERC released a copy of the recorded phone call and it is available here Enforcement Staff commented that, despite the report to regulatory authorities, BP’s Compliance did not conduct a meaningful analysis of trading behavior, nor did it submit a detailed report concerning the behavior.

In evaluating culpability under the Commission’s Penalty Guidelines, Enforcement Staff’s report considered the following:

1. BP has a prior history within five years of an adjudication by the CFTC and the Department of Justice concerning manipulation of the market for TET propane between 2003 and 2004;

2. BP violated a CFTC order prohibiting BP from “manipulating the price of any commodity in interstate commerce.”

3. BP did not engage in obstruction of justice.

4. BP self-reported the violation through a referral to the CFTC, who in turn, informed Enforcement Staff.

5. BP fully cooperated with the investigation.

6. BP had an effective compliance program but did not apply its compliance program and ethics program with sufficient seriousness and failed to conduct a credible internal inquiry after a junior trader brought the matter to the attention of Senior Management.

BP has 30 days to reply to the Order to Show Cause, and Enforcement Staff has an additional 30 days to answer BP’s response. BP has previously indicated that Enforcement is improperly interpreting the recorded call and that it will fight the charges in the Order to Show Cause.

Following the responses by BP and Enforcement Staff, the Commission will issue a further order assessing a penalty if the record is sufficient. In contrast to the pending Barclays market manipulation proceeding, BP does not have the option under the Natural Gas Act to elect an immediate assessment of a penalty without formal administrative adjudication.