Prohibition Against Market Manipulation

Energy market participants are subject to numerous anti-manipulation regulations. Federal regulators (FERC, FTC, or CFTC) can impose civil penalties of up to $1 million per violation for every day the violation occurs. They can order disgorgement of profits and revoke a company’s market-based rate authority. The courts can, in some circumstances, bar individuals from serving as an officer or director of an electric utility or natural gas company, as well as prohibiting such individuals from engaging in the business of buying or selling energy commodities or transmission services subject to FERC jurisdiction.

Kolobara Law Firm draws on its significant in-house experience dealing with market manipulation matters to assist our clients with training and implementing the best industry practices to prevent market manipulation. When it comes to anti-manipulation issues, our emphasis is on prevention.

The Energy Policy Act of 2005 (“EPAct”) significantly increased FERC’s authority to police energy markets, and the agency has demonstrated their vigorous exercise of these new enforcement powers. The Energy Policy Act of 2005 expanded FERC’s authority to police energy cash markets. In 2006, FERC adopted final “anti-manipulation” rules providing new authority to punish fraud in the electricity and natural gas markets (Order No. 670). In combination with the increased penalties adopted in the EPAct, the rules were intended to provide an incentive for energy market participants to ensure that they are in full compliance with FERC’s rules and regulations, and that they implement appropriate measures to ensure ongoing compliance.

FERC’s enforcement focus now extends beyond the traditional jurisdictional entities, and includes any entity that may be in violation of the sweeping new anti-manipulation rules. Thus, in addition to already known prohibited trading practices—that included, without limitation, wash trades, physical and economic withholding, causing artificial congestion, selling non-firm product as firm, megawatt laundering, double-selling ancillary services, cornering the market, squeezes, concentrated trading, and spoofing—FERC now has the authority to scrutinize every energy trade, and every marketing or hedging strategy.

In addition, the Commodity Exchange Act (“CEA”) grants the CFTC the exclusive jurisdiction to regulate futures markets. The CFTC has the authority to police market manipulation and fraud in physical commodities markets, including energy products (this authority is in addition to anti-manipulation authority granted to the CFTC under the Dodd-Frank Act). Also, on November 4, 2009, the FTC started enforcing a new Petroleum Market Manipulation Rules pursuant to authority granted to the FTC by the Energy Independence and Security Act of 2007. The FTC’s jurisdiction extends to crude oil, gasoline, or petroleum distillates.

Kolobara Law Firm develops anti-manipulation training and implementation programs designed to assist the front and middle office personnel with minimizing the exposure to inadvertent violation of anti-manipulation regulations. Our training programs are designed around a specific operational and geographic footprint of our clients. We help energy market participants identify and manage a jurisdictional overlap in the enforcement of market manipulation rules. Kolobara Law Firm believes that energy markets depend on trust and accuracy of market information and transparency among its participants. The enhanced penalties for violations of the various anti-manipulation regulations provide sufficient incentive for all market participants to take the steps necessary to ensure compliance with the rules and to properly monitor and modify such compliance rules accordingly.
If the enhanced penalties are not convincing enough, individual traders have been indicted on felony charges and courts have sentenced some energy traders to multi-year prison terms. Additionally, the absence of a robust compliance program is certain to be used against a company in any enforcement proceeding. The importance of a robust program also is amplified by the fact that, where one is lacking, regulators will develop a compliance program for energy market participants. Most likely, a program imposed by regulators is not going to be one that the company would have wanted if it had addressed its compliance issues and implemented its own, customized compliance program.

Finally, the reputational risk and potential market cap impact of an alleged misconduct in the energy trading arena cannot be overstated. The energy market landscape is littered with corporate headstones belonging to those who did not adequately understand, or chose to ignore, the rules of the market.

Unfortunately, the rules are not always very clear. Sometimes they are contradicting, vague, or counterintuitive. Nevertheless, they must be implemented and followed. Not just because of the sanctions or fines, but because the markets cannot function properly unless all participants play by the same rules and maintain integrity of the marketplace. Kolobara Law Firm understands and shares the importance of preventing market manipulation with our clients and we stand ready to assist our clients in meeting that goal.
Energy Trading Law
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