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
Transactions
Risk Management
Compliance