Fifth Circuit Clarifies FERC's Authority to Address Natural Gas Market Manipulation

Last week, in the first appellate decision on the merits of a natural gas manipulation case under Section 4A of the Natural Gas Act ("NGA"), the Fifth Circuit upheld FERC's determination that BP Energy (and affiliates) unlawfully manipulated the natural gas market. But it concluded that FERC has jurisdiction to address manipulation only in relation to interstate natural gas transactions, and the agency exceeded its authority by also claiming jurisdiction over intrastate transactions. Accordingly, the court remanded for FERC to recalculate its $20 million penalty. See BP Am., Inc. v. FERC, No. 16-60604, – F.4th – (Slip Op. Oct. 20, 2022).

The litigation arose out of BP's activities after Hurricane Ike in 2008. FERC found that BP traders worked to keep natural gas prices in Houston low after the hurricane caused them to plunge, in violation of the NGA and the corresponding anti-manipulation rule. BP argued that FERC exceeded its jurisdiction, erred in finding market manipulation and in its penalty assessment, and violated the Administrative Procedure Act ("APA").

The Fifth Circuit agreed with BP that FERC exceeded its jurisdiction by considering intrastate transactions in the manipulation finding. Section 4A prohibits manipulation "in connection with" transactions subject to FERC's jurisdiction. 15 U.S.C. § 717c‑1. The court, based on longstanding precedent that only interstate transactions are subject to FERC's jurisdiction, rejected FERC's attempt to use the "in connection with" language to claim authority over intrastate transactions that may affect prices. It emphasized that jurisdiction cannot be expanded through "a subtle reading of an otherwise non-jurisdictional provision." 

The Fifth Circuit otherwise ruled for FERC. The court explained that BP's arguments against the overall finding of manipulation "amount[ed] to disagreements with FERC's permissible interpretations of the evidence and reasonable resolution of conflicting expert testimony." It also held that FERC did not err by considering in its penalty determination past settlement agreements, such as an agreement with the Commodity Futures Trading Commission ("CFTC") in which BP promised not to manipulate commodity prices.

Finally, the court determined that FERC did not violate the APA's rule separating agency investigative and prosecuting functions. It upheld FERC orders implementing the rule, which had allowed certain members of FERC's Office of Enforcement to participate in the case's adjudication, because the APA rule "only prohibits individuals from performing both functions in the same case." 

This decision sets an important precedent for FERC and potentially other agencies. The decision underscores that FERC's anti-manipulation rule reaches no broader than the agency's jurisdiction over natural gas activity, i.e., interstate transactions. This holding limits FERC's authority and may aid other litigants facing agency assertions of sweeping jurisdiction. But the decision likewise highlights the challenges facing commodities traders at risk of legal exposure for manipulation. For example, by determining it was appropriate to consider undertakings in prior orders issued by the CFTC, it is a reminder to companies in both spot and derivatives markets that the regulators often take a broader view of their conduct in those related—and often correlated—markets.