BP Am., Inc. v. Fed. Energy Regulatory Comm'n
| Docket Number | 16-60604 consolidated with No. 21-60083 |
| Decision Date | 20 October 2022 |
| Citation | 52 F.4th 204 |
| Parties | BP AMERICA, INCORPORATED ; BP Corporation North America, Incorporated; BP America Production Company ; BP Energy Company, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Mark Richard Haskell, Esq., Brett A. Snyder, Blank Rome, L.L.P., Washington, DC, for Petitioners.
Anand Viswanathan, Robert Harris Solomon, Esq., Solicitor, Federal Energy Regulatory Commission, Washington, DC, for Respondent.
Before Jolly, Willett, and Oldham, Circuit Judges.
Hurricane Ike made landfall over southeastern Texas on September 13, 2008. Although more than a decade has elapsed since the hurricane's passage, there yet remains some legal rubble for this court to clear.
The Federal Energy Regulatory Commission (FERC) has brought this enforcement action against BP, alleging the company capitalized on the hurricane-induced chaos in commodities markets by devising a scheme to manipulate the market for natural gas.1 Now, years later, BP seeks judicial review of FERC's order finding that BP engaged in market manipulation and imposing a $20 million civil penalty.
BP makes a bevy of arguments as to why FERC's order should be overturned, but all are meritless save one. Contrary to FERC's position, we hold that the Commission has jurisdiction only over transactions in interstate natural gas directly regulated by the Natural Gas Act (NGA). Specifically, we reject FERC's broader theory that its authority to address market manipulation extends to any natural gas transaction which affects the price of a transaction under the NGA. Otherwise, however, we uphold the Commission's order. Nevertheless, because FERC predicated its penalty assessment on its erroneous position that it had jurisdiction over all (and not just some) of BP's transactions, we must remand for reassessment of the penalty in the light of our jurisdictional holding. Thus, we GRANT in part and DENY in part BP's petition for review and REMAND to the agency for reassessment of the penalty.
To understand BP's scheme, some background on the natural gas industry is necessary. In addition to producing and selling their own oil and gas, participants in the natural gas market are permitted to engage in a variety of trades. In general, traders may make either "physical" or "financial" transactions. Physical trading involves the purchase or sale of actual natural gas, which must then be physically delivered from one party to another. Financial trades, on the other hand, are more in the nature of bets on the future price of gas; a financial transaction can be settled in cash without the need for any natural gas to actually change hands.
Shortly before Hurricane Ike arrived, traders on BP's Texas team had amassed a significant financial position known as a "spread." The value of this spread position was determined by the difference in natural gas prices at Henry Hub, a major natural gas market in Louisiana frequently used as a national benchmark, and Houston Ship Channel (HSC), a gas hub in Houston. When gas prices at Henry Hub were higher than those at HSC, BP's financial position became more valuable; the greater the difference, the more money BP stood to make.
When the hurricane hit, natural gas prices at HSC plummeted, causing BP to realize a sizeable profit. And amidst the tumult in the market, BP spied an opportunity; the company would make millions more if the price differential between HSC and Henry Hub persisted after the hurricane became history. According to FERC, BP capitalized on this opportunity by engaging in a glut of physical gas sales at HSC, intending to depress the prices on which the value of its financial position depended. BP's task was eased by the fact that it did not need to cause a sudden spike or dip in prices—a change which would have been easily detected by regulators—but only needed to delay the market's return to normal following the hurricane.
Central to BP's plan was the Houston Pipeline (HPL). The HPL connects HSC to Katy, another natural gas hub approximately thirty miles away. BP had purchased the right to transport a certain amount of natural gas on the HPL per day in order to satisfy its various business needs, but the pipeline was generally underutilized. BP thus allowed its Texas trading desk to engage in arbitrage using the HPL; when there was a price difference between Katy and HSC, traders could transport gas accordingly between the two to make a profit while incurring only minor transportation costs. According to FERC, however, BP traders effectively abandoned their arbitrage strategy after the hurricane, instead using the HPL to transport significant quantities of natural gas from Katy to HSC, thereby lowering prices at the latter. Although BP incurred some losses in its physical trading by buying at Katy and selling at HSC regardless of whether it was economical to do so, these losses were dwarfed by the increase in value to BP's financial position. Access to transportation capacity on the HPL was therefore essential to the BP traders' scheme.2
The Texas trading desk's machinations went undetected until November 5, 2008. On that day, Clayton Luskie, a junior member of the Texas team, was attending a BP assessment program designed to determine whether aspiring traders were qualified for advancement in the company. While there, Luskie described the team's trading strategy to a member of BP's senior management, who became concerned that what Luskie had described "could be perceived as market manipulation." Alarmed, Luskie called Gradyn Comfort, a senior member of the Texas team and primary trader in charge of transactions at Katy and HSC. Because Luskie called Comfort at his trading desk, BP recorded the call, which is laid out in pertinent part below:
Despite claiming that that he "need[ed] to run," Luskie called Comfort back on Comfort's unrecorded cell phone less than one minute later. Comfort did not answer but returned the call two minutes later. Comfort and Luskie then had two unrecorded cell phone conversations lasting nine and ten minutes, respectively. Neither party was able to recall with specificity what was discussed during those phone conversations. In the last such conversation, however, Luskie and Comfort decided to report the initial, recorded phone conversation to BP's internal compliance team, which led FERC to initiate an investigation and which culminated in this enforcement proceeding.3
Following several years of discovery and administrative proceedings, FERC issued its decision. See BP Am., Inc. , 156 FERC 61,031 (2016). In its decision, the Commission compared BP's natural gas trades during the Investigative Period—from September 18 to November 30, 2008—to its trading during the prior portion of 2008. FERC found that, following Hurricane Ike, BP changed its trading behavior at HSC by selling more natural gas, selling earlier in the day, selling at lower prices, and transporting more gas from Katy to HSC even when doing so was unprofitable. Viewing these changes together with the phone calls already discussed, FERC concluded that BP had engaged in market manipulation and ordered BP to pay a civil penalty of approximately $20 million. BP petitioned this court for review of FERC's order but agreed to stay the case pending the Commission's decision on BP's request for rehearing. In December 2020, FERC issued its order on rehearing, which modified portions of FERC's jurisdictional holdings but otherwise upheld its previous decision and penalty. See BP Am., Inc. , 173 FERC 61,239 (2020). BP brought another petition for review, which was consolidated with the previous case. These petitions are now properly before us and are ripe for our review.4
We review FERC's order under the standards established by the Administrative Procedure Act, 5 U.S.C. § 706. We are required to "hold unlawful and set aside agency action" which is "in excess of statutory jurisdiction" or "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Id.
The agency's factual findings and conclusions will be upheld unless they are unsupported by substantial evidence. Id. ; see also 15 U.S.C. § 717r(b). Substantial evidence...
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