by Nicole Castle

On July 24, 2013, Baker Hughes, Inc., the owner of the third-largest pressure pumping fleet in the United States, disclosed as part of its filing with the Securities and Exchange Commission that it had received a civil investigative demand (CID) from the Department of Justice (DOJ) on May 30, 2013.  The CID requests information and documents relating to U.S. pressure pumping services for the period from May 29, 2011, through May 30, 2013.  

Baker Hughes stated in its filing that it was “not able to predict what action, if any, might be taken in the future by the DOJ or other governmental authorities as a result of the investigation.”

Pressure pumping services generally refers to the process of pumping water and other materials into a well to break apart rock formations and increase the well’s oil or gas production.   Pressure pumping is the main step in the hydraulic fracturing process, and has in recent years become more heavily used for extracting oil and natural gas from rock formations.

The following day, on July 25, 2013, Halliburton Co., the largest provider of pressure pumping services in the United States., confirmed that it had also received a CID from the DOJ regarding pressure pumping services.  

by Dan Watkiss

In a July 16 order, the Federal Energy Regulatory Commission (FERC) assessed civil penalties of $453 million against a British banking conglomerate (BCL) and four of its power traders for manipulating western electricity markets from from November 2006 to December 2008 in violation of the Federal Power Act (FPA) and Commission regulation 1c.2.  The bank has 30 days to pay its $435 million penalty and disgorge $34.9 million in profits plus interest from its manipulative trades; likewise, the traders have 30 days to pay penalties ranging from $1 million to $15 million each.  The bank announced that it will not pay and instead will contest the finding of market manipulation in federal court.  The penalties are among the highest FERC has ever assessed under the authority Congress conferred on it in 2005 to police market manipulation.

FERC’s Office of Enforcement launched its investigation of BCL in July 2007, culminating in an October 2012 FERC order directing the bank and its traders to show cause why they should not be found guilty of market manipulation and assessed penalties.  Following the investigation, FERC concluded that the bank and traders traded fixed price products not to profit from the relationship between the market fundamentals of supply and demand, but rather to move the daily Index Price in favor of BCL’s long or short financial swap positions at the four most liquid western trading locations:  Mid-Columbia, Palo Verde, North Path 15 and South Path 15. According to FERC’s July 16 order, Enforcement Staff’s investigation unearthed a trove of communications among the BCL’s traders describing the allegedly manipulative scheme and affirming their intent to effectuate it, including so-called “speaking” documents in which traders describe their efforts “to drive price,” “move” the Index and “protect” their swap positions.

As amended to include an anti-manipulation rule modeled on the Securities and Exchange Commission’s Rule 10b-5, the Federal Power Act and FERC’s implementing regulations prohibit an entity from: (1) using a fraudulent device, scheme or artifice to defraud or to engage in a course of business that operates as a fraud or deceit; (2) with the requisite intent; (3) in connection with the purchase, sale or transmission of electric energy subject to the jurisdiction of the Commission.  The Act also empowers FERC to assess a civil penalty of up to $1 million per day, per violation against any person who violates Part II of the FPA (including section 222 of the FPA) or any rule or order thereunder.  As it has in other prosecutions for market manipulation, FERC rejected BCL’s defense that “open market” trading is per se not manipulative.

The July 16 order is noteworthy not only for the amount of penalties FERC assessed, but also for the procedural history of the BCL investigation.  The bank and traders chose to forego their right to an evidentiary hearing before a FERC judge and instead had the Office of Enforcement’s proposed findings of manipulation submitted directly to the Commission for its determination.  The bank’s and traders’ claims that the statute of limitations had run or that Enforcement Staff was equitably estopped from making its allegations were not successful in convincing the government to drop the charges against them.

FERC must now seek to enforce its decision and collect the penalties and disgorgement in federal court.

by Megan Morley

White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.

by Frank Schoneveld

In the last six months, China’s antitrust enforcement agencies have signed five Memorandums of Cooperation with antitrust authorities in the United States, European Union, South Korea, Australia and Brazil. During this same period, Chinese antitrust enforcement agencies have substantially increased their personnel resources.  So far, in 2012 more than 10 cartel investigations have been opened by China’s antitrust enforcement agencies, resulting in fines of millions of dollars in four cases in the last four months alone.  (In the previous three years there had been only three cartel cases with total reported fines of less than US$1 million).

Why all of this activity?  The implications seem clear, and it is not just a matter of reading the tea leaves (so to speak): the Chinese antitrust enforcement agencies are clearly gearing up to implement an even more aggressive enforcement agenda that will now include international cartels that affect China. As a Director of China’s antitrust enforcement agency – the National Development and Reform Commission (NDRC) – stated in a speech on November 2, 2012: "We will increase our anti-price monopoly enforcement capability and strive to investigate and penalize a number of large cases that are influential domestically and internationally". Senior Chinese antitrust officials have privately confirmed that they were planning to execute on this agenda as soon as the new Politburo was in place.  Now that this has occurred, we can expect to see a significant uptick in the number of cartel investigations and prosecutions in China, which can subject offenders to fines of up to 10 percent of their annual revenues and confiscation of illegal gains. The "priority" industries reportedly targeted for scrutiny include energy, insurance, motor vehicles, travel and the internet.

The risks associated with the enforcement agencies more aggressive enforcement agenda are compounded by the fact that companies will now be subjected to heightened risk of follow-on private class actions in China.  In particular, the Court rules now make it easier for private plaintiffs to commence class actions in Chinese courts and the Supreme People’s Court recently held that once a cartel agreement has been found to exist, the burden of proof shifts to the defendant to prove that the agreement did not result in any restriction of competition.

These developments demonstrate that corporations active in China need to ramp up their antitrust compliance efforts without delay to reduce the risk of being targeted for investigation and serious financial exposure. As a first step, conducting an antitrust compliance audit is advisable to assess potential risk areas and, where appropriate, to position the company to take advantage of the Chinese enforcement agencies’ leniency application procedures.  

by Dan Watkiss and William Friedman

“No showing of the respondent’s intent or mindset is necessary to show a violation of [18 CFR § 35.41(b)] has occurred,” explained a divided (4-1) Federal Energy Regulatory Commission (FERC) last week in an order suspending for six-months the authority of J.P. Morgan Ventures Energy (JPM) to sell power at market-based rates (MBR).  FERC did so based on its findings that JPM had submitted inaccurate information and omitted material information in three filings with the Commission. Ironically, the section 35.41(b) violation that cost JPM its MBR authority arose in connection with JPM’s alleged resistance to discovery, and not in connection with the underlying California ISO referral to FERC enforcement staff of suspicions that JPM may have manipulated the California power markets.

This decision should serve as a cautionary tale: Liability for misrepresentations to FERC or its authorized power market operators can be strict — context doesn’t matter — and can result in forfeiture of MBR authority in addition to monetary penalties.  The FERC majority justified its strict enforcement of section 35.41(b) on the ground that an accurate and complete flow of information is essential to the operation of the Commission’s MBR program.

FERC Commissioner Le Fleur’s dissent accepted JPM’s argument that an alleged violation of section 35.41(b) in discovery associated with litigation over a suspected violation of market rules should not be decided independently of a merits decision on the underlying allegation of a market rules violation.  She worried that the majority decision could have the unintended consequence of discouraging targets from asserting legitimate defenses in enforcement actions.

Section 35.41 of FERC’s rules implementing the Federal Power Act directs that a seller authorized (as was respondent JPM) to sell at MBR “must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission [or] Commission-approved [market monitors] . . . , unless Seller exercises due diligence to prevent such occurrences.”

In a complicated back-and-forth, the California ISO suspected JPM of market manipulation, the ISO referred its suspicion to FERC Office of Enforcement, and FERC Enforcement, with notice to JPM, directed the ISO to continue its investigation while FERC began its own. JPM, on advice of counsel, did not cooperate fully in the investigation because it alleged that the ISO was not authorized to pursue the investigation once it had been referred to FERC. But in two emails and one letter, FERC enforcement staff told JPM that was wrong; FERC apparently had authorized the ISO’s further investigation of JPM.  JPM’s subsequent filing of pleadings with FERC either denying or failing to acknowledge that it had been notified that FERC approved the ISO’s further investigation was therefore deemed to inaccurate and to withheld material information in violation of § 35.41(b).

Notably, there is a due diligence exculpation from § 35.41(b).  JPM defended on the ground that it had hired experienced outside counsel to advise it in connection with the ISO and the FERC submissions found to be false and omitting material information. But FERC ruled that retaining experienced and competent lawyers is not enough; there must be proof that the respondent and its lawyers vigorously sought to ensure that all representations to the commission and its surrogates (RTOs, ISOs and other approved market operators) were accurate and did not omit material information.

Recognizing that its ruling has consequences for innocent JPM counterparties, FERC deferred the MBR suspension until April of next year.  Once the suspension takes effect, JPM can schedule its transactions without a price or at a zero or price-taker price.

by Jon B. Dubrow and Shauna A. Barnes

Recently published reports of land acquisition activities between Chesapeake Energy and EnCana senior executives will likely expose those companies to a Department of Justice (DOJ) antitrust investigation and challenge, as well as, if accurate, civil antitrust claims.  This matter highlights the risks that energy companies face when discussing lease arrangements with their competitors. 

In February 2012, DOJ settled its first challenge to a bidding agreement for mineral rights, alleging that agreements between Gunneson Energy Corporation and SGI Interests to bid jointly for government mineral leases were anticompetitive.  In a previous post, we explained the potential issues and pitfalls related to joint bidding for oil and gas properties.  We suggested various factors that companies can use to assess, or manage, their antitrust exposure. 

On June 25, 2012, Reuters published a special report indicating that Chesapeake and EnCana agreed to suppress bids for mineral rights at public and private land auctions.  Citing dozens of highly inflammatory emails, the article purports to detail how Chesapeake’s CEO, Aubrey McClendon, and other senior executives at Chesapeake and EnCana discussed how to avoid creating a bidding price war in acquiring drilling rights for Northern Michigan properties. 

According to Reuters, throughout 2010, EnCana and Chesapeake were the leading buyers in Michigan and they aggressively competed to acquire properties for hydraulic fracturing (fracing) operations.  During a May 2010 land auction, they paid approximately $1,413 per acre.  Following the auction, private landowners sought competing bids, leading to a bidding war resulting in offers of more than $3,000 per acre.

Reuters indicates that Chesapeake and EnCana discussed via email entering into a formal venture, including some areas of mutual interest that would allow the parties to share in the risks and rewards of developing properties.  However, they did not enter into any venture.  Instead, they purportedly discussed in emails ways, as independent bidders, to refrain from bidding up land prices, and to allocate various properties between themselves.  These emails were followed by significant price reductions in the offers made by Chesapeake and EnCana. 

The Chesapeake-EnCana situation, following quickly on the heels of the DOJ’s joint bidding challenge earlier this year, serves as a reminder that companies in the oil and gas industry must exercise care in situations where they may want to work with potentially competing bidders.  In the oil and gas industry, firms frequently work together to acquire and develop properties, and that can often be lawfully accomplished through a legitimate collaboration.  Firms, and their executives, may often have opportunities to discuss property acquisition in the context of a legitimate, integrated venture, including with firms that might otherwise be competitors.  However, while some joint activities may be permissible, other conduct may create antitrust liability.  Companies, and their personnel interacting with potentially competing land purchasers, need to be aware of the conditions under which a joint bid is likely to pass antitrust review, as well as when the proposed activity would likely be viewed as a simple market allocation or bid-rigging conspiracy.  An individual may believe, based on prior collaborative activities, that he or she is discussing a legitimate topic without realizing that the contemplated conduct is creating substantial legal exposure in the present circumstances. 

As these cases demonstrate, it is important for companies to be sensitive to the antitrust issues involved in coordinating bidding activities with competitors.  In some cases, working jointly on property acquisitions can be accomplished lawfully, but if done improperly it can create substantial risks.  The fact that there have been two instances arising this year in which energy companies have apparently engaged in activities creating antitrust issues indicates that companies operating in this field may not be properly sensitized to the antitrust issues.

by Elizabeth P. Philpott

The U.S. Federal Energy Regulatory Commission (FERC) recently approved with conditions the North American Electric Reliability Corporation’s (NERC) petition proposing the use of the “Find, Fix, Track and Report” (FFT) to report possible lesser-risk violations of Reliability Standards.  FERC determined that the FFT initiative would more efficiently process lesser-risk violations and promote reliability because it streamlines the manner NERC reports minor violations and allows NERC to focus its resources on issues that pose more serious risks to reliability.

NERC’s petition proposed three tracks to address possible violations: (1) a Notice of Penalty; (2) an FFT information filing; or (3) a Dismissal. Unlike a Notice of Penalty, which deals with moderate to substantial reliability risks and can result in fines, the FFT process uses informational filings to report possible lesser-risk violations, such administrative, documentation and certain maintenance or testing program implementation failures. 

FERC approved NERC’s FFT initiative subject to the following conditions:

  • Only minimal risk possible violations are eligible;
  • Officer of entity that receives FFT treatment must certify that its statement of remediation is true and correct; and
  • NERC’s monthly FFT informational filings must publicly identify entities receiving FFT treatment unless the disclosure relates to a cybersecurity incident or would jeopardize the security of the Bulk-Power System.

FERC will also continue to monitor the FFT initiative through surveys to determine if the initiative is working and whether it needs improvement.  Additionally, FERC Chairman Jon Wellinghoff reiterated that compliance, not penalties, is his main goal and he has a concern that the FFT initiative may have an adverse impact on self-reporting. Accordingly, NERC is required to include an analysis of the impact that the FFT initiative has on self-reporting in a report due to FERC. 

Welcome to McDermott’s Energy Business Law Blog.  Our objective in this forum is to provide our readers with insights into the evolving regulatory, business, tax and legal issues affecting the U.S. and international energy and commodities markets.  Contributions to this blog will be a collective effort of lawyers and professional staff that are part of McDermott’s broad-based energy practice, with ten U.S. and seven European offices, and a strategic alliance in China.  We will bring to bear our experience across the global energy sector, which spans exploration and production, oil, gas and refined products pipelines, storage and processing facilities, liquefied natural gas, refining and petrochemicals, electric power generation and transmission, renewable and alternative energy (including wind, solar, biofuels and others), trading and regulatory, carbon and emissions, metals and agriculture. 

We hope you find our energy blog to be an informative resource.  Please feel free to provide us any feedback on how we might improve our offerings.

Blake H. Winburne
Global Head, Energy Advisory Practice

by Elizabeth Philpott

Fraud and market manipulation, serious violations of the reliability standards, anticompetitive conduct, and conduct that threatens the transparency of regulated markets will continue to be the focus of FERC investigations and enforcement actions in 2012 according to the 2011 Annual Report on Enforcement.

The 2011 Report, issued November 17, 2011, describes the agency’s efforts in fiscal year (FY) 2011 to make its investigations more transparent through public notices of alleged violations and consistent implementation of penalty guidelines in settlements and adjudications.

The Enforcement Office (the Office) received 107 self-reports in FY 2011, up from 93 in FY 2010.  In its 2010 Report the Office predicted that the leniency afforded to self reporters by the penalty guidelines would drive this increase.  Enforcement staff closed 54 self-reports in 2011 after an initial review; 53 self-reports remain open.  These self-reports came from a variety of market participants — regional transmission organizations (RTO) and independent system operators (ISO), natural gas companies, electric utilities and marketers.  Most self-reports involved violations of tariff provisions, particularly open-access requirements.  Other infractions involved filing requirements, behavioral rule and conduct violations, and natural gas pipeline shipper restrictions.

The 2011 Report provides insight into the kinds of findings that will persuade the Office not to pursue enforcement actions against self-reporters.  Those findings include: 

  • the violation caused no harm to markets or parties or was isolated, inadvertent or unlikely to reoccur;
  • the self-reporter took prompt remedial action or instituted measures to ensure future compliance;
  • the self-reporter already paid penalties, refunds, or voluntarily disgorged profits; and
  • the self-reporter had an adequate compliance program in place.

Enforcement staff opened slightly fewer non-self-reported investigations in FY 2011 (12 investigations and two inquiries) than it did in FY 2010 (15 investigations).  The 2011 investigations were instigated on referrals from RTO/ISO market monitoring units, market oversight committees and program offices, and calls to the Office of Enforcement Hotline.  While most investigations addressed alleged tariff violations, others targeted suspected market manipulation, false statements to FERC, hydropower license violations and standards of conduct violations.

Enforcement staff closed slightly more investigations in FY 2011 (19 investigations) than it did in FY 2010 (16 investigations and one inquiry).  Nine of the 2011 investigations ended in settlements and five ended with no enforcement action.  Factors persuading the Office not to pursue enforcement even when the investigation found a violation included finding the violator received no economic gain or caused no economic harm, and finding the violator committed to implement improved compliance and training programs.

by Thomas Morgan

European Union (EU) Regulation 1227/2011 on wholesale energy market integrity and transparency (REMIT), which came into force on December 28, regulates at an EU-level, the wholesale energy markets.  REMIT seeks to detect and prevent market abuse (or more specifically, market manipulation and insider trading) in the wholesale energy sector.  This is in contrast to the existing European market abuse legislation which applied, almost exclusively, to financial instruments admitted to trade on regulated markets.

REMIT applies to wholesale energy products (WEPs):

  • contracts for the supply of electricity or natural gas delivered in the EU;
  • contracts relating to the transport of electricity or natural gas within the EU; and
  • derivatives of those contracts;

irrespective of where or how they are traded, but does not apply if the consumption capacity of the gas or electricity is less than 600 GWh per year.

REMIT prohibits the manipulation of WEP transactions, and requires energy market participants to publish inside information relating to WEPs and submit details of energy transactions to the European energy regulatory authority, the Agency for the Cooperation of Energy Regulators (ACER).  REMIT also requires ACER, working with National Regulatory Authorities (NRA), to monitor wholesale energy markets and requires energy market participants to register with the NRAs.  Member States, in turn, are charged with ensuring that NRAs have the necessary investigatory powers, which shall be exercised in a proportionate manner.

REMIT extends securities market concepts to the energy sector by prohibiting manipulative transactions and the dissemination of misleading information, and preventing insiders from benefiting from access to information relating to power, natural gas and commodity derivatives markets.  Compliance with REMIT will require market participants to introduce or review information barriers between operational and trading activities and ensure timely public disclosure of relevant information.

Rules are to be promulgated requiring energy traders to report transactions to ACER.  ACER, in turn, will be responsible for monitoring and analysing all trades to verify that the rules are followed, and will instruct NRAs to investigate any incidents of market abuse.

Each NRA must establish a register of market participants.  This,is central to the goal of increased market transparency.  Participants will be required to register with one authority only: in the Member State in which it was established or is resident (if neither applies to the participant, then it must register in a Member State where it is active).  The European Commission will adopt implementing acts defining the scope of trade reporting and registration obligations.  Member States must establish registries of electricity and natural gas traders three months after the adoption of the implementing acts, with transaction reporting requirements coming into force three months later.