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US CFTC accuses Energy Transfer Partners and subsidiaries of natural gas market manipulation

The US Commodity Futures Trading Commission (CFTC) has filed a complaint against Energy Transfer Partners and three of its subsidiaries alleging attempted manipulation of the price of physical natural gas at the Houston Ship Channel (HSC) delivery hub during September and November 2005.

The complaint further alleges that the defendants attempted to manipulate the October 2005 and December 2005 HSC monthly index prices of natural gas published by Platts (a division of The McGraw-Hill Companies, Inc) in its Inside FERC's Gas Market Report (Inside FERC). The CFTC is seeking permanent injunctive relief, an award of civil penalties, and other remedial and ancillary relief as is necessary.

The subsidiaries named in the complaint are: Energy Transfer Company (a/k/a La Grange Acquisition, LP) (ETC); Texas; Houston Pipeline Company (HPLC); and ETC Marketing Ltd. (ETC Marketing).

'Although these defendants utilized multiple cash contracts, OTC products and indices in an attempt to manipulate the natural gas market, their efforts did not go undetected. At the end of the day, our professionals were able to gather the evidence that led them to the allegations that are in the complaint,' says CFTC Director of Enforcement Gregory Mocek. 'The free market allows commodity traders to manage price risk, but it does not grant them the right to attempt to manipulate prices of natural gas in interstate commerce. During the last five years, the Commission has filed 28 separate cases that involved attempted manipulation or manipulation in the energy markets.'
The complaint alleges that the defendants used Hurricane Rita as a pretext for their scheme. Specifically, the complaint states that Hurricane Rita made landfall in the Texas and Louisiana Gulf region on September 24, 2005, and demand for natural gas in Houston dropped as residents fled the hurricane. Anticipating this occurrence, the defendants allegedly devised a four-step plan to take advantage of - and financially benefit from - Hurricane Rita's impact.

As alleged, the first step in the defendants' plan was to build their short position in the October 2005 HSC financial basis swap. A basis swap is a swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date. In this instance, the two legs of the swap are the monthly HSC index price published by Inside FERC and the final settlement price of the Henry Hub futures contract traded on the New York Mercantile Exchange (NYMEX). As a short, the defendants were obligated to pay the longs the HSC index price; thus they benefited from a lower HSC index price.

Second, in the days just before and after Hurricane Rita, the defendants allegedly built up a huge inventory of physical gas with the intent to deliver that gas to HSC, despite the lack of demand in the Houston area.

Third, on September 28, 2005, the defendants sold a vast quantity of natural gas for delivery during October 2005 at HSC with the intent to push down, or cap, the price of physical natural gas at HSC. They purportedly made most of these sales on the IntercontinentalExchange (ICE). In fact, the defendants represented 96 percent by volume of all the trades that took place that day on ICE in the HSC contract.

The fourth and final step in the defendants' plan allegedly occurred when they reported the September 28, 2005, sales to Platts with the intent and belief that Platts would use these transactions in calculating the October Inside FERC monthly price index at HSC - presumably at lower or stabilized prices to the benefit of the defendants' short swaps positions.

The complaint further alleges that the defendants attempted to manipulate the price for November 2005 physical natural gas at HSC and attempted to manipulate the December Inside FERC monthly index price. Defendants purportedly repeated the same course of action in the November/December 2005 time period as they did during September/October 2005.

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