October Surprise: FERC Seeks Record Market Manipulation Fine Against Barclays

November 2, 2012

For Barclays Bank, Halloween wasn't much fun this year. But perhaps a treat has been served up for electricity utilities, consumers, and many others who depend upon properly functioning electricity markets.

In an order issued on October 31, the Federal Energy Regulatory Commission ("FERC") proposed to fine Barclays Bank a record $435 million, to disgorge $34.5 million in profits, and to fine four individual Western energy traders a total of $18 million, for manipulation of the Western electricity markets alleged to have occurred between 2006 and 2008. The proposed fines are based upon an extensive report compiled by FERC's Office of Enforcement ("OE"). The OE Report alleges that Barclays' power traders engaged in a coordinated strategy to manipulate prices for physical power at four Western market hubs, including the Mid-Columbia Hub here in the Pacific Northwest, in order to benefit Barclays' positions in the financial swaps market. The Office of Enforcement report estimates that Barclays' manipulations caused approximately $139.5 million in losses to other market participants.

As with much litigation in the computer age, the OE Report is built on a foundation of e-mails and instant messages compiled in Barclays' computers. Like the infamous Enron trader tapes, these messages often contain profanity-laced boasting about the traders' success in manipulating the market. For example, the OE Report quotes an instant message sent by Barclays trader Ryan Smith to another trader on November 3, 2006, in which Smith states: "I totally f****** with the Palo [Verde hub] market today . . . was fun. need to do that more often . . . I just started lifting the p*** out of the palo."

And, similar to the Enron traders, the OE Report contains evidence the Barclays traders recognized (at least at times) they should move incriminating conversations to non-recorded lines. Another instant message quoted in the Report, between Ryan Smith and an employee of Mirant, contains the following exchange:
"[Mirant employee]: why you buy index if its gonna tank?
Smith: my lil secret. . . . tell you about it later . . . call me on the bat line."

This order, along with similar actions in the last few months against JP Morgan Chase and Deutchse Bank (see our blog post of September 28), suggests that FERC is taking its role as enforcer of market rules seriously, an element notably absent during the Western market meltdown of 2000-01. FERC's recent actions also demonstrate the importance of the new authority it received in the Energy Policy Act of 2005 to combat market manipulation and the anti-manipulation rules adopted by FERC in the aftermath of the 2000-01 debacle.

But the news is not all good. The Barclays schemes point up the importance of resolving the still-disputed jurisdictional boundaries between FERC and the CFTC where physical and financially-based energy transactions intersect. That is, the alleged Barclays schemes involved manipulation of the physical energy markets in the West with the aim of benefiting Barclays' position in the financial markets, primarily in fixed-for-floating financial hedges tied to price indices at the Western power trading hubs. The jurisdictional dispute between FERC and CFTC is even now being played out in litigation before the D.C. Circuit.

If you have any questions about the Barclays order, FERC enforcement matters, or other matters related to the utility industry or FERC, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in FERC and BPA matters, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.