FERC Issues Order Proposing Nearly A Half-Billion Dollars In Civil Penalties

On Halloween the Federal Energy Regulatory Commission (FERC) issued an order1 (Order) directing Barclays Bank PLC (Barclays) and four individuals from its Western U.S. electricity trading operations (Traders) to show cause why they should not be found to have violated the Federal Power Act and FERC prohibitions against energy market manipulation. The FERC's Office of Enforcement (OE) proposed that Barclays be assessed a $435 million civil penalty and disgorge nearly $35 million in payments received. Further, OE proposed that the Traders be assessed individual civil penalties totaling $18 million ($15 million to the head of Barclays' Western U.S. power trading operations, and $1 million each to the remaining Traders). The Order is based on allegations, contained in an OE report, concluding that Barclays and its Traders engaged over a two-year period in a deliberate and coordinated strategy of trading physical electricity at an economic loss at four trading points in the Western United States in order to boost its financial positions at those same trading points. OE further alleged that Barclays' and Traders' conduct resulted in an estimated $139 million in financial losses to other market participants with positions settling off of the allegedly manipulated trading points. The Order presents yet another breathtaking reminder and valuable lessons for all participants in FERC-regulated energy markets to ensure that they have in place robust programs and controls carefully designed to ensure effective compliance with both the letter and the spirit of FERC rules and regulations. A participant's failure to do so puts both the company and its key individuals at risk of substantial liability.

Background

The period covered by the Order is November 2006 to December 2008, during which OE alleges that Barclays traded both physical and financial electricity products. The physical products included "dailies" (electricity sold at a specific fixed price and delivered or received, generally the next day, at a specific trading location) and "at index" power (electricity transacted at a price determined by calculating the average volume-weighted price of all electricity delivered at a specific physical location). The financial products most relevant to OE's investigation were "financial swaps," under which parties to the transactions assumed no obligation to deliver or receive physical electricity but where the buyer exchanged with the seller a fixed price...