Commentary – Three FERC manipulation fact patterns energy traders should watch

David Applebaum of Jones Day points to price manipulation, "gaming," and weather events

5 September 2023


The US Federal Energy Regulatory Commission and the Commodity Futures Trading Commission oversee trading in US energy and commodity markets. MarketVoice recently published an article on CFTC enforcement trends in commodity markets in anticipation of FIA’s Commodities Forum in Houston, September 13-14, where those trends will be covered in depth. Today, we turn to FERC, which has jurisdiction over physical power and gas markets.

David Applebaum, a partner at the law firm of Jones Day and the former director of the Division of Investigations at FERC, will be moderating a panel at the Commodities Forum dedicated to FERC enforcement and regulatory initiatives. MarketVoice asked David to distill some of the FERC enforcement trends that should be top-of-mind for traders and compliance departments. Click here for more information on the Forum or to register.


FERC’s enforcement focus has expanded recently, including through its new priority to redress violations related to natural gas “infrastructure” – specifically, whether pipeline, LNG, and storage companies are following the requirements of their permitting certificates.

But the biggest enforcement risk facing commodities firms doing business in FERC markets has been, and remains, market manipulation. There are three key areas of interest for market participants that are worth watching:

Price manipulation

For FERC, price manipulation cases have focused on intentional schemes using physical transactions to move prices for the purpose of benefiting related positions.

FIA Forum: Commodities 2023

FIA returns to Houston 13-14 September for in-depth discussions of historic market developments and their implications for physical commodity and derivatives markets. Ellen Wheeler, a partner and litigation attorney with Foley & Lardner, will moderate the CFTC enforcement panel at the Houston forum.

For natural gas trading, that often means physical trading in bid week the last week of the month for the purpose of benefiting financial positions on CFTC-regulated exchanges such as ICE. For power trading, that often means using virtual or physical power trades for the purpose of influencing a locational marginal price (LMP) in a regional transmission market (such as the PJM Interconnection across the MidAtlantic region and parts of the Midwest) to benefit a financial transmission right position or sales from the company’s generation fleet. 

FERC had some very large cases along these lines some years ago – several have been resolved recently, others are still in litigation – but the slowdown in new “major” public enforcement actions does not mean FERC has stopped vigorously investigating these matters. As defense counsel, we still routinely see these investigations, including a significant price manipulation settlement just a few months ago that relies in part on a lower standard of intent, namely, recklessness.

"Gaming" manipulation

FERC thinks of “gaming” manipulation as intentionally evading market rules, or interfering with how markets are supposed to function, to inappropriately benefit a company in some way, often to extract outsized “uplift” or other payments from an RTO market.

Like price manipulation, this is not new for FERC. And, like price manipulation, some of the larger gaming cases are years old. FERC continues to investigate and bring gaming cases – including a focus on potential gaming of RTO capacity markets. Gaming cases, in short, are not going away. These cases can often be more difficult to defend, as they require traders to do more than comply with clearer rules such as “don’t intentionally move market prices” and instead require understanding the underlying purpose of often lengthy, complex, technical FERC tariffs.

Trading around weather events

Both price manipulation and gaming manipulation investigations can be challenging for market participants under the best of circumstances, but even more so when focused on periods of market stress surrounding major storms and other extreme weather events.

It is now routine and expected that FERC, and the North American Electric Reliability Corporation (NERC), will launch or consider electric reliability inquiries where weather events harm the functioning of the grid as they did after Winter Storm Uri. But FERC also launches surveillance inquiries, and potentially investigations, for natural gas and power trading that the agency suspects exacerbated or took advantage of stressed market conditions.

Adopting the right compliance practices to avoid or mitigate the risk of price manipulation or gaming investigations – in normal conditions, and especially weather events – presents challenges. Some core best practices are straightforward enough in theory, for example, mandating consequences for unlawful conduct. 

But the biggest challenge is figuring out what type of resources, and at what cost, to allocate to monitoring, surveilling, and auditing a company’s trading. FERC (and the CFTC) have undertaken significant effort to be able to surveil trading conduct in the markets they regulate. It is important – though not easy – to figure out cost-effective ways to ensure that compliance departments, not just the government, have a clear window into their organization’s trading to address potential problems before they get out of hand.


About the author: David Applebaum is a partner at Jones Day and the former director of FERC’s Division of Investigations. His practice focuses on energy industry enforcement, compliance, internal investigations, audits, litigation, regulatory, and policy matters. He regularly advises on proposed energy market transactions to mitigate enforcement risk from FERC, CFTC, NERC, state PUCs, antitrust enforcers, and RTO market monitors. He has successfully represented clients on a broad range of enforcement investigations and surveillance inquiries alleging market manipulation.

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