Direct Energy to Pay Fine, Disgorgement Under FERC Settlement

FERC approved a settlement with Direct Energy LLC under which Direct will pay a civil penalty of $20,000 and disgorge nearly $32,000 for actions that FERC said amounted to, "manipulating natural gas prices during May 2012 at Algonquin and Transco Zone 6 New York (Transco Zone 6) in order to benefit its related financial positions."

Direct Energy neither admits nor denies the allegations under the stipulation.

In May 2012, counsel for Direct Energy contacted FERC Enforcement Staff to initiate a self-report that two traders had engaged in what Direct Energy described as "atypical" trading behavior.

In a written self-report, Direct Energy explained that immediately following its May 9, 2012 training on the FERC settlement in a Constellation case, one of its traders notified his supervisor and subsequently the Compliance Office that he had noticed one of the Houston traders engaging in unusual trading at Transco Zone 6 by engaging in transactions in which he bought next-day gas at Index and sold next-day gas at a fixed price.

On May 11, 2012, Direct Energy’s back office also independently flagged the trades because they included an unusually large volume of transaction confirmations for May 11 delivery. "Direct Energy’s actions demonstrate that it had an effective compliance program in place," FERC said.

FERC said that Direct Energy promptly began an internal investigation, and determined that two natural gas traders (Terminated Traders) had engaged in questionable trades during April and May 2012. Direct Energy interviewed and quickly addressed the behavior by promptly suspending the traders mid-afternoon on May 11, 2012 and terminating the traders’ employment on May 18, 2012.

The Terminated Traders traded physical gas at Algonquin on May 1, 2, 7, 8, and 9 and at Transco Zone 6 on May 11, 2012 (Trade Days). The total physical and financial volumes traded by the Terminated Traders on these days involved 2,123,000 MMBtus, of which the physical fixed price sales accounted for approximately 23% of the fixed-price volume transacted on ICE on those days.

Most of the trading conducted by the Terminated Traders on the Trade Days was very early in the day when there were very few market participants and sold at prices lower than prices others bought at later in the day.

The trades the Terminated Traders made on the Trade Days had the effect of moving down prices at Algonquin and Transco Zone 6. In making these trades, Direct Energy bought next-day physical index gas and sold comparable volumes of fixed-price gas. Direct Energy lost money on these transactions and, in the process, lowered the Gas Daily index. Simultaneously, Direct Energy held financial positions that benefited from this lowered Gas Daily index. Enforcement calculated the harm to the market caused by Direct Energy’s trades as $69,019.

As part of the investigation, FERC Enforcement Staff reviewed Direct Energy’s current compliance program, "and found that Direct Energy satisfies the criteria for an effective compliance program under the Commission’s Penalty Guidelines. Enforcement’s conclusion in this regard was reinforced by the fact that Direct Energy not only self-reported the trades at issue but caught the trades through two different types of compliance – education and daily data analysis."

Docket No. IN14-22