Prohibition of Energy Market Manipulation, 4244-4258 [06-716]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Rules and Regulations]
[Pages 4244-4258]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-716]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 1c

[Docket No. RM06-3-000; Order No. 670]


Prohibition of Energy Market Manipulation

Issued January 19, 2006.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this Final Rule, pursuant to Title III, Subtitle B, and 
Title XII, Subtitle G of the Energy Policy Act of 2005, the Federal 
Energy Regulatory Commission (Commission) is amending its regulations 
to implement new section 4A of the Natural Gas Act and new section 222 
of the Federal Power

[[Page 4245]]

Act, prohibiting the employment of manipulative or deceptive devices or 
contrivances.

DATES: Effective Date: January 26, 2006.

FOR FURTHER INFORMATION CONTACT: 
Mark Higgins, Office of Market Oversight and Investigations, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426. (202) 502-8273. Mark.Higgins@ferc.gov.
Frank Karabetsos, Office of General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426. (202) 502-
8133. Frank.Karabetsos@ferc.gov.

SUPPLEMENTARY INFORMATION: 

Table of Contents

 
                                                               Paragraph
                                                                  No.
 
I. Introduction.............................................          1.
II. Background                                                        6.
III. Discussion.............................................          8.
    A. Scope of Application of Regulations..................          9.
        1. Comments.........................................          9.
        2. Commission Determination.........................         16.
    B. General Applicability of Securities Law Concepts.....         26.
        1. Comments.........................................         26.
        2. Commission Determination.........................         30.
    C. Disclosure...........................................         33.
        1. Duty of Disclosure...............................         34.
            a. Comments.....................................         34.
            b. Commission Determination.....................         35.
        2. Sections 1c.1(a)(2) and 1c.2(a)(2) and Omissions          38.
         of Material Fact...................................
            a. Comments.....................................         38.
            b. Commission Determination.....................         41.
    D. Sections 1c.1(a)(3) and 1c.2(a)(3) and Intent........         43.
        1. Comments.........................................         43.
        2. Commission Determination.........................         45.
    E. Elements of a Manipulation Claim.....................         46.
        1. Comments.........................................         46.
        2. Commission Determination.........................         48.
    F. Interplay with Market Behavior Rules.................         55.
        1. Comments.........................................         55.
        2. Commission Determination.........................         58.
    G. Statute of Limitations...............................         61.
        1. Comments.........................................         61.
        2. Commission Determination.........................         62.
    H. Safe Harbors and Affirmative Defenses................         64.
        1. Comments.........................................         64.
        2. Commission Determination.........................         66.
    I. Procedures for Handling Manipulation Claims..........         68.
        1. Comments.........................................         68.
        2. Commission Determination.........................         70.
    J. Miscellaneous Issues.................................         75.
        1. Use of ``Entity'' in place of ``Person'' in               75.
         sections 1c.1(a)(3) and 1c.2(a)(3).................
            a. Comments.....................................         75.
            b. Commission Determination.....................         76.
        2. Impact of New Regulations on the Policy Statement         77.
         on Natural Gas and Electric Price Indices..........
            a. Comments.....................................         77.
            b. Commission Determination.....................         78.
        3. Special Pleading.................................         79.
            a. Comments.....................................         79.
            b. Commission Determination.....................         80.
IV. Regulatory Flexibility Act Certification................         81.
V. Information Collection Statement.........................         83.
VI. Environmental Statement.................................         84.
VII. Document Availability..................................         85.
VIII. Effective Date and Congressional Notification.........         88.
Regulatory Text.............................................
Appendix: Parties Filing Initial and Reply Comments and
 Acronyms...................................................
 

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly.

I. Introduction

    1. On October 20, 2005, the Commission issued a Notice of Proposed 
Rulemaking (NOPR) to prohibit energy market manipulation.\1\ Pursuant 
to section 4A of the Natural Gas Act (NGA) \2\ and section 222 of the 
Federal Power Act (FPA),\3\ as added to the statutes by the Energy 
Policy Act of 2005 (EPAct 2005),\4\ the Commission proposed to add a 
Part 159 under Subchapter E and a Part 47 under Subchapter B to Title 
18 of the Code of Federal Regulations. Under the proposed regulations, 
it would be

[[Page 4246]]

unlawful for any entity, directly or indirectly, in connection with the 
purchase or sale of natural gas or the purchase or sale of 
transportation services subject to the jurisdiction of the Commission, 
or in connection with the purchase or sale of electric energy or the 
purchase or sale of transmission services subject to the jurisdiction 
of the Commission, (1) to use or employ any device, scheme, or artifice 
to defraud, (2) to make any untrue statement of a material fact or to 
omit to state a material fact necessary in order to make the statements 
made, in the light of the circumstances under which they were made, not 
misleading, or (3) to engage in any act, practice, or course of 
business that operates or would operate as a fraud or deceit upon any 
person.
---------------------------------------------------------------------------

    \1\ Prohibition of Energy Market Manipulation, 113 FERC ] 61,067 
(2005); 70 FR 61930, October 27, 2005.
    \2\ 15 U.S.C. 717 et al. (2000).
    \3\ 16 U.S.C. 791a et al. (2000).
    \4\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 
(2005), 315 and 1283, respectively.
---------------------------------------------------------------------------

    2. In the NOPR, the Commission stated that sections 315 and 1283 of 
EPAct 2005 ``apply to the conduct of `any entity,' not just 
jurisdictional market-based rate sellers, natural gas pipelines, or 
holders of blanket certificate authority,'' and ``includes not only 
regulated utilities but also governmental utilities and other market 
participants.'' \5\ Furthermore, we stated in the NOPR that sections 
1c.1(a)(1)-(3) and 1c.2(a)(1)-(3) of the proposed regulations were 
patterned after the Securities and Exchange Commission's (SEC) Rule 
10b-5,\6\ and were ``intended to be interpreted consistent with 
analogous SEC precedent that is appropriate under the circumstances.'' 
\7\ Sections 1c.1(b) and 1c.2(b) of the proposed regulations stated 
that nothing in these provisions should be construed to create a 
private right of action. The Commission further noted, however, that 
sections 1c.1(b) and 1c.2(b) were not intended to take away any other 
right that may otherwise exist.
---------------------------------------------------------------------------

    \5\ NOPR at 70 FR 61931.
    \6\ 17 CFR 240.10b-5 (2005).
    \7\ NOPR at 70 FR 61931. As explained in P 5, supra, the 
regulations proposed to be placed in new sections 159.1 and 47.1 
will be new sections 1c.1 and 1c.2, respectively.
---------------------------------------------------------------------------

    3. Thirty parties filed comments and nine parties filed reply 
comments.\8\ In response to the comments, and as discussed more fully 
below, the Commission, among other things: clarifies the scope of 
application of the final rule; addresses comments pertaining to 
disclosure and sections 1c.1(a)(2)-(3) and 1c.2(a)(2)-(3) of the final 
rule; discusses the elements of a violation of the final rule; notes 
the relationship of the final rule to the Market Behavior Rules \9\ ; 
and deals with a number of implementation issues, such as the 
applicable statute of limitations, affirmative defenses and safe harbor 
provisions, and procedural matters.
---------------------------------------------------------------------------

    \8\ Entities filing intervening and reply comments are listed in 
the Appendix to this final rule. The abbreviations for such 
commenters are noted in the Appendix. The Commission has accepted 
and considered all comments filed, including late-filed comments.
    \9\ Investigation of Terms and Conditions of Public Utility 
Market-Based Rate Authorizations, 105 FERC ] 61,218 (2003), reh'g 
denied, 107 FERC ] 61,175 (2004); Order No. 644, Amendment to 
Blanket Sales Certificates, 68 FR 66323 (2003), FERC Stats. & Regs. 
] 31,153 (2003), reh'g denied, 107 FERC ] 61,174 (2004). The Market 
Behavior Rules are currently on appeal. Cinergy Marketing & Trading, 
L.P. v. FERC, Nos. 04-1168 et al. (DC Cir., appeal filed April 28, 
2004).
---------------------------------------------------------------------------

    4. For the most part, the Commission finds it unnecessary to change 
the wording of the proposed regulatory text, except in one respect: 
substituting ``entity'' for ``person'' in sections 1c.1(a)(3) and 
1c.2(a)(3) of the final rule. However, we do provide certain 
clarifications requested by several commenters. In addition, we find 
that some of the recommendations made by commenters are more 
appropriately addressed in the proceeding initiated in Docket No. RM06-
5-000, proposing to repeal the codes of conduct for unbundled sales 
service and for persons holding blanket marketing certificates, and in 
Docket No. EL06-16-000, proposing to repeal the Market Behavior Rules, 
which are currently included in all public utility sellers' market-
based rate tariffs and authorizations.\10\
---------------------------------------------------------------------------

    \10\ Amendments to Codes of Conduct for Unbundled Sales Service 
and for Persons Holding Blanket Marketing Certificates, 70 FR 72090 
(2005), 113 FERC ] 61,189 (2005); Investigation of Terms and 
Conditions of Public Utility Market-Based Rate Authorizations, 70 FR 
71484 (2005), 113 FERC ] 61,190 (2005).
---------------------------------------------------------------------------

    5. Without a rule prohibiting manipulative or deceptive conduct, 
the language of EPAct 2005 sections 315 and 1283 does not, by itself, 
make any particular act unlawful. As a result, this final rule serves 
as the implementing provision designed to prohibit manipulation and 
fraud in the markets the Commission is charged with regulating. The 
final rule is not intended to regulate negligent practices or corporate 
mismanagement, but rather to deter or punish fraud in wholesale energy 
markets. In addition, to ease references to the final rule, we have 
determined to place the new regulations in a new Part 1c of the 
Commission's general regulations, rather than separately in new Parts 
159 and 47 as proposed in the NOPR. The regulatory text of proposed 
sections 159.1 and 47.1 as identified herein will be new sections 1c.1 
and 1c.2, respectively.

II. Background

    6. On August 8, 2005, EPAct 2005 became law. Sections 315 and 1283 
of EPAct 2005, amending the NGA and the FPA, respectively, are 
virtually identical, and prohibit the use or employment of manipulative 
or deceptive devices or contrivances in connection with the purchase or 
sale of natural gas, electric energy, or transportation or transmission 
services subject to the jurisdiction of the Commission. These anti-
manipulation sections of EPAct 2005 closely track the prohibited 
conduct language in section 10(b) of the Securities Exchange Act of 
1934,\11\ and specifically dictate that the terms ``manipulative or 
deceptive device or contrivance'' are to be used ``as those terms are 
used in section 10(b) of the Securities Exchange Act of 1934.''
---------------------------------------------------------------------------

    \11\ Securities Exchange Act of 1934, 15 U.S.C. 78j(b) (2000) 
(Exchange Act).
---------------------------------------------------------------------------

    7. The SEC adopted Rule 10b-5,\12\ which implemented section 10(b) 
of the Exchange Act. Since their promulgation, a significant body of 
legal precedent concerning section 10(b) of the Exchange Act and Rule 
10b-5 has developed. Consistent with the mandate that certain aspects 
of the Commission's new authority be exercised in a manner consistent 
with section 10(b) of the Exchange Act, consistent with Congress' 
modeling sections 315 and 1283 of EPAct 2005 on section 10(b) of the 
Exchange Act, and as proposed in the NOPR, the Commission has modeled 
the final rule on Rule 10b-5. This approach will benefit entities 
subject to the new rule because there is a substantial body of 
precedent applying the comparable language of Rule 10b-5. In the course 
of responding to various comments, we will discuss the appropriate 
application of analogous securities law precedent that will inform the 
interpretation of the final rule in the context of the NGA and FPA.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.10b-5 (2005).
---------------------------------------------------------------------------

III. Discussion

    8. The 30 initial comments and nine reply comments on the NOPR are 
from a diverse group of industry stakeholders. Overwhelmingly, 
commenters are supportive of our efforts to implement well-developed, 
clear and fair rules aimed at eliminating the potential for fraud in 
wholesale energy transactions. The comments identify a number of 
issues: (1) The scope of application of the Final Rule; (2) the 
usefulness of securities law precedents to the energy industry; (3) the 
disclosure implications of the Final Rule; (4) the elements that 
comprise a violation of the Final Rule; (5) how the Final Rule will 
interact with the Market Behavior Rules; and (6) a variety of 
procedural matters, including the appropriate

[[Page 4247]]

statute of limitations to apply to the Final Rule. These issues and 
others that were raised in comments are addressed in the sections that 
follow.

A. Scope of Application of Regulations

1. Comments
    9. Several commenters express views on the appropriate scope of the 
proposed anti-manipulation regulations.\13\ Commenters ask the 
Commission to clarify the meaning of ``any entity'' and ``subject to 
the jurisdiction of the Commission'' as these statutory terms apply to 
the proposed regulations. For example, the Midwest ISO supports broad 
application of the proposed regulations to any entity as opposed to 
``limiting the application of the regulations to FERC jurisdictional 
parties.'' \14\ Likewise, NASUCA reads the proposed regulations as 
applying to all entities, ``not just jurisdictional market-based rate 
sellers, natural gas pipelines, or holders of blanket certificate 
authority.'' \15\ AGA asks the Commission to clarify that ``any 
entity'' means that the proposed regulations extend beyond Order No. 
644 regulation of jurisdictional market-based rate sellers, natural gas 
pipelines, or holders of blanket certificate authority. This is 
necessary, AGA asserts, to ensure the rules will have the ``intended 
effective impact on the market place for natural gas sales.'' \16\
---------------------------------------------------------------------------

    \13\ See, e.g., AGA at 4-5; APGA at 10; APPA at 3-4; AOPL at 2; 
BP at 1-2; Cinergy at 8; EEI at 25-26; Indicated Market Participants 
at 8; Midwest ISO at 4; NARUC Reply at 3-5; SCANA at 3; SUEZ at 6-
11.
    \14\ Midwest ISO at 4.
    \15\ NASUCA at 3.
    \16\ AGA at 4.
---------------------------------------------------------------------------

    10. Two commenters specifically address whether the proposed 
regulations apply to ``first sales'' \17\ of natural gas. APGA, noting 
that first sales represent a substantial part of the wholesale natural 
gas market, argues that the phrase ``subject to the jurisdiction of the 
Commission'' in NGA section 4A must be read to apply only to ``the 
purchase or sale of transportation services'' and not to the preceding 
clause ``purchase or sale of natural gas.'' \18\ SUEZ, however, argues 
that ``subject to the jurisdiction of the Commission'' applies to 
purchases and sales as well as to transportation services. SUEZ 
maintains that ``any entity'' does not include entities engaged in non-
jurisdictional transactions such as first sales, sales of LNG, or 
retail sales, but is intended only to bring certain governmental 
entities otherwise excluded from FPA jurisdiction under the umbrella of 
the proposed regulations.\19\
---------------------------------------------------------------------------

    \17\ ``First sales'' are certain wholesale sales of natural gas 
removed from the Commission's jurisdiction by the Natural Gas Policy 
Act of 1978 (NGPA) and the Wellhead Decontrol Act of 1989. 
Accordingly, the only sales of natural gas that the Commission 
currently has jurisdiction to regulate are sales for resale of 
domestic gas by pipelines, local distribution companies (LDCs), or 
their affiliates so long as they do not produce the gas that they 
sell, and sales for resale of natural gas previously purchased and 
sold by an interstate pipeline, LDC or retail customer. See Dan 
Diego Gas and Electric Company, 101 FERC ] 61,161 at P 10 (2002); 
Reporting of Natural Gas Sales to the California Market, 96 FERC & 
61,119 at 61,463, reh'g denied, 97 FERC ] 61,029 (2001).
    \18\ APGA at 3-10.
    \19\ SUEZ at 10, referring to FPA section 201(f) entities.
---------------------------------------------------------------------------

    11. APPA and NARUC also urge the Commission to construe the phrase 
``subject to the Commission's jurisdiction'' to modify both the 
purchase or sale of electric energy and the purchase or sale of 
transmission services. By doing so, APPA and NARUC argue, the 
Commission will make clear the regulation does not apply to retail 
sales or purchases and thus will avoid overlap with state and local 
jurisdiction.\20\ In reply comments, Cinergy argues that regardless of 
the parsing of the statutory language, the manipulation authority falls 
within the existing scope of the FPA and NGA, and that nothing in the 
scope of these statutes suggests that retail sales are in any way 
subject to the Commission's authority.\21\ Likewise, EEI argues that 
the FPA is limited to wholesale markets, and that matters subject to 
state regulation are excluded from the reach of the Commission.\22\
---------------------------------------------------------------------------

    \20\ APPA at 4; NARUC Reply at 3.5.
    \21\ Cinergy Reply at 2-4.
    \22\ EEI Reply at 6.
---------------------------------------------------------------------------

    12. NGSA asserts that EPAct 2005 does not open the door to 
regulation of non-jurisdictional sales even if they are subject to the 
anti-manipulation rules. NGSA acknowledges that the statutory 
provisions expand the Commission's authority to prevent market 
manipulation, but cautions that nothing in the statute grants the 
Commission any rate or certificate jurisdiction over deregulated first 
sales of natural gas.\23\
---------------------------------------------------------------------------

    \23\ NGSA at 3.
---------------------------------------------------------------------------

    13. Other commenters address the meaning of ``any entity'' in the 
context of FPA sections 201(f) and 211A. PG&E argues that it is crucial 
that the Commission's authority to prohibit manipulation extend to all 
entities involved in the market. Noting the specific reference to 
entities described in FPA section 201(f), PG&E states that the proposed 
regulations should apply to all municipalities and other governmental 
agencies.\24\ EEI also states that the proposed regulations must reach 
entities described in FPA section 201(f), including unregulated 
transmitting utilities under FPA section 211A. This is so, EEI argues, 
because the authority to require comparable open access transmission 
under FPA section 211A makes all transmission service provided by FPA 
section 201(f) entities subject to the jurisdiction of the Commission 
and thus subject to the proposed anti-manipulation rules.\25\ APPA 
responds that under section 211A(c) certain entities are not subject to 
the transmission service requirements (those selling less than 
4,000,000 MWhs per year, or that do not own facilities necessary to 
operate an interconnected transmission system, or that meet other 
criteria that the Commission may adopt in the future). These entities, 
APPA argues, are not subject to the jurisdiction of the Commission and 
thus not subject to the proposed regulations.\26\ NRECA goes further, 
asserting that while FPA section 201(f) governmental entities are 
``potentially'' subject to the proposed anti-manipulation regulations, 
the regulations can only apply to transactions that are otherwise 
subject to the Commission's jurisdiction. Thus, NRECA argues that 
neither party to a retail sale, to transmission service in intrastate 
commerce, or to a sale of electricity or transmission service by a FPA 
section 201(f) entity are subject to the proposed regulations.\27\
---------------------------------------------------------------------------

    \24\ PG&E at 6.
    \25\ EEI at 25.
    \26\ APPA Reply at 5-6.
    \27\ NRECA Reply at 2-5.
---------------------------------------------------------------------------

    14. AOPL seeks clarification that ``subject to the jurisdiction of 
the Commission'' does not mean the Commission would subject oil 
pipelines to claims of market manipulation in connection with 
transportation and transmission services subject to the Commission's 
jurisdiction under the Interstate Commerce Act (ICA).\28\
---------------------------------------------------------------------------

    \28\ AOPL at 1-3.
---------------------------------------------------------------------------

    15. Finally, Cinergy asks that the text of the proposed regulations 
be modified to make explicit that the regulations pertain only to 
market manipulation, noting that SEC Rule 10b-5 applies to a wide range 
of activities beyond market manipulation.\29\
---------------------------------------------------------------------------

    \29\ Cinergy at 8.
---------------------------------------------------------------------------

2. Commission Determination
    16. As an initial matter, this Final Rule does not, and is not 
intended to, expand the types of transactions subject to the 
Commission's jurisdiction under the FPA, NGA, NGPA, or ICA. As now 
explained, however, the new regulations do apply to ``any entity'' as 
that is the scope of the final rule as directed by sections 315 and 
1283 of EPAct 2005. If

[[Page 4248]]

any entity engages in manipulation and the conduct is found to be ``in 
connection with'' a jurisdictional transaction, the entity is subject 
to the Commission's anti-manipulation authority. Absent such nexus to a 
jurisdictional transaction, however, fraud and manipulation in a non-
jurisdictional transaction (such as a first or retail sale) is not 
subject to the new regulations.
    17. NGA section 4A and FPA section 222 make it unlawful for ``any 
entity'' to use a manipulative or deceptive device or contrivance ``in 
connection with'' the purchase or sale of natural gas or electric 
energy or the purchase or sale of transportation or transmission 
services ``subject to the jurisdiction of the Commission.'' \30\ The 
answer to the scope of application of the final rule lies in a 
reasonable reading of these terms in relation to each other.
---------------------------------------------------------------------------

    \30\ The text of EPAct 2005 section 315, adding section 4A to 
the NGA, is:
    It shall be unlawful for any entity, directly or indirectly, to 
use or employ, in connection with the purchase or sale of natural 
gas or the purchase or sale of transportation services subject to 
the jurisdiction of the Commission, any manipulative or deceptive 
device or contrivance (as those terms are used in section 10(b) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78j(b))) in 
contravention of such rules and regulations as the Commission may 
prescribe as necessary in the public interest or for the protection 
of natural gas ratepayers. Nothing in this section shall be 
construed to create a private right of action.
    The corresponding text of EPAct 2005 section 1283, adding 
section 222 to the FPA, is:
    (a) In general.--It shall be unlawful for any entity (including 
an entity described in section 201(f)), directly or indirectly, to 
use or employ, in connection with the purchase or sale of electric 
energy or the purchase or sale of transmission services subject to 
the jurisdiction of the Commission, any manipulative or deceptive 
device or contrivance (as those terms are used in section 10(b) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78j(b))), in 
contravention of such rules and regulations as the Commission may 
prescribe as necessary or appropriate in the public interest or for 
the protection of electric ratepayers.
    (b) No Private Right of Action.--Nothing in this section shall 
be construed to create a private right of action.
---------------------------------------------------------------------------

    18. ``Any entity'' is a deliberately inclusive term. Congress could 
have used the existing defined terms in the NGA and FPA of ``person,'' 
``natural-gas company,'' or ``electric utility,'' but instead chose to 
use a broader term without providing a specific definition.\31\ Thus, 
the Commission interprets ``any entity'' to include any person or form 
of organization, regardless of its legal status, function or 
activities.\32\
---------------------------------------------------------------------------

    \31\ See NGA sections 2(1) and 2(6); FPA sections 3(4) and 
3(22). Congress did note that entities described in FPA section 
201(f) are included in the meaning of entity. See FPA section 
222(a).
    \32\ Because many entities that are engaged in wholesale natural 
gas or electricity transactions or in interstate transportation or 
transmission services, engage in both jurisdictional and non-
jurisdictional transactions, it is not enough to say, as SUEZ 
suggests, that entities engaging in non-jurisdictional transactions 
are not covered.
---------------------------------------------------------------------------

    19. The second aspect of the analysis focuses on the transaction 
involved. A transaction under NGA section 4A is ``the purchase or sale 
of natural gas or the purchase or sale of transportation services 
subject to the jurisdiction of the Commission.'' A transaction under 
FPA section 222 is ``the purchase or sale of electric energy or the 
purchase or sale of transmission services subject to the jurisdiction 
of the Commission.'' The critical issue is whether the limiting phrase 
of ``subject to the jurisdiction of the Commission'' applies to both 
preceding phrases, that is, (1) the purchase or sale of the energy 
commodity and (2) transportation services or transmission services, or 
just to the transportation or transmission services. APGA argues that 
the ``rule of the last antecedent'' means that it should only modify 
the last phrase, that is, transportation services or transmission 
services. But in the absence of definitive punctuation or other clearer 
expression of intent to limit the jurisdiction requirement only to 
transportation or transmission, the Commission must look for the 
meaning which is the most reasonable under the circumstances.\33\
---------------------------------------------------------------------------

    \33\ APGA at 4 (citing 2a N. Singer, Sutherland on Statutory 
Construction Sec.  47:33 at 369 (6th rev. ed. 2000) and Barnhart v. 
Thomas, 540 U.S. 20, 26 (1993)). The general rule is that a 
qualifying phrase will normally apply to the provision or clause 
immediately preceding it. However, ``where the sense of the entire 
act requires that a qualifying word or phrase apply to several 
preceding * * * sections, the word or phrase will not be restricted 
to its immediate antecedent.'' Sutherland Sec.  47:33 at 372. The 
case referred to by APGA also notes that the rule is ``not an 
absolute'' and ``can assuredly be overcome by other indicia of 
meaning.'' Barnhart v. Thomas, 540 U.S. at 26.
---------------------------------------------------------------------------

    20. The Commission concludes that the phrase ``subject to the 
jurisdiction of the Commission'' should be read as modifying both 
preceding phrases, that is, ``the purchase or sale'' as well as 
``transportation services'' (NGA) and ``transmission services'' (FPA). 
Had Congress intended to expand the Commission's jurisdiction so 
significantly as to give it anti-manipulation authority over such 
transactions as first sales of imported natural gas, intrastate sales 
of electric energy, retail sales of electric energy or energy sales by 
governmental entities, we believe it would have done so explicitly.\34\ 
Further, in light of the close link between transportation or 
transmission services and natural gas and electric commodity sales, we 
do not believe that Congress would have expanded the Commission's 
authority to cover all natural gas and electric commodity sales but not 
all gas transportation and electric transmission. Accordingly, we 
conclude that the most reasonable interpretation is that Congress did 
not expand the Commission's traditional NGA and FPA subject matter 
jurisdiction in sections 315 or 1283 of EPAct, but rather gave the 
Commission broad jurisdiction over the entities that engage in certain 
conduct affecting our subject matter jurisdiction.
---------------------------------------------------------------------------

    \34\ Transactions not subject to the Commission's jurisdiction 
include first sales, sales of imported natural gas, sales of 
imported LNG, sales and transportation by NGA section 1(b)-(d) 
entities (i.e., activities including production and gathering, local 
distribution, ``Hinshaw'' pipelines, and vehicular natural gas), or 
by NGA section 7(f) companies, retail sales of electric energy, 
sales of electric energy in intrastate commerce, sales of electric 
energy by governmental entities and certain electric power 
cooperatives, and certain interstate transmission by governmental 
entities.
---------------------------------------------------------------------------

    21. Third, the phrase ``in connection with'' must be given meaning. 
APGA says that interpreting ``subject to the jurisdiction of the 
Commission'' as applying to sales effectively would exclude producers 
and marketers from the reach of the final rule as these are the 
dominant sellers of natural gas in wholesale markets. APGA argues this 
interpretation implies that enactment of NGA section 4A serves no 
purpose, as it does not increase the Commission's reach beyond the 
rules already promulgated by Order No. 644.\35\ This is not the case, 
however. As discussed below, any entity may be subject to the final 
rule if its fraudulent or manipulative conduct is ``in connection 
with'' a purchase or sale of natural gas, electric energy, 
transportation service, or transmission service that is subject to the 
Commission's jurisdiction.\36\ Thus,

[[Page 4249]]

the third aspect of the analysis is to consider whether the fraud is 
``in connection with'' a jurisdictional transaction.
---------------------------------------------------------------------------

    \35\ APGA at 6-8. APGA also points to EPAct 2005 section 318, 
which adds a new section (d) to NGA section 20. Section 20(d) 
authorizes the Commission to seek a court order barring an 
individual found to have engaged in manipulation from future energy 
transactions; there is a similar new provision in FPA section 
314(d). Here, APGA argues, Congress used subparts to separate sales 
from transportation service, and applied the ``subject to the 
jurisdiction of the Commission'' only to the latter. This is not 
dispositive. First, this is a separate section of the statute. 
Second, the use of subparts does not conclusively mean that 
``subject to the jurisdiction of the Commission'' cannot also modify 
the first subpart. Third, the reading APGA urges still presents the 
troublesome prospect that parties could assert that the anti-
manipulation authority now applies to retail sales or other 
transactions otherwise expressly excluded from the Commission's 
jurisdiction.
    \36\ AEP urges that the final rule identify the modalities 
through which an entity is prohibited from manipulating a market, 
noting that SEC Rule 10b-5 specifies that fraud or manipulation must 
involve the ``use of any means or instrumentality of interstate 
commerce or of the mails, of any facility of any national securities 
exchange.'' AEP at 2. This is not necessary, as manipulation must be 
in connection with jurisdictional transactions which, by definitions 
in NGA section 1(b) and FPA section 201(b), are in interstate 
commerce.
---------------------------------------------------------------------------

    22. Section 10(b)'s ``in connection with'' requirement has been 
construed broadly by the Supreme Court to encompass many circumstances 
where securities transactions ``coincide'' with the overall scheme to 
defraud.\37\ However, the Supreme Court was careful to state that 
section 10(b) ``must not be construed so broadly as to convert every 
common law fraud that happens to involve securities into a violation'' 
of section 10(b) and Rule 10b-5.\38\ Guided by this precedent, the 
Commission views the ``in connection with'' element in the energy 
context as encompassing situations in which there is a nexus between 
the fraudulent conduct of an entity and a jurisdictional transaction. 
We note that, unlike the SEC, which has broad jurisdiction over 
securities transactions, our jurisdiction is limited to certain 
wholesale transactions that remain within the ambit of the NGA, NGPA, 
and FPA. At the same time, energy markets are made up of both 
jurisdictional and non-jurisdictional transactions. We do not intend to 
construe the Final Rule so broadly as to convert every common-law fraud 
that happens to touch a jurisdictional transaction into a violation of 
the final rule. Rather, in committing fraud, the entity must have 
intended to affect, or have acted recklessly to affect, a 
jurisdictional transaction.\39\ For example, any entity engaging in a 
non-jurisdictional transaction through a Commission-regulated RTO/ISO 
market, that acts with intent or with recklessness to affect the single 
price auction clearing price (which sets the price of both non-
jurisdictional and jurisdictional transactions), would be engaging in 
fraudulent conduct in connection with a jurisdictional transaction and, 
therefore, would be in violation of the final rule.
---------------------------------------------------------------------------

    \37\ SEC v. Zandford, 535 U.S. 813, 825 (2002) (``[T]he SEC 
complaint describes a fraudulent scheme in which the securities 
transaction and breaches of fiduciary duty coincide. Those breaches 
were therefore `in connection with' securities sales within the 
meaning of [section] 10(b).''). See also Superintendent of Insurance 
v. Bankers Life & Casualty Co., 404 U.S. 6, 12-13 (1971) (previously 
the Supreme Court had stated that the requirement was met when there 
was an ``injury as a result of deceptive practices touching [the] 
sale of securities''); Head v. Head, 759 F.2d 1172, 1175 (4th Cir. 
1985) (the nexus must be more than a de minimis ``touch,'' yet is 
applied flexibly where there is fraud affecting securities 
transactions).
    \38\ SEC v. Zandford, 535 U.S. at 820.
    \39\ See PP 52-53 infra for a discussion of the intent required 
for a violation of the final rule.
---------------------------------------------------------------------------

    23. Turning to the comments that address the applicability of the 
proposed regulations to FPA sections 201(f) and 211A,\40\ here too the 
focus must be on the transaction and the entity's conduct to determine 
whether a violation of the final rule occurred. Again, the Commission 
emphasizes that if any entity engages in fraudulent conduct and that 
conduct is in connection with a jurisdictional transaction, then the 
final rule is applicable to that entity. It is, therefore, not 
necessary for the Commission to determine in this context how sections 
201(f) and 211A are to be applied generally.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., APPA Reply at 5-6; EEI at 25; PG&E at 6; NRECA 
Reply at 2-5.
    \41\ Section 211A permits the Commission to issue regulations to 
implement the provisions of FPA section 211A. At this time, the 
Commission has not proposed such regulations, but has included this 
issue in the Notice of Inquiry issued in Preventing Undue 
Discrimination and Preference in Transmission Service, 70 FR 55796 
(2005), FERC Stats. & Regs. ] 35,553 (2005). Full delineation of the 
scope of FPA section 211A should be developed through that 
proceeding, not in the context of the anti-manipulation regulations.
---------------------------------------------------------------------------

    24. With respect to the request by AOPL for clarification on 
whether ``subject to the jurisdiction of the Commission'' would cause 
oil pipelines to be subject to claims of market manipulation in 
connection with transportation services subject to the Commission's 
jurisdiction under the ICA, the Commission points out that EPAct 2005 
did not amend the ICA to include anti-manipulation provisions, and 
therefore we do not read the authority granted under the NGA and FPA to 
proscribe and penalize fraud or deceit as applying to oil pipeline 
transportation under the ICA.
    25. As to Cinergy's request that the text of the final rule be 
modified to make explicit that the regulations apply only to market 
manipulation, we decline to do so. Cinergy's request would unduly 
narrow the broad authority Congress granted in EPAct 2005. The language 
of EPAct 2005 sections 315 and 1283 is modeled after section 10(b) of 
the Exchange Act, which has been interpreted as a broad anti-fraud 
``catch-all clause.'' \42\ SEC Rule 10b-5, on which the final rule is 
patterned, does not expressly limit itself to manipulation, but uses 
terms such as ``device, scheme, or artifice to defraud'' and ``fraud or 
deceit.'' \43\ We will retain similar language in our final rule, which 
will permit the Commission to police all forms of fraud and 
manipulation that affect natural gas and electric energy transactions 
and activities the Commission is charged with protecting.
---------------------------------------------------------------------------

    \42\ See Aaron v. SEC, 446 U.S. 680, 690 (1980); see also 
Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 6-7 (1985) 
(describing section 10(b) as a ``general prohibition of practices * 
* * artificially affecting market activity in order to mislead 
investors * * *.''); Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151-53 (1972) (noting that the repeated use of 
the word ``any'' in section 10(b) and SEC Rule 10b-5 denotes a 
congressional intent to have the provisions apply to a wide range of 
practices).
    \43\ 17 CFR 240.10b-5 (2005). SEC Rule 10b-5 is titled 
``Employment of manipulative and deceptive devices.''
---------------------------------------------------------------------------

B. General Applicability of Securities Law Concepts

1. Comments
    26. Commenters are divided as to whether we should model the 
proposed anti-manipulation regulations after SEC Rule 10b-5. Ameren, 
Cinergy, EPSA, Indicated Market Participants, EEI, LG&E, NGSA, PNM and 
Xcel argue that adoption of a rule patterned on SEC Rule 10b-5 is 
problematic because the securities model is one of disclosure, designed 
in large part to protect novice investors by eliminating disparities in 
access to information, whereas the purpose of the FPA and NGA is to 
ensure ``just and reasonable'' rates in wholesale energy markets. Many 
of the commenters also argue that the participants in energy markets 
are largely sophisticated, and unlike less-sophisticated participants 
in the securities markets, do not need the protections of a disclosure 
regime.\44\
---------------------------------------------------------------------------

    \44\ Ameren at 3-4; Cinergy at 6-7; EPSA at 5-8; Indicated 
Market Participants at 10-13; EEI at 6-8; LG&E at 3-7; NGSA at 4-5; 
PNM Reply at 4-5; Xcel at 3-6.
---------------------------------------------------------------------------

    27. AGA comments that it is unclear how the SEC's model of 
disclosure will apply to natural gas market transactions, and ISDA and 
PNM argue that the Commission should refrain from a wholesale adoption 
of SEC case law as such an action would create uncertainty as to the 
duties, standards and obligations owed by market participants because 
of the different regulatory frameworks for energy and securities 
markets.\45\ EPSA, PG&E and SUEZ call for further study and tailoring 
of Rule 10b-5 to the energy industry because of the differences between 
the operations of the securities markets and the energy markets.\46\ 
FirstEnergy argues that the

[[Page 4250]]

rules proposed in the NOPR are vague and overly broad.\47\
---------------------------------------------------------------------------

    \45\ AGA at 4; ISDA at 3-5; PNM Reply at 4-6. But not everyone 
dismisses the importance of the regulations to sophisticated 
parties. APPA shares SCE's observation that the degree of 
``protection'' implied by relative levels of counterparty 
sophistication must not be overstated, noting that even 
sophisticated market participants may need protection against market 
manipulations. APPA Reply at 3-4; SCE at 3-4.
    \46\ EPSA at 11; PG&E at 12; SUEZ at 14.
    \47\ FirstEnergy at 4-6.
---------------------------------------------------------------------------

    28. On the other hand, APGA, NARUC, NASCUA, NJBPU, and the States 
support the Commission's decision to model the proposed regulations on 
SEC Rule 10b-5.\48\ APPA, NARUC and NJBPU argue that Rule 10b-5 case 
law will provide useful guidance as the Commission develops its own 
body of precedent to follow.\49\ TDUS argues that the Commission's 
proposed rule prohibiting market manipulation plainly implements, in a 
straightforward manner, the express intent of EPAct 2005.\50\ TDUS 
finds the arguments of Ameren and Xcel unpersuasive because parties as 
sophisticated as they purport to be ought to have no problem complying 
with a straightforward prohibition against making fraudulent 
representations in their transactions.\51\ TDUS also argues that the 
level of sophistication of the parties to a bilateral negotiation is 
irrelevant because the Commission's anti-manipulation rules are not to 
protect the contracting parties from each other, but to protect the 
consumers who rely on the market for their energy supplies.\52\
---------------------------------------------------------------------------

    \48\ APGA at 4-5; NARUC at 4-5; NASCUA at 2-3; NJBPU at 2-3; 
States at 2. APGA, NARUC, and the States argue that modeling the 
final rule on SEC Rule 10b-5 is consistent with the express 
congressional dictates of EPAct 2005.
    \49\ APPA Reply at 1-2; NARUC at 5; NJPBU at 3.
    \50\ TDUS at 2-3.
    \51\ Id. at 3.
    \52\ Id. at 3-4.
---------------------------------------------------------------------------

    29. APPA and INGAA support the Commission's reliance on section 
10(b) of the Exchange Act and SEC Rule 10b-5, and the case law 
interpreting the statute and rule, as providing guidance to the 
Commission in administering its new EPAct 2005 anti-manipulation 
authority.\53\ APPA and INGAA also recommend that the Commission take 
into account pertinent differences between the regulatory regimes of 
the Exchange Act and the NGA and NGPA, and depart from securities law 
precedent when industry structure and common sense so dictate.\54\
---------------------------------------------------------------------------

    \53\ APPA Reply at 1-3; INGAA at 7.
    \54\ APPA Reply at 1; INGAA at 5.
---------------------------------------------------------------------------

2. Commission Determination
    30. As a general matter, the Commission does not believe that 
modeling the Final Rule on SEC Rule 10b-5 is problematic or will create 
uncertainty. This is not to say that commenters did not raise valid 
concerns about how securities precedent will be applied in the energy 
industry context. We intend to adapt analogous securities precedents as 
appropriate to specific facts, circumstances, and situations that arise 
in the energy industry. This is consistent with Congress' modeling of 
EPAct 2005 sections 315 and 1283 on section 10(b) of the Exchange Act 
and explicit references to section 10(b) in EPAct 2005 sections 315 and 
1283, and will provide a level of substantial certainty with respect to 
how the regulations will operate that the Commission is not typically 
able to provide where a preexisting body of law and precedent is not 
readily available. The Commission likewise finds that modeling the 
final rule on SEC Rule 10b-5 provides clarity to affected parties 
similar to the clarity provided by Congress. Thus, the Commission 
rejects FirstEnergy's argument that the proposed regulations are vague 
and overly broad. As previously stated, the Final Rule is modeled on 
SEC Rule 10b-5, which is not vague or overly broad.\55\
---------------------------------------------------------------------------

    \55\ See, e.g., United States v. Persky, 520 F.2d 283 (2d Cir. 
1975); accord Todd & Co. v. SEC, 557 F.2d 1008, 1013 (3d Cir. 1977).
---------------------------------------------------------------------------

    31. The Commission rejects EPSA's, PG&E's and SUEZ's calls for 
further study and tailoring of Rule 10b-5 to the industry the 
Commission regulates. Further study and tailoring would not improve the 
final rule or industry understanding of its scope and applicability. 
While the Commission generally agrees with commenters that a wholesale 
overlay of the securities laws onto energy markets is overly 
simplistic, we also believe it would be illogical to simply ignore 
decades of useful guidance that securities law precedent can offer, 
especially considering that Congress deliberately modeled EPAct 2005 
sections 315 and 1283 on section 10(b) of the Exchange Act. Therefore, 
the Commission intends to recognize, on a case-by-case basis, that the 
roles of the Commission and the SEC are not identical in determining 
whether it is appropriate to adopt securities precedents to specific 
energy industry facts, circumstances, or situations.\56\
---------------------------------------------------------------------------

    \56\ For example, as explained in paragraph 36 supra, the 
Commission is not adopting the disclosure regime of the SEC, and as 
explained in paragraphs 52-53 infra, the element of scienter will 
apply in the Final Rule just as it applies to SEC Rule 10b-5.
---------------------------------------------------------------------------

    32. The Commission recognizes that the SEC does not have a duty to 
assure that the price of a security is just and reasonable, and that 
our duty is not to protect purchasers through a regime of disclosure. 
Despite these differences in mission, however, wholesale natural gas 
and power markets, like securities markets, are susceptible to fraud 
and market manipulation, regardless of the level of sophistication of 
the market participants. Therefore, it is appropriate to model the 
final rule on SEC Rule 10b-5 in an effort to prevent (and where 
appropriate remedy) fraud and manipulation affecting the markets the 
Commission is entrusted to protect, while providing a level of 
certainty to market participants that is beyond that which the 
Commission would be otherwise required to provide. However, as 
discussed below, we provide several of the clarifications requested by 
the commenters to address the differences between the SEC's regulation 
of securities markets and our regulation of markets for natural gas and 
electricity.

C. Disclosure

    33. Several commenters expressed concern over what they consider to 
be disclosure implications of the proposed regulations.\57\ In 
particular, commenters focused on two disclosure-related areas: Whether 
the proposed anti-manipulation regulations create a new duty of 
disclosure; and whether sections 1c.1(a)(2) and 1c.2(a)(2), and 
particularly the references to ``omissions of material fact,'' impose 
an undue burden on bilateral, arm's-length negotiations.
---------------------------------------------------------------------------

    \57\ See, e.g., Ameren at 4-6; AGA at 4; AEP at 2; Cinergy at 8-
9; Indicated Market Participants at 10-13, 23-28; EEI at 14-16; EPSA 
at 5-11; FirstEnergy at 10-13; ISDA at 3-8; INGAA at 5-7, 10; LG&E 
at 9; NGSA at 2, 5-6; PG&E at 7; Progress at 2-4; SCE at 3-4; SUEZ 
at 12-14; Xcel at 2, 4-6.
---------------------------------------------------------------------------

1. Duty of Disclosure
a. Comments
    34. Commenters' view is that the proposed regulations should not 
create an affirmative duty to disclose strategic or proprietary 
information not otherwise required under the FPA, NGA, or Commission 
orders, rules, or regulations.\58\ Ameren argues that there is no 
evidence in EPAct 2005 that Congress intended to impose a general 
obligation of disclosure in the energy markets.\59\ Ameren and LG&E 
provide examples of a company purchasing power as a result of a forced 
outage, and question whether, under the regulations, a party would have 
to disclose information detrimental to its bargaining position.\60\ AEP 
expresses similar concern that the regulations should not require 
companies to disclose trade secrets, sensitive information, or forward 
looking information developed by the company.\61\ AEP argues that the 
proposed rules be clarified to

[[Page 4251]]

encompass only those instances where there is an affirmative duty to 
disclose, such as a Commission-imposed disclosure or reporting 
requirement.\62\ EPSA and Progress argue that the regulations should be 
clarified so as not to result in broad disclosure obligations that 
would be incompatible with the arm's-length transactions that the 
Commission oversees.\63\ Similarly, INGAA and EEI argue that the 
regulations should be revised to delete or limit any affirmative 
obligation to disclose information to a counterparty, or to educate 
another party in bilateral negotiations.\64\ In support of its 
argument, INGAA cites SEC Regulation D, which exempts certain 
securities offerings from the registration and disclosure requirements 
of the securities laws because the investors in such offerings are 
sophisticated.\65\ NGSA also states that the Commission should clarify 
that it does not intend to incorporate by reference the disclosure 
obligations applicable to issuers of securities.\66\
---------------------------------------------------------------------------

    \58\ See, e.g., Ameren at 4; EEI at 16; Indicated Market 
Participants at 27.
    \59\ Ameren at 4.
    \60\ Id. at 5; LG&E at 8.
    \61\ AEP at 2.
    \62\ Id. at 3.
    \63\ EPSA at 1; Progress at 2-4.
    \64\ INGAA at 7; EEI at 16. See also ISDA Supplemental Reply at 
2.
    \65\ INGAA at 5.
    \66\ NGSA at 2, 5-6.
---------------------------------------------------------------------------

b. Commission Determination
    35. The Commission declines to modify the proposed regulations in 
this final rule. To avoid uncertainty, however, we clarify that the 
final rule creates no new affirmative duty of disclosure. Commenters 
are mistaken to the extent they believe section 10(b) of the Exchange 
Act or SEC Rule 10b-5 imposes an independent affirmative obligation to 
disclose. Well-settled case law interpreting section 10(b) and Rule 
10b-5 makes clear that section 10(b) and Rule 10b-5 do not, by 
themselves, create an affirmative duty to disclose absent a 
relationship of trust and confidence (i.e., a fiduciary relationship) 
or some other duty imposed elsewhere in the securities laws.\67\ 
Therefore, in the arm's-length, bilateral negotiations that are typical 
in wholesale energy markets, absent some tariff requirement or 
Commission directive mandating disclosure, the final rule imposes no 
new affirmative duty of disclosure.
---------------------------------------------------------------------------

    \67\ See Basic Inc. v. Levinson, 485 U.S. 224, 239, n.17 (1988) 
(``Silence, absent a duty to disclose, is not misleading under Rule 
10b-5.'') citing Chiarella v. United States, 445 U.S. 222, 234 
(1980) (``* * * a duty to disclose under [section] 10(b) does not 
arise from the mere possession of nonpublic market information. 
[T]he duty to disclose arises when [there exists] a relationship of 
trust and confidence * * * .''); see also Gross v. Summa Four, 93 
F.3d 987, 992 (1st Cir. 1996) (citing Chiarella, the court holds 
that ``[b]y itself * * * Rule 10b-5[] does not create an affirmative 
duty of disclosure. Indeed, a corporation does not commit securities 
fraud merely by failing to disclose all nonpublic material 
information in its possession.''); accord Castellano v. Young & 
Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2002); Ackerman v. 
Schwartz, 947 F.2d 841, 848 (7th Cir. 1991).
---------------------------------------------------------------------------

    36. As there is no new affirmative duty of disclosure under the 
final rule, commenters' concern over the disclosure implications of the 
proposed regulations is misplaced. The final rule operates within the 
regulatory framework of the FPA and NGA; the Commission is not adopting 
the disclosure provisions of the securities laws \68\ or the purpose of 
the securities laws, which is ``to protect investors by promoting full 
disclosure of information thought necessary to informed investment 
decisions.'' \69\ Rather, the final rule, like section 10(b) of the 
Exchange Act and SEC Rule 10b-5, is an anti-fraud provision, not a 
disclosure provision.\70\ Nothing in the final rule requires disclosure 
of sensitive information that would only function to weaken an entity's 
bargaining position in arm's-length, bilateral negotiations. Absent a 
tariff requirement or Commission directive mandating disclosure, there 
is no violation of the final rule simply because an entity chooses not 
to disclose all non-public information in its possession.\71\
---------------------------------------------------------------------------

    \68\ See, e.g., 15 U.S.C. 78m (2000).
    \69\ SEC v. Ralston Purina Co., 346 U.S. 119, 123-5 (1953).
    \70\ See, e.g., International Brotherhood of Teamsters v. 
Daniel, 439 U.S. 551, 565 n.18 (1979) (distinguishing between the 
disclosure and antifraud provisions of the securities laws, the 
court states that a waiver from disclosure requirements because an 
investor is sophisticated does ``not provide shelter from the 
criminal anti-fraud protection of Rule 10b-5 or other civil anti-
fraud provisions); Sonnenfeld v. City of Denver, 100 F.3d 744, 746 
n.1 (10th Cir. 1996) (noting that securities exempted from 
regulatory burdens are still subject to civil fraud causes of 
action).
    \71\ See supra note 67.
---------------------------------------------------------------------------

    37. Similarly, the Commission clarifies that nothing in the final 
rule changes the Commission's precedent on contract law. Private 
contracts are fundamental to the functioning of the energy industry, 
and the Commission expects parties to continue to rely on the contracts 
they enter into. The Commission expects parties to continue to resolve 
most contract disputes, including those based on claims of fraud in the 
inducement, without the involvement of the Commission, relying on State 
and Federal courts to apply contract law as appropriate.
2. Sections 1c.1(a)(2) and 1c.2(a)(2) and Omissions of Material Fact
a. Comments
    38. Commenters are divided as to whether the Commission should 
modify or delete sections 1c.1(a)(2) and 1c.2(a)(2) of the final rule, 
particularly with regard to sections 1c.1(a)(2) and 1c.2(a)(2)'s 
references to omissions.\72\ Ameren, Cinergy, and Indicated Market 
Participants argue that sections 1c.1(a)(2) and 1c.2(a)(2) should not 
be adopted because the definition of market manipulation should not 
include any general duty to disclose.\73\ More specifically, EEI and 
EPSA argue that reference in sections 1c.1(a)(2) and 1c.2(a)(2) to 
``omissions of material fact'' should be deleted as it would require 
market participants to disclose sensitive information that would not 
otherwise be exchanged among wholesale energy market participants 
engaged in bilateral negotiations, which could result in harm to the 
market participant's bargaining position.\74\ EEI also argues that 
sections 1c.1(a)(2) and 1c.2(a)(2) should be modified to incorporate a 
knowledge and intent standard.\75\
---------------------------------------------------------------------------

    \72\ Sections 1c.1(a)(2) and 1c.2(a)(2) read: ``to make any 
untrue statement of a material fact or to omit to state a material 
fact necessary in order to make the statements made, in the light of 
the circumstances under which they were made, not misleading * * * 
.''
    \73\ Ameren at 6; Cinergy at 8; Indicated Market Participants at 
28.
    \74\ EEI at 16; EPSA at 8.
    \75\ EEI at 16.
---------------------------------------------------------------------------

    39. FirstEnergy argues that sections 1c.1(a)(2) and 1c.2(a)(2) are 
overly broad, and unnecessary to protect electric ratepayers because 
participants in wholesale power sales transactions are sophisticated 
and have the ability to evaluate the veracity of any information that 
may be conveyed by other participants.\76\ Indicated Market 
Participants argue that since the disclosure concepts of the securities 
laws are not generally applicable to electric and gas markets, sections 
1c.1(a)(2) and 1c.2(a)(2) should be deleted.\77\ Likewise, Xcel argues 
that there is no need to require SEC-like disclosure in wholesale 
energy markets, and it argues that the Commission should modify or 
delete sections 1c.1(a)(2) and 1c.2(a)(2).\78\ While not asking for a 
change in the regulations, INGAA requests that we clarify that ``mere 
puffery'' is not actionable under the regulations.\79\
---------------------------------------------------------------------------

    \76\ FirstEnergy at 11.
    \77\ Indicated Market Participants at 27-28.
    \78\ Xcel at 2, 4-6.
    \79\ INGAA at 9.
---------------------------------------------------------------------------

    40. On the other hand, APGA, PNM and TDUS support the inclusion of

[[Page 4252]]

sections 1c.1(a)(2) and 1c.2(a)(2) without modification.\80\ APGA urges 
the Commission to reject calls for the deletion or modification of 
sections 1c.1(a)(2) and 1c.2(a)(2) because the vast bulk of natural gas 
sales are not negotiated by sophisticated market participants, but are 
determined by price indices that rely on full and accurate 
reporting.\81\ PNM supports the inclusion of sections 1c.1(a)(2) and 
1c.2(a)(2) noting that there may be rare instances where an omission of 
material fact amounts to market manipulation, but also notes that the 
Commission should make clear that the sections create no new duty of 
disclosure.\82\
---------------------------------------------------------------------------

    \80\ APGA at 5; PNM at 9; TDUS at 3-4.
    \81\ APGA at 5.
    \82\ PNM at 9. As discussed above in paragraph 28, TDUS argues 
that no dilution or alteration of the proposed rules is warranted, 
regardless of the sophistication of the parties to a transaction. 
TDUS at 3-4.
---------------------------------------------------------------------------

b. Commission Determination
    41. The Commission rejects proposals to modify or delete sections 
1c.1(a)(2) and 1c.2(a)(2) of the regulations. As just discussed, the 
final rule does not create an affirmative duty to disclose beyond any 
existing requirements. It is important to note, however, that where an 
entity voluntarily provides information or where the entity is required 
by a tariff or a Commission statute, order, rule or regulation to 
provide information, and the entity then misrepresents or omits a 
material fact such that the information provided is materially 
misleading, there can be a violation of the final rule if all of the 
other elements of a violation are present.\83\ This does not mean, 
however, that a material misrepresentation or omission that affects 
only negotiations between two sophisticated parties will necessarily 
result in an enforcement action by the Commission. Instead, the 
Commission will decide whether to pursue enforcement action in such a 
situation on a case-by-case basis, with due consideration of whether 
such material misrepresentations or omissions occur in or have an 
effect on jurisdictional transactions. Absent such an effect, as we 
noted earlier, we generally will not apply the final rule to bilateral 
contract negotiations.
---------------------------------------------------------------------------

    \83\ These include the requisite scienter, discussed infra, and 
the conduct being in connection with a jurisdictional purchase or 
sale or jurisdictional transportation or transmission, discussed 
supra.
---------------------------------------------------------------------------

    42. With respect to other comments related to the application of 
specific securities law precedent, as discussed earlier, the Commission 
intends, on a case-by-case basis, to be guided by analogous securities 
law precedent that is appropriate under the specific facts, 
circumstances, and situations in the energy industry. For example, even 
if some duty to provide information exists, the Commission agrees with 
INGAA that ``mere puffery'' is not violation of sections 1c.1(a)(2) and 
1c.2(a)(2).\84\
---------------------------------------------------------------------------

    \84\ See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 538 (3rd 
Cir. 1999) (noting that general expressions of optimism for the 
future are immaterial and not actionable); Eisenstadt v. Centel 
Corp., 113 F.3d 738, 745 (7th Cir. 1997) (``Everybody knows that 
someone trying to sell something is going to look and talk on the 
bright side. You don't sell a product by bad-mouthing it. And 
everybody knows that auctions can be disappointing.'') (emphasis in 
original); Raab v. General Physics Corp., 4 F.3d 286, 287 (4th Cir. 
1996) (holding that predictions of future business prospects were 
not specific guarantees necessary to make them material within the 
meaning of section 10b); see also In re Northern Telecom Ltd. 
Securities Litig., 116 F. Supp. 2d 446, 466 (S.D.N.Y 2000) (stating 
that under section 10b and Rule 10b-5, actionable statements must be 
sufficiently ``concrete'' or ``specific'' to be material