Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead Brownell, and Suedeen G. Kelly; Investigation of Terms and Conditions of Public Utility Market-Based Rate Authorizations; Order Revising Market-Based Rate Tariffs and Authorizations, 9811-9819 [06-1720]
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Federal Register / Vol. 71, No. 38 / Monday, February 27, 2006 / Notices
8. Duke Power Company LLC, Duke
Power Company, Duke Energy Trading
and Marketing, L.L.C., Duke Energy
Marketing America, LLC, Duke Energy
Fayette, LLC, Duke Energy Hanging
Rock, LLC, Duke Energy Lee, LLC, Duke
Energy Vermillion, LLC, Duke Energy
Washington, LLC, Cincinnati Gas &
Electric Co., PSI Energy, Inc., Union
Light Heat & Power Company, Cinergy
Marketing & Trading, LP, Brownsville
Power I, L.L.C., Caledonia Power I,
L.L.C., CinCap IV, LLC, CinCap V, LLC,
Cinergy Capital & Trading, Inc.,
Cinergy Power Investments, Inc., St.
Paul Cogeneration, LLC
[Docket Nos. ER06–619–000, ER96–110–019,
ER99–2774–011, ER03–956–008, ER03–185–
006, ER03–17–006, ER01–545–008, ER00–
1783–008, ER02–795–006, ER96–2504–013,
ER05–1367–002, ER05–1368–002, ER05–
1369–003, ER00–826–005, ER00–828–005,
ER98–421–016, ER98–4055–013, ER01–
1337–008, ER02–177–009, ER03–1212–007]
hsrobinson on PROD1PC70 with NOTICES
Take notice that on February 7, 2006,
the above-referenced proceedings,
tendered for filing under section 205 of
the Federal Power Act: (1) Amended
market based rate tariffs for each of the
MBR Companies and (ii) a notice of
succession for the name change of Duke
Power, currently a division of Duke
Energy to Duke Power Company LLC.
Comment Date: 5 p.m. Eastern Time
on February 28, 2006.
Standard Paragraph
Any person desiring to intervene or to
protest this filing must file in
accordance with Rules 211 and 214 of
the Commission’s Rules of Practice and
Procedure (18 CFR 385.211, 385.214).
Protests will be considered by the
Commission in determining the
appropriate action to be taken, but will
not serve to make protestants parties to
the proceeding. Any person wishing to
become a party must file a notice of
intervention or motion to intervene, as
appropriate. Such notices, motions, or
protests must be filed on or before the
comment date. Anyone filing a motion
to intervene or protest must serve a copy
of that document on the Applicant and
all the parties in this proceeding.
The Commission encourages
electronic submission of protests and
interventions in lieu of paper using the
‘‘eFiling’’ link at https://www.ferc.gov.
Persons unable to file electronically
should submit an original and 14 copies
of the protest or intervention to the
Federal Energy Regulatory Commission,
888 First Street, NE., Washington, DC
20426.
This filing is accessible online at
https://www.ferc.gov, using the
‘‘eLibrary’’ link and is available for
review in the Commission’s Public
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14:15 Feb 24, 2006
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Reference Room in Washington, DC.
There is an ‘‘eSubscription’’ link on the
Web site that enables subscribers to
receive e-mail notification when a
document is added to a subscribed
docket(s). For assistance with any FERC
Online service, please e-mail
FERCOnlineSupport@ferc.gov, or call
(866) 208–3676 (toll free). For TTY, call
(202) 502–8659.
Magalie R. Salas,
Secretary.
[FR Doc. E6–2708 Filed 2–24–06; 8:45 am]
BILLING CODE 6717–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
[Docket No. EL06–16–000]
Before Commissioners: Joseph T.
Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly;
Investigation of Terms and Conditions
of Public Utility Market-Based Rate
Authorizations; Order Revising MarketBased Rate Tariffs and Authorizations
Issued February 16, 2006.
1. The Commission has decided to
rescind Market Behavior Rules 2 and 6
and to codify the substance of Market
Behavior Rules 1, 3, 4, and 5 in the
Commission’s regulations under the
Federal Power Act (FPA).1 The central
purpose of the Market Behavior Rules 2
was to prohibit market manipulation by
public utility sellers acting under
market-based rate authority. This
prohibition is set out in Market
Behavior Rule 2. Subsequent to the
issuance of the Market Behavior Rules,
Congress provided the Commission with
specific anti-manipulation authority in
the Energy Policy Act of 2005 (EPAct
2005).3 To implement this new
authority, the Commission recently
issued Order No. 670, adopting a final
rule making it unlawful for any entity,
1 16
U.S.C. 791a et seq. (2000).
of Terms and Conditions of Public
Utility Market-Based Rate Authorizations, ‘‘Order
Amending Market-Based Rate Tariffs and
Authorizations,’’ 105 FERC ¶ 61,218 (2003), reh’g
denied, 107 FERC ¶ 61,175 (2004) at Appendix A
(Market Behavior Rules Order). The Market
Behavior Rules are currently on appeal. Cinergy
Marketing & Trading, L.P. v. FERC, Nos. 04–1168
et al. (DC Cir. Filed April 28, 2004).
3 Energy Policy Act of 2005, Public Law No. 109–
58, 119 Stat. 594 (2005). Congress prohibited the
use or employment of ‘‘any manipulative or
deceptive device or contrivance’’ in connection
with the purchase or sale of electric energy or
transmission services subject to the jurisdiction of
the Commission. Congress directed the Commission
to give these terms the same meaning as under the
Securities Exchange Act of 1934, 15 U.S.C. 78j(b)
(2000).
2 Investigation
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9811
including public utility market-based
rate sellers, to engage in fraudulent or
deceptive conduct in connection with
the purchase or sale of electric energy,
natural gas, or transmission or
transportation services subject to the
jurisdiction of the Commission.4 In
order to avoid regulatory uncertainty
and confusion, to assure that all market
participants are held to the same
standard, and to provide clarity to
entities subject to our rules and
regulations, we rescind Market Behavior
Rule 2 effective upon publication of this
order in the Federal Register.
2. In addition, we will remove Market
Behavior Rules 1, 3, 4, and 5 from
public utility market-based rate tariffs
and instead codify them in our
regulations, rescind Market Behavior
Rule 6 as no longer necessary, and
rescind Appendix B of the Market
Behavior Rules Order as no longer
applicable. Contemporaneously
herewith, the Commission is issuing a
Final Rule in Docket No. RM06–13–
000 5 which is being made effective
immediately upon publication in the
Federal Register. The Market Behavior
Rules Codification Order incorporates
Rules 1, 3, 4, and 5 into our FPA
regulations with no substantive change.
In light of this action, Market Behavior
Rules 1, 3, 4, and 5 will no longer be
of any force or effect in market-based
rate tariffs as of the date the Market
Behavior Rules Codification Order is
effective.6
I. Background
3. On November 17, 2003, acting
pursuant to section 206 of the FPA, the
4 Prohibition of Energy Market Manipulation,
Order No. 670, 71 FR 4244 (Jan. 26, 2006), FERC
Stats. & Regs. ¶ 31,202, 114 FERC ¶ 61,047 (Jan. 19,
2006) (Order No. 670).
5 Compliance for Public Utility Market-Based Rate
Authorization Holders, Docket No. RM06–13–000,
issued February 16, 2006 (Market Behavior Rules
Codification Order).
6 As provided for in the Market Behavior Rules
Order, the Market Behavior Rules have been
included in tariff filings by a number of marketbased rate sellers. As a result of the changes being
made in this order and the contemporaneous
Market Behavior Rules Codification Order, the
Market Behavior Rules no longer will be part of
seller’s market-based rate tariffs. It would be
burdensome, however, to require sellers to make
new tariff filings for the sole purpose of removing
the Market Behavior Rules from their tariffs. Sellers
need not do so, unless we direct otherwise in the
future. In the absence of any such direction, at such
time as sellers make any amendments to their
market-based rate tariffs or seek continued
authorization to sell at market-based rates (e.g., in
their three-year update filings), sellers shall at that
time remove the Market Behavior Rules from their
tariffs. Nonetheless, Market Behavior Rules 2 and 6
will be of no force or effect in sellers’ tariffs as of
the date this order is published in the Federal
Register, and Market Behavior Rules 1, 3, 4, and 5
will be of no force and effect as of the effective date
of the Market Behavior Rules Codification Order.
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Federal Register / Vol. 71, No. 38 / Monday, February 27, 2006 / Notices
Commission amended all market-based
rate tariffs and authorizations to include
the Market Behavior Rules. We
determined that sellers’ market-based
tariffs and authorizations to make sales
at market rates would be unjust and
unreasonable unless they included
clearly-delineated rules governing
market participant conduct, and that the
Market Behavior Rules fairly apprised
market participants of their obligations
in competitive power markets and were
just and reasonable.7
4. Market Behavior Rule 1 requires
sellers to follow Commission-approved
rules and regulations in organized
power markets. These rules and
regulations are part of the Commissionapproved tariffs of Independent System
Operators (ISO) or Regional
Transmission Organizations (RTO), and,
where applicable, market-based rate
sellers’ agreements to operate within
ISOs and RTOs bind them to follow the
applicable rules and regulations of the
organized market.
5. Market Behavior Rule 2 prohibits
‘‘actions or transactions that are without
a legitimate business purpose and that
are intended to or foreseeably could
manipulate market prices, market
conditions, or market rules for electric
energy or electricity products.’’ Actions
or transactions explicitly contemplated
in Commission-approved rules and
regulations of an organized market, or
undertaken by a market-based rate seller
at the direction of an ISO or RTO,
however, are not violations of Market
Behavior Rule 2. In addition, Market
Behavior Rule 2 prohibits certain
specific behavior: Rule 2(a) prohibits
wash trades, Rule 2(b) prohibits
transactions predicated on submitting
false information, Rule 2(c) prohibits the
creation and relief of artificial
congestion, and Rule 2(d) prohibits
collusion for the purpose of market
manipulation.
6. Market Behavior Rule 3 requires
sellers to provide accurate and factual
information, and not to submit false or
misleading information or to omit
material information, in any
communication with the Commission,
market monitors, ISOs, RTOs, or
jurisdictional transmission providers.
7. Market Behavior Rule 4 deals with
reporting of transaction information to
price index publishers. It requires that
if a seller reports transaction data, the
data be accurate and factual, and not
knowingly false or misleading, and be
reported in accordance with the
Commission’s Policy Statement on price
7 Market Behavior Rules Order, 105 FERC ¶
61,218 at P 3, 158–74.
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indices.8 Rule 4 also requires that sellers
notify the Commission of whether they
report transaction data to price index
publishers in accordance with the Price
Index Policy Statement, and to update
any changes in their reporting status.
8. Market Behavior Rule 5 requires
that sellers retain for a minimum threeyear period all data and information
upon which they billed the prices
charged for electricity and related
products in sales made under their
market-based rate tariffs and
authorizations or in transactions the
prices of which were reported to price
index publishers.
9. Finally, Market Behavior Rule 6
directs sellers not to violate, or to
collude with others in actions that
violate, sellers’ market-based rate codes
of conduct or the Standards of Conduct
under part 358 of our regulations.9
10. Following enactment of EPAct
2005, the Commission issued a Notice of
Proposed Rulemaking on October 20,
2005, in which we proposed rules to
implement the new statutory antimanipulation provisions.10 In the AntiManipulation NOPR, we noted the
overlap between Market Behavior Rule
2 and the proposed EPAct 2005
regulations. We said that we would
retain Market Behavior Rule 2 for the
time being, but also indicated that we
would seek comment on whether we
should revise or rescind Market
Behavior Rule 2. In the meantime, we
assured market participants that we will
not seek duplicative sanctions for the
same conduct in the event that conduct
violates both Market Behavior Rule 2
and the proposed new antimanipulation rule.11
8 Price Discovery in Natural Gas and Electric
Markets, ‘‘Policy Statement on Natural Gas and
Electric Price Indices,’’ 104 FERC ¶ 61,121 (2003)
(Price Index Policy Statement).
9 18 CFR part 358 (2005). At the same time that
the Market Behavior Rules were adopted for
jurisdictional wholesale electric transactions, the
Commission issued Order No. 644, which
introduced parallel provisions in part 284 of our
regulations under the Natural Gas Act governing
pipelines and holders of blanket certificate
authority that sell natural gas at wholesale. 18 CFR
284.288 and 284.403 (2005). Not every aspect of the
electric Market Behavior Rules was applicable in
the natural gas sales context, however. The part 284
regulations encompass Market Behavior Rule 2,
including wash sales and collusion to manipulate,
and Market Behavior Rules 4 and 5.
Contemporaneously herewith, we also are issuing a
final rule in Docket No. RM06–5–000 making
parallel changes in sections 284.288 and 284.403 of
the Commission’s regulations.
10 Prohibition of Energy Market Manipulation,
113 FERC ¶ 61,067 (2005) (Anti-Manipulation
NOPR).
11 Id. at P 15. See also Enforcement of Statutes,
Orders, Rules, and Regulations, ‘‘Policy Statement
on Enforcement,’’ 113 FERC ¶ 61,068 at P 14 (2005).
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11. In an order dated November 21,
2005,12 the Commission, acting
pursuant to section 206 of the FPA,
proposed to rescind the Market
Behavior Rules once we issued final
regulations implementing the antimanipulation provisions of EPAct 2005
and have had the opportunity to
incorporate certain other aspects of the
Market Behavior Rules in appropriate
Commission orders, rules, and
regulations. The Commission also
requested comment on whether the
Market Behavior Rules should be
revised or rescinded. We noted that
rescission of the Market Behavior Rules
will simplify the Commission’s rules
and regulations, avoid confusion, and
provide greater clarity and regulatory
certainty to the industry. We
emphasized our belief that rescinding
the Market Behavior Rules is consistent
with Congressional intent in EPAct
2005, which provided the Commission
with explicit anti-manipulation
authority, and that rescission will
simplify and streamline the rules and
regulations sellers must follow, yet not
eliminate beneficial rules governing
market behavior.13
12. The Commission received 21
comments and four reply comments in
response to the November 21 Order.14
Many of the comments support the
Commission’s overall objectives in this
proceeding, that is, to simplify the
Commission’s rules and regulations,
avoid confusion, and provide greater
clarity and regulatory certainty to the
industry, while not eliminating
beneficial rules governing market
behavior by addressing them in other
rules and regulations.
13. On January 19, 2006, the
Commission issued Order No. 670,
adopting regulations implementing the
EPAct 2005 anti-manipulation
provisions. In Order No. 670 the
Commission adopted a new part 1c of
our regulations under which it is
12 Investigation of Terms and Conditions of Public
Utility Market-Based Rate Authorizations, 113
FERC ¶ 61,190 (2005) (November 21 Order).
13 November 21 Order, 113 FERC ¶ 61,190 at P
13. At the same time we issued a Notice of
Proposed Rulemaking in Docket No. RM06–5–000
proposing similar changes to sections 284.288 and
284.403 of the regulations under the Natural Gas
Act, 18 CFR 284.288 and 284.403 (2005).
14 Entities filing comments and reply comments
are listed in the Appendix to this order, along with
the acronyms for such commenters. The
Commission has accepted and considered all
comments filed, including late-filed comments.
With respect to commenters that also filed motions
to intervene, we are treating this proceeding as a
rulemaking seeking comments from all interested
entities. See Investigation of Terms and Conditions
of Public Utility Market-Based Rate Authorizations,
‘‘Order Addressing Application of Ex Parte Rule
and Requests for Extension of Time,’’ 104 FERC ¶
61,132 at P 5 (2003).
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Federal Register / Vol. 71, No. 38 / Monday, February 27, 2006 / Notices
‘‘unlawful for any entity, directly or
indirectly, 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 entity.’’15
II. Discussion
A. Market Behavior Rule 2
14. In the November 21 Order the
Commission sought comment on
whether there is a need or basis for
retaining existing Market Behavior Rule
2 in light of the then-proposed antimanipulation rule, and whether the
Commission should retain any of the
affirmative defenses against a claim of
manipulation, that is, actions or
transactions explicitly contemplated by
Commission rules, or undertaken at the
direction of an ISO or RTO, or actions
taken for a ‘‘legitimate business
purpose.’’
hsrobinson on PROD1PC70 with NOTICES
1. Should the Commission Retain or
Rescind Market Behavior Rule 2?
a. Comments
15. Commenters were divided on the
issue of whether Rule 2 should be
retained or rescinded in light of the antimanipulation provisions. Those in favor
of retaining Rule 2 argue two principal
points: first, the foreseeability standard
of Rule 2 reaches negligent conduct or
other conduct that falls short of being
‘‘provably’’ intentional but nonetheless
has a foreseeable impact on rates; and
second, Rule 2 has lasting utility
because it provides a remedy for
activities that may not be fraudulent,
but could nevertheless function to
manipulate prices for wholesale electric
power and transmission services.16
16. Several commenters argue that
Rule 2 should be retained because it
prohibits conduct that ‘‘foreseeably
could manipulate market prices,’’ and
does not require the showing of scienter
(intentional or reckless conduct), which
means that Rule 2 reaches a broader
range of conduct that may adversely
affect consumers and energy markets
than would the proposed anti15 18
CFR 1c.2(a), 71 FR 4244, 4258 (2006).
at 4–7; CAISO at 3–7; CPUC at 5–9;
NASUCA at 5–10; NECPUC at 5–6; NJBPU at 5–7;
NYISO at 7–12; PG&E at 7–12; PJMICC at 7–11;
TDUS at 17–20.
16 CEOB
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manipulation rule alone.17 CPUC and
others argue that nothing in EPAct 2005
dictates or justifies the repeal of Rule 2.
They argue that, in determining whether
rates are just and reasonable, the
Commission should only focus on the
effect of a seller’s action and not on the
seller’s intent, and that relying solely on
intent may result in rates becoming
unjust and unreasonable because it
would limit the Commission’s ability to
remedy conduct falling short of being
intentional but whose rate-altering effect
is foreseeable.18 PG&E and others argue
that there is no risk of confusion or
double jeopardy created by having both
the Market Behavior Rules and the antimanipulation rule promulgated
pursuant to EPAct 2005, and TDUS
argues that repeal of the Market
Behavior Rules may well create
confusion rather than promote clarity.19
More generally, TDUS argues that the
need for vigilant consumer protection is
just as strong today as it was in 2003
when the Market Behavior Rules were
adopted.20 NYISO comments that the
scienter standard of the proposed antimanipulation regulations will make
extensive discovery a necessity and
greatly increase the cost of enforcement
for all parties involved.21
17. APPA/TAPS (which argue that
Rule 2 should be interpreted to include
a scienter requirement) and others
comment that Rule 2 should be retained
because it prohibits the exercise of
market power.22 SMUD notes that a
tariff condition that protects the rights
of consumers to refunds of charges that
are the product of the exercise of market
power or collusion is critical to
customers who may have no antitrust
remedy for such conduct.23 PJM
supports repeal of the Market Behavior
Rules (including Rule 2), but encourages
the Commission to amplify its
continuing authority to take action to
curb the exercise of market power in
particular transactions in contexts not
necessarily including fraud.24
18. Commenters advocating rescission
of Rule 2 argue three main points. First,
commenters argue that the Commission
should not retain the foreseeability
standard of proof of Rule 2 because of
the clear Congressional intent in section
17 CAISO at 1–2, 8; CPUC at 4, 6–9; NASUCA at
5; NECPUC at 2, 6; NJBPU at 5–6; PJMICC at 3, 7–
8, 10–11; TDUS (Reply) at 11–12.
18 CPUC at 7–8; CEOB at 4; NASUCA at 5, 8;
NECPUC at 6; PJMICC at 10.
19 PG&E at 12; NYISO at 14; TDUS at 14.
20 TDUS at 5.
21 NYISO at 11.
22 APPA/TAPS at 3, 8–12; ISO–NE (Reply) at 11;
PJM at 4–5; TDUS at 2, 7.
23 SMUD at 2–3.
24 PJM at 1, 4–5.
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9813
1283 of EPAct 2005, which directs the
Commission to adopt a standard of
proof based upon scienter.25 Second,
commenters supporting rescission argue
that there should be only one definition
or standard to define what constitutes
market manipulation. Retaining two sets
of proscriptions, they argue, could lead
to regulatory uncertainty and confusion,
and would be unduly discriminatory
because of the dual standard applicable
to market-based rate sellers of electricity
while the remaining industry
participants would be covered solely by
the new standard of section 1c.2.26
Third, the anti-manipulation regulations
represent an improvement over Rule 2
because, among other things, the
language of new section 1c.2 provides
stakeholders with clarity of language not
present in Rule 2, and similarly, the
broad language of section 1c.2 means
that any behavior forbidden by Rule 2
would also act as a fraud within the
meaning of the anti-manipulation
regulations.27
19. EEI disagrees with commenters
who argue for retention of the Market
Behavior Rules in market-based rate
tariffs on the theory that they provide an
additional check on unlawful exercise
of market power.28 To the contrary, EEI
thinks the Commission has established
an increasingly sophisticated screening
process to identify and require
mitigation of any potential market
power a tariff applicant may possess,
prior to granting or reauthorizing
market-based rate authority, and has
developed several other tools, including
RTO market rules and tariffs, market
monitor oversight, and OMOI
enforcement capabilities, to prevent and
remedy the exercise of market power.29
20. Some commenters supporting
rescission of Rule 2, however, do so
with the qualification that the
specifically prohibited activities in Rule
2(a) through 2(d) (i.e. wash trades,
transactions predicated on submitting
false information, transactions creating
and relieving artificial congestion, and
collusion for the purpose of market
manipulation) be retained to provide
clearer guidance to market
participants.30 SUEZ supports
rescission, but thinks the Commission
should take steps to explain that it
intends to retain the precedent that has
25 Ameren at 7; Cinergy at 7–8; EEI at 4–5, 8–9;
EPSA at 6–7; PNMR at 8.
26 Cinergy at 6–7; EEI at 5; PJM at 1–2.
27 Ameren at 6, 9; Cinergy at 7.
28 EEI (Reply) at 7–8.
29 EEI (Reply) at 8.
30 EEI at 6; Indicated Market Participants at 12–
13; PNMR at 6–7; SCE at 4.
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accumulated under the Market Behavior
Rules.31
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b. Commission Determination
21. The Commission finds it
unnecessary to retain Rule 2. Congress
prohibited market manipulation by any
entity and defined manipulation to
include the requirement of scienter.32 It
would be inconsistent with Congress’
direction if foreseeability were retained
as a lesser standard of proof for market
manipulation perpetrated by public
utility market-based rate sellers. To
avoid the potential for uneven
application of regulatory requirements
based on whether an entity is a public
utility under the FPA and a ‘‘nonjurisdictional’’ entity, or whether an
entity is a public utility selling under
market-based rate authority or selling at
cost-based rates, the same standard of
proof should apply to all entities and all
jurisdictional sales for purposes of
determining whether market
manipulation occurred. It is not
appropriate, as some commenters
suggest, for the Commission to maintain
a lesser standard of proof for only
certain market participants or certain
types of sales.
22. The Commission rejects comments
that suggest Rule 2 has a purpose other
than to prevent market manipulation,
that is, also to curb market power or
anti-competitive conduct that does not
meet the deceptive conduct criteria for
manipulation. Rule 2 focused on actions
or transactions intended to manipulate
market prices, conditions, or rules, not
the existence or use of market power
absent some manipulation. Market
power, of course, can be used by a seller
to manipulate markets; in such cases it
is the act of manipulation—perpetrating
a fraud or deceit of some kind—that is
the violation of Rule 2 or of the new
anti-manipulation rule.
23. Generally speaking, however,
market power is a structural issue to be
remedied, not by behavioral
prohibitions, but by processes to
identify and, where necessary, mitigate
market power that a tariff applicant may
possess or acquire. This occurs in the
31 SUEZ at 6, 10, referring to Intertie Bidding in
the California Independent System Operator’s
Supplemental Energy Market, ‘‘Order Authorizing
Public Disclosure of Staff Report of Investigation,’’
112 FERC ¶ 61,333 (2005); see generally EPSA at
9–10, 13.
32 In new section 222 of the FPA, Congress used
the terms ‘‘manipulative or deceptive device or
contrivance’’ and directed that they be given the
same meaning as used in section 10b of the
Securities Exchange Act of 1934. It is well settled
that those terms require a showing of scienter, that
is, an intent to deceive, manipulate or defraud.
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201
(1976). See Order No. 670, 114 FERC ¶ 61,047 at
P 52–53.
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14:15 Feb 24, 2006
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screening process before the
Commission grants an application for
market-based rate authority, on
consideration of changes in the seller’s
status or operations, and in the triennial
review of market-based rate
authorization, all of which are designed
to assure just and reasonable rates. In
addition, the Commission requires
RTOs and ISOs to have independent
market monitors,33 and the Office of
Market Oversight and Investigations
monitors market operations. When such
monitoring detects market abuse or
structural problems, they will be
addressed under FPA sections 205 or
206 to assure that reliance on market
mechanisms produces just and
reasonable rates.
24. With respect to the suggestion that
the specific proscribed behaviors in
Market Behavior Rule 2(a)–(d) be
retained, the Commission finds this
unnecessary. As we stated in issuing the
new anti-manipulation rule, the
specifically prohibited actions in Rule 2
(i.e., wash trades, transactions
predicated on submitting false
information, transactions creating and
relieving artificial congestion, and
collusion for the purpose of market
manipulation) all are prohibited
activities under new section 1c.2 of our
regulations and are subject to sanctions
and remedial action.34 Furthermore, we
recognize that fraud is a very factspecific violation, the permutations of
which are limited only by the
imagination of the perpetrator.
Therefore, no list of prohibited activities
could be all-inclusive. The absence of a
list of specific prohibited activities does
not lessen the reach of the new antimanipulation rule, nor are we
foreclosing the possibility that we may
need to amplify section 1c.2 as we gain
experience with the new rule, just as the
SEC has done.35
33 The Commission issued a policy statement on
market monitors which discussed, among other
things, referrals by market monitors to the
Commission when a market monitor finds actions
by a market participant that may be a violation of
the Market Behavior Rules. Market Monitoring
Units in Regional Transmission Organizations and
Independent System Operators, ‘‘Policy Statement
on Market Monitoring Units,’’ 111 FERC ¶ 61,267
at P 6 and Appendix A (Protocols on Referrals). We
clarify that this Policy Statement applies to
potential violations of the new Order No. 670 antimanipulation rule in lieu of Market Behavior Rule
2, and will apply to the requirements of Market
Behavior Rules 1, 3, 4, 5, and 6 to the extent they
are incorporated into other parts of the
Commission’s regulations.
34 Order No. 670, 114 FERC ¶ 61,047 at P 59.
35 After considerable experience with Rule 10b–
5, upon which our new anti-manipulation rule is
modeled, the SEC has expanded the original Rule
10b–5 to add a number of specific provisions
describing prohibited conduct. See 17 CFR
240.10b–5–1 through 240.10b–5–14.
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25. In short, rescission of Rule 2 is
consistent with Congressional direction
and will not dilute customer protection.
If conduct occurs that is not the result
of fraud or deceit but nonetheless
results in unjust and unreasonable rates,
a person may file a complaint at the
Commission under FPA section 206, or
the Commission on its own motion may
institute a proceeding under section
206, to modify the rates that have
become unjust and unreasonable. In
many respects customers are better
protected by section 1c.2’s breadth and
purposeful design as a broad ‘‘catch all’’
anti-fraud provision.36
2. Affirmative Defenses
a. Actions or Transactions Undertaken
at the Direction of a Commissionapproved ISO or RTO
i. Comments
26. Several commenters argue that
actions undertaken at the direction of a
Commission-approved ISO or RTO
should have explicit safe harbor status
because market participants should be
able to rely on the directives of an ISO
or RTO without fear of prosecution for
market manipulation for following such
provisions.37 CEOB and PJM, however,
caution that such an affirmative defense
should not be allowed in circumstances
where: (1) The market participant does
not have ‘‘clean hands’’ in creating the
situation that necessitated the directions
of the ISO/RTO; (2) the rule/direction is
general or ambiguous; or (3) there is any
associated fraudulent conduct because a
market seller should not be able to use
the RTO as a shield for those activities
not explicitly permitted by market rules
or where the RTO did not specifically
prohibit the behavior.38 Similarly, SCE,
informed by its experience during the
California energy crisis of 2001–2002,
argues that actions which were
individually contemplated by ISO/RTO
rules should not categorically be exempt
from punishment should the
Commission find that, in combination,
intentional, unlawful market
manipulation has nevertheless
occurred.39
36 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).
37 Ameren at 8; CAISO at 11; EEI at 6; Indicated
Market Participants at 11–12; NYISO at 16–17;
PG&E at 14; SUEZ at 1, 7.
38 CEOB at 7; PJM at 6.
39 SCE at 4.
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ii. Commission Determination
27. Comments that market
participants should be able to rely on
the directives of an ISO or RTO make a
valid point. As the Commission stated
in Order No. 670, if a market participant
undertakes an action or transaction that
is explicitly contemplated in
Commission-approved rules and
regulations, we will presume that the
market participant is not in violation of
section 1c.2. If a market participant
undertakes an action or transaction at
the direction of an ISO or RTO that is
not approved by the Commission, the
market participant can assert this as a
defense for the action taken.40 Of
course, if a market participant acting
with the requisite scienter has provided
inaccurate or incomplete information to
the ISO or RTO, and the ISO and RTO
acts in reliance on the false or
incomplete information, following such
ISO or RTO directions is no defense to
such manipulative conduct for that
market participant. Just as we reject
calls for inclusion of a list of prohibited
conduct in section 1c.2, we similarly
reject a list-type approach to defenses.
Instead, we will evaluate all of the facts
and circumstances of an allegation of
market manipulation before deciding
how to proceed.
b. Legitimate Business Purpose
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i. Comments
28. Commenters are divided on
whether the Commission should retain
the ‘‘legitimate business purpose’’
provision of Rule 2. CEOB and CAISO
oppose retention because in their view
there is simply no manner in which
activity taken with intent to defraud can
constitute a legitimate business
practice.41 CPUC argues that no such
‘‘good faith’’ defense exists in the
context of SEC Rule 10b–5.42 NASUCA
argues that the Commission should not
keep only aspects of Rule 2 that are
favorable to market-based rate sellers.43
EEI, however, thinks the affirmative
defense of legitimate business purpose
was part of a generic definition of
market manipulation that was vague
and confusing to many in the industry,
but it believes that the concept of
legitimate business purpose should be
maintained as an affirmative defense.44
NYISO says it would be appropriate to
continue the legitimate business
purpose defense now specified in Rule
2 because this defense would ensure
40 Order
No. 670 at P 67.
at 7; CAISO at 11–12.
42 CPUC at 11.
43 NASUCA at 20.
44 EEI at 11.
41 CEOB
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proper consideration of the economic,
commercial and physical complexities
of competitive energy markets,
including such practices as valid
arbitrage between real-time and forward
markets.45 EPSA argues that the
legitimate business purpose affirmative
defense should also be preserved given
the intent standard required by EPAct
2005.46 Similarly, Indicated Market
Participants argue that a legitimate
business purpose should be a complete
defense to an allegation of market
manipulation whether under Market
Behavior Rule 2 or under the antimanipulation rule.47
ii. Commission Determination
29. In promulgating section 1c.2, the
Commission purposefully modeled its
anti-manipulation rule after SEC Rule
10b–5 to provide stakeholders with as
much regulatory certainty and clarity as
possible, given the large body of
precedent interpreting SEC Rule 10b–
5.48 SEC Rule 10b–5 does not include
provisions for ‘‘good faith’’ defenses.
However, in all cases, the intent behind
and rationale for actions taken by an
entity will be examined and taken into
consideration as part of determining
whether the actions were manipulative
behavior. The reasons given by an entity
for its actions are part of the overall
facts and circumstances that will be
weighed in deciding whether a violation
of the new anti-manipulation regulation
has occurred. Therefore, the
Commission rejects calls for inclusion of
a ‘‘legitimate business purpose’’
affirmative defense.
B. Remedies and Sanctions
1. Comments
30. A number of commenters arguing
for retention of the Market Behavior
Rules express concern that the Market
Behavior Rules provide the Commission
with remedies, such as disgorgement of
unjust profits for tariff violations, that
may not be available under the antimanipulation regulations.49 These
commenters also contend that civil
penalties may not be a sufficient
deterrent and, regardless, such sanctions
are paid to the United States Treasury
45 NYISO
at 16–17.
at 10, 13–14.
47 Indicated Market Participants at 10–11.
48 Order No. 670, 114 FERC ¶ 61,047 at P 30–31.
49 APPA/TAPS at 3, 13; CEOB at 3; NASUCA at
5, 7–8, 11–13; NECPUC at 1, 3; NYISO at 10–13;
PJMICC at 8–9; SMUD at 3; TDUS at 24–27, TDUS
(Reply) at 14. ISO-NE, for instance, urges the
Commission to clarify that, under new FPA section
222, we are not limited to imposing civil penalties
in the event of market manipulation, but may also
order disgorgement of profits or other economic
benefits to be returned to ratepayers. ISO-NE
(Reply) at 14–17.
46 EPSA
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and not to the damaged customers.
NYISO seeks clarification on whether
the Commission has discretion to use
monies it receives in the form of civil
penalties to compensate victims of
market manipulation.50
31. Arguing for repeal of the Market
Behavior Rules, EEI submits that, under
new FPA section 222, disgorgement of
profits proximately linked to welldefined acts of market manipulation is
a remedy available to the Commission
and applicable to all, and not limited to
market-based rate sellers.51
2. Commission Determination
32. Concerns over the extent of the
Commission’s remedial powers are
misplaced. The Market Behavior Rules
Order addressed a concern, stemming
from the abuses in Western markets in
2000–2001, that there were not clear
rules to deal with abusive market
conduct. By fashioning tariff rules
prohibiting manipulation, we
established a clear basis for ordering
disgorgement of unjust profits, along
with other remedial actions, in the event
of violations of such rules.52 With the
issuance of Order No. 670 and the
availability of significant civil monetary
penalties for violations, the Commission
now has a more complete set of
enforcement tools—both rules and
remedies and/or sanctions—to deal with
market manipulation. The Commission
will use these authorities as the facts
and circumstances of each case indicate,
as our discretion is at its zenith in
determining an appropriate remedy for
violations.53 Accordingly, if companies
subject to our jurisdiction violate the
statutes, orders, rules, or regulations
administered by the Commission, the
Commission can order, among other
things, disgorgement of unjust profits.54
50 NYISO
at 13.
(Reply) at 4–5, 12–14.
52 Market Behavior Rules Order, 105 FERC ¶
61,218 at P 149 (stating ‘‘in approving these Market
Behavior Rules and requiring sellers to be fully
accountable for any unjust gains attributable to their
violation, we do not foreclose our reliance on
existing procedures or other remedial tools, as may
be necessary, including generic rule changes or the
approval of new market rules applicable to specific
markets’’). See also Market Behavior Rules Order,
order on reh’g, 107 FERC ¶ 61,175 at P 129.
53 See Niagara Mohawk Power Corp. v. FERC, 379
F.2d 153, 159 (DC Cir. 1967); accord 16 U.S.C. 825h
(2000); Mesa Petroleum Co. v. FERC, 441 F.2d 182,
187–88 (DC Cir. 1971); Gulf Oil Corporation v. FPC,
563 F.2d 588, 608 (3rd Cir. 1977), cert. denied 434
U.S. 1062, reh’g denied, 435 U.S. 981 (1978);
Consolidated Gas Transmission Corp. v. FERC, 771
F.2d 1536, 1549 (DC Cir. 1985).
54 See, e.g., Transcontinental Gas Pipe Line Corp.
v. FERC, 998 F.2d 1313, 1320 (5th Cir. 1993)
(holding the remedy of disgorgement of ill-gotten
profits for a violation of the Natural Gas Act ‘‘well
within [the Commission’s] equitable powers’’);
51 EEI
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The Commission also has the option of
conditioning, suspending, or revoking
market-based rate authority, certificate
authority, or blanket certificate
authority.55 Moreover, while section
206 of the FPA does not permit the
Commission to establish just and
reasonable rates prior to the refund
effective date established under section
206, the Commission clearly has
authority to order disgorgement of
profits associated with an illegally
charged rate, i.e., a rate other than the
rate on file or in violation of a
Commission rule, order, regulation, or
tariff on file.56 Therefore, the
Commission may use disgorgement of
unjust profits where appropriate,
including to remedy a violation of the
new anti-manipulation regulations.
33. EPAct 2005 has enhanced the
Commission’s civil penalty authority.57
Civil penalties, however, serve a
different purpose from disgorgement or
other equitable remedies. As we have
said, the purpose of civil penalties is to
‘‘encourage compliance with the
law.’’ 58 The purpose of disgorgement,
on the other hand, is to remedy unjust
enrichment. The Commission will
Coastal Oil & Gas Corp. v. FERC, 782 F.2d 1249,
1253 (5th Cir. 1986) (profits from illegal intrastate
sales of gas in excess of a just and reasonable rate
may be subject to disgorgement).
55 See, e.g., Enron Power Marketing, Inc., 103
FERC ¶ 61,343 at P 52 (2003); Fact-Finding
Investigation of Potential Manipulation of Electric
and Natural Gas Prices, 99 FERC ¶ 61,272 at 62,154
(2002); San Diego Gas & Electric Company, 95 FERC
¶ 61,418 at 62,548, 62,565, order on reh’g, 97 FERC
¶ 61,275 (2001), order on reh’g, 99 FERC ¶ 61,160
(2002); accord Enron Power Marketing, Inc., ‘‘Order
Proposing Revocation of Market-Based Rate
Authority and Termination of Blanket Marketing
Certificates,’’ 102 FERC ¶ 61,316 at P 8 and n.10
(2003), and cases cited therein.
56 Transcontinental Gas Pipe Line Corp., 998 F.2d
1313 at 1320; see also Dominion Resources, Inc. et
al., 108 FERC ¶ 61,110 (2004) (disgorgement for
violations of the Commission’s Standards of
Conduct); El Paso Electric Company, 105 FERC ¶
61,131 at P35 (2003) (finding disgorgement an
‘‘appropriate and proportionate remedy’’ for a
violation of the Federal Power Act); Kinder Morgan
Interstate Gas Transmission LLC, 90 FERC ¶ 61,310
(2000) (disgorgement ordered to remedy preferential
discounts to affiliates); Stowers Oil & Gas Company,
44 FERC ¶ 61,128 (1988), reh. denied in part and
granted in part, 48 FERC ¶ 61,230 at 61,817 (1989),
appeal dismissed sub nom. Northern Natural Gas
Co. v. FERC, Case Nos. 89–1512 et al., (DC Cir.
1992) (Commission ‘‘properly exercised its broad
equitable power’’ in requiring disgorgement of
unjust enrichment resulting from illegal sales of
gas).
57 EPAct 2005 expanded the Commission’s FPA
civil penalty authority to encompass violations of
all provisions of FPA part II (EPAct 2005 section
1284(e)(1), amending FPA section 316A(a)), and
established the maximum civil penalty the
Commission can assess under FPA part II as $1
million per day per violation. EPAct 2005 section
1284(e)(2), amending FPA section 316A(b).
58 Procedures for the Assessment of Civil
Penalties under Section 31 of the Federal Power
Act, Order No. 502, 53 FR 32035 (Aug. 23, 1988),
FERC Stats. & Regs. ¶ 30,828 (Aug. 17, 1988).
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choose from the full range of available
remedies and penalties—revocation,
suspension, or conditioning of
authority, disgorgement, and civil
penalties—according to the nature of the
violation and all of the facts presented.
The imposition of both remedies and
civil penalties in tandem may be
necessary under certain circumstances
to reach a fair result.59 These are
separate powers available to the
Commission, as they arise under
different provisions of the FPA.60
34. We note that other agencies also
impose civil penalties and equitable
remedies in tandem. For example, the
SEC can require an accounting and
disgorgement to investors for losses and
also impose penalties for the
misconduct, and the CFTC can order
restitution or obtain disgorgement and
also impose fines for violations.61
Similarly, in the environmental context,
the government is free to seek an
equitable remedy in addition to, or
independent of, civil penalties.62 When
we impose disgorgement as a remedy,
we have broad discretion in allocating
monies to those injured by the
violations. As we noted in our Policy
Statement on Enforcement, each case
depends on the circumstances
presented, and the Commission will not
predetermine which remedy and/or
sanction authorities it will use.63
59 Policy Statement on Enforcement, 113 FERC ¶
61,068 at P 12 (2005) (‘‘Our enhanced civil penalty
authority will operate in tandem with our existing
authority to require disgorgement of unjust profits
obtained through misconduct and/or to condition,
suspend, or revoke certificate authority or other
authorizations, such as market-based rate authority
for sellers of electric energy’’).
60 The authority to order disgorgement and other
equitable remedies arises under the ‘‘necessary or
appropriate’’ powers of section 309 of the FPA.
Towns of Concord v. FERC, 955 F.2d 67, 73 (DC Cir.
1992). The authority to impose civil penalties arises
under section 316A of the FPA as amended by
EPAct 2005.
61 See sections 21–21C of the Securities Exchange
Act, 15 U.S.C. 78u–78u–3 (2000); SEC v. Happ, 392
F.3d 12, 31–33 (1st Cir. 2004) (upholding SEC’s
imposition of both disgorgement and a civil penalty
equal to the amount of disgorgement; further, the
court noted that the wrongdoer bears the risk of
uncertainty in calculating the amount of
disgorgement). The CFTC can revoke or suspend a
registration, suspend or prohibit certain trading,
issue cease and desist orders, order restitution, and
seek equitable remedies (injunction, rescission, or
disgorgement), all in addition to imposing a
monetary fine. 7 U.S.C. 13a and 13b (2000); Comm.
Fut. L. Rep. (CCH) ¶ 26,265 at 42,247 (1994).
62 See, e.g., Tull v. United States, 481 U.S. 412,
425 (1987) (holding that the Clean Water Act does
not intertwine equitable relief with the imposition
of civil penalties; instead, each kind of relief is
separately authorized in distinct statutory
provisions).
63 Policy Statement on Enforcement, 113 FERC
¶ 61,068 at P 13 (2005) (‘‘[W]e will not prescribe
specific penalties or develop formulas for different
violations. It is important that we retain the
discretion and flexibility to address each case on its
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C. Market Behavior Rules 1, 3, 4, 5, and
6
35. In the November 21 Order, we
indicated that some provisions of the
Market Behavior Rules, such as Rules 1
and 6, restate existing obligations, and
that other parts of the Market Behavior
Rules, such as Rule 3 and the first part
of Rule 4, would be covered by the new
anti-manipulation rule. Other rules, we
noted, should be incorporated into other
regulatory requirements. 64 We
indicated that action on the Market
Behavior Rules would be taken in such
a way as to assure there would be no
gap in regulatory requirements.
1. Comments
36. Some commenters addressed Rule
1, arguing that a requirement to comply
with organized market rules should be
retained because these markets may not
have adequate remedies for violations of
their rules, or that such rules can be
violated without fraudulent behavior.65
NASUCA argues that Rule 1 provides a
disgorgement remedy when a seller’s
conduct violates the tariff rules of
another utility (the RTO).66 On the other
hand, Indicated Market Participants
support elimination of Rule 1, but ask
the Commission to make clear that
compliance with the requirements of an
organized market is an affirmative
defense to a claim of manipulation.67
37. Other commenters addressed Rule
3, suggesting that the requirement of
providing accurate and factual
information in communications is
broader than prohibiting manipulation.
NASUCA believes that Rule 3 covers
misinformation that could be harmful
but that does not amount to intentional
misrepresentation, such as negligent
transaction reporting that could
manipulate index prices.68 NYISO
agrees and urges the Commission to
retain a broad requirement for accurate
and complete information provided to
RTOs, ISOs, and the Commission.69 PJM
likewise says that Rule 3 is needed to
impose an affirmative duty to provide
accurate information even in
circumstances involving no intent to
merits, and to fashion remedies appropriate to the
facts presented, including any mitigating factors.’’).
64 November 21 Order at P 19–23.
65 APPA/TAPS at 3; CAISO at 10; CPUC at 3, 5–
6; NYISO at 14–15.
66 NASUCA at 6–7. NASUCA notes that
disgorgement is available as a remedy when a seller
violates its own tariff but, absent Rule 1, it is not
clear that the disgorgement remedy (as opposed to
penalties that may apply under the RTO tariff)
would be available for a seller’s violation of RTO
tariff provisions or rules.
67 Indicated Market Participants at 15–16.
68 NASUCA at 21.
69 NYISO at 19.
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deceive.70 CAISO argues that Rule 3
prohibits submitting any false
information, not just material
information.71 SCE argues that Rule 3 is
a superior formulation to the antimanipulation rule and urges that it be
used instead of the Rule 10b–5
language.72
38. Some commenters believe Rule 4
is unnecessary, arguing that false
reporting to an index publisher would
be a violation of the new antimanipulation rule. EPSA, for instance,
urges the Commission to repeal Rule 4
but reaffirm the applicability of the
Policy Statement on price indices.73
Ameren, on the other hand, proposes
that Rule 4 be added to the antimanipulation regulations to explicitly
require any entity to provide accurate
and factual information to price index
publishers.74 CAISO believes that it is
necessary to maintain a separate
requirement in Rule 4 to report
transaction information accurately to
the extent a seller reports such
information to price index publishers,
because the accuracy of the information
published should not depend upon
whether the provider of the information
had an intent to defraud.75 EEI sees
value in the guidance provided by Rule
4 and suggests that it be adopted as a
Commission rule, thereby applying to
all market participants.76 TDUS calls for
the retention of requirements to report
changes in reporting status.77
39. There was little controversy over
Rule 5, as parties generally
recommended that the record retention
requirement be retained. CAISO says the
data retention requirement is crucial to
the Commission’s enforcement
powers.78 The Indicated Market
Participants say that the record
retention requirement more
appropriately belongs in the
Commission’s general regulations so
that it will be applicable to more than
just market-base rate sellers.79 EEI
supports keeping the three-year
retention requirement, noting that
otherwise the default ten-year period of
part 125 of the Commission’s
regulations might be deemed to apply.80
NASUCA, however, is concerned that
moving the record retention
70 PJM
at 7–8; TDUS at 21.
at 12.
72 SCE at 6; see also Ameren at 11; PG&E at 14.
73 EPSA at 11–12, 15–16. See also SUEZ at 10–
11; Indicated Market Participants at 16–19.
74 Ameren at 11; SCE at 6.
75 CAISO at 12.
76 EEI at 12–13.
77 TDUS at 27.
78 CAISO at 10. See also CPUC at 9; TDUS at 27.
79 Indicated Market Participants at 17–18.
80 EEI at 13.
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requirement to another rule might limit
‘‘remedies for the benefit of consumers
when records are not kept.’’81
40. There also was general agreement
that Rule 6, for the most part, restates
requirements independently applicable
to market-based rate sellers under each
seller’s code of conduct or by the
Standards of Conduct in Part 358 of the
Commission’s regulations. PJM, EEI, and
EPSA think Rule 6 may be rescinded as
duplicative and unnecessary.82 APPA/
TAPS, however, believes that Rule 6
should be retained because marketbased rate sellers’ codes of conduct and
the Standards of Conduct do not
identify remedies for violations, thus
potentially leaving the Commission
without an appropriate remedy.83 SCE,
on the other hand, expresses concern
that aspects of Rule 6, particularly its
prohibition of collusion, may not be
captured by the proposed antimanipulation regulations because there
are collusive activities that do not
amount to fraud.84
2. Commission Determination
41. The Commission already
indicated that certain requirements of
the Market Behavior Rules would be
recast in other Commission rules or
regulations. Upon consideration of the
comments, we have determined that
there is benefit to incorporating most of
the non-manipulation provisions of the
Market Behavior Rules into the
Commission’s regulations, and we do so
contemporaneously in the Market
Behavior Rules Codification Order.
While the basis for incorporating Rules
1, 3, 4, and 5 in our regulations is
discussed there, we note the value
provided by these rules briefly below.
We also discuss the reason for
rescinding Rule 6 as unnecessary.
42. Market Behavior Rule 1 is
applicable in organized RTO or ISO
markets. While it is essentially a
restatement of existing obligations that
are in the tariffs of the RTOs and ISOs,
applicable to market participants
through their participant agreements,
there is value to customers in
reinforcing the obligation to operate in
accordance with Commission-approved
rules and regulations by placing this
expectation in the Commission’s
regulations. Accordingly, the Market
81 NASUCA
at 7.
82 PJM at 8; EEI at 13; EPSA at 16.
83 APPA/TAPS at 13. APPA/TAPS agrees that
Rule 6 does not itself impose any new obligation,
but notes that the Market Behavior Rules also
provide for remedies for rule violations. Id.
84 SCE at 7. SCE is concerned that market
participants could collude, through a combination
of lawful means, to accomplish an unlawful
purpose. Id.
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Behavior Rules Codification Order
includes Market Behavior Rule 1 in the
Commission’s regulations.
43. Market Behavior Rule 3 requires
accurate and factual communications
with the Commission, Commissionapproved market monitors,
Commission-approved RTOs and ISOs,
or jurisdictional transmission providers.
In the November 21 Order we
commented that this requirement would
be covered by the new antimanipulation rule, and it could be
confusing to have a duplicate rule
regarding accurate and factual
information.85 As commenters point
out, however, this rule is somewhat
broader than the new anti-manipulation
rule, as it applies to all
communications, not just those that are
material in furtherance of a fraudulent
or deceptive scheme. Accordingly, we
believe the substance of Rule 3 can be
incorporated in our regulations without
duplicating or causing undue confusion
with respect to the new antimanipulation rule.
44. Market Behavior Rule 4 requires
sellers to provide accurate data to price
index publishers, if the seller is
reporting transactions to such
publishers, and includes a requirement
that sellers notify the Commission of
their price reporting status and of any
changes in that status. While a
deliberate false report would be a
violation of the new anti-manipulation
rule, there is no confusion in stating this
in our regulations and thereby
reinforcing the importance of the Price
Index Policy Statement. The second
aspect of Market Behavior Rule 4,
notification to the Commission of the
market participant’s price reporting
status and of any changes in that status,
is not otherwise provided for. This is a
simple and non-burdensome way for the
Commission to be informed of the
prevalence of price reporting to price
index developers, and is included in the
Market Behavior Rules Codification
Order.86
45. Market Behavior Rule 5 requires
sellers to maintain certain records for a
period of three years to reconstruct
prices charged for electricity and related
products. This is different from the
record retention requirements in part
85 November
21 Order at P 19.
is discussed in the Market Behavior Rules
Codification Order, codification of the notification
requirement does not mean that sellers who have
previously provided notifications pursuant to Rule
4 now must repeat that notification. Only sellers
who have not previously provided a notification of
their price reporting status, and sellers who have a
change in their reporting status, are required to
notify the Commission. In other words, codification
of Rule 4 does not increase the burden of, or
requirements for, notification in any way.
86 As
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125 of our regulations, which largely are
related to cost-of-service rate
requirements.87 Given the importance of
records related to charges under marketbased rate authority to any investigation
of possible wrongdoing, a separate
record retention requirement
specifically for market-based
transactions is necessary. We include
the Rule 5 record retention requirement
in the Market Behavior Rules
Codification Order.88
46. Market Behavior Rule 6 requires
adherence to a market-based rate seller’s
code of conduct and to the Order No.
2004 Standards of Conduct, and
prohibits collusion to violate codes of
conduct or the Standards of Conduct.
The Standards of Conduct are already in
our regulations. Many market-based rate
sellers have a code of conduct in their
tariff as a result of the authorization
granted by the Commission to make
market-based rate sales.89 As for
collusion, to the extent a seller colludes
to violate either a code of conduct or the
Standards of Conduct, the collusion
would be a violation of the new antimanipulation rule. In light of these
facts, we find it unnecessary to codify
Rule 6. Accordingly, we will rescind
Market Behavior Rule 6 effective upon
publication of this order in the Federal
Register.
D. Miscellaneous Issues
1. The Commission Can Rescind the
Market Behavior Rules in a Section 206
Order
a. Comments
47. A few commenters advocating
retention of the Market Behavior Rules
argue that the Commission has not
found the Market Behavior Rules unjust
and unreasonable. NASUCA, PG&E, and
PJMICC contend that such a finding is
a necessary prerequisite to acting under
FPA section 206 to remove the Market
Behavior Rules from market-based
87 18
CFR Part 125 (2005).
No. 670, 114 FERC ¶ 61,047 at P 62–63.
In a Notice of Proposed Rulemaking in Docket No.
RM06–14–000, issued contemporaneously
herewith, we propose to extend the record retention
period to five years. We encourage sellers to take
the proposed change into account in their record
retention policies.
89 To safeguard against affiliate abuse, the
Commission requires affiliates of public utilities,
when they request market-based rate authority, to
submit a code of conduct to govern their
relationship with the affiliated utility. See, e.g.,
Potomac Electric Power Company, 93 FERC
¶ 61,240 at 61,782 (2000); Heartland Energy
Services, Inc., 68 FERC ¶ 61,223 at 62,062–63
(1994). Not all market-based rate sellers have codes
of conduct. In addition, the Commission may waive
the code of conduct requirement where there are no
captive customers and, therefore, no potential for
affiliate abuse. Alcoa, Inc. 88 FERC ¶ 61,045 at
61,119 (1999).
hsrobinson on PROD1PC70 with NOTICES
88 Order
VerDate Aug<31>2005
14:15 Feb 24, 2006
Jkt 208001
tariffs and authorizations. These
commenters contend that there have
been no changed circumstances
warranting rescission of the Market
Behavior Rules.90 Other commenters,
however, argue that it is unduly
discriminatory, confusing, and
duplicative to retain the Market
Behavior Rules given the
implementation of the new antimanipulation rule applicable to all
entities, not just market-based rate
sellers.91
b. Commission Determination
48. The Commission is acting within
the scope of its authority under section
206 of the FPA in rescinding the Market
Behavior Rules 2 and 6. Although the
Commission in most circumstances
would need to find that existing rates,
terms or conditions are unjust,
unreasonable, unduly discriminatory or
preferential in order to modify them
under section 206, here such a finding
is not necessary because, as discussed in
greater detail below, we are basing our
changes to public utility tariffs on the
change in law in EPAct 2005 and the
incorporation of substitute antimanipulation provisions in our
regulations. Additionally, were we not
to modify public utility tariffs to delete
Market Behavior Rule 2, public utilities
would be subject to two differing
standards for manipulative practices
while other market participants would
be subject to one standard for
manipulative practices. We do not
believe this non-comparable treatment
is justified.
49. The Market Behavior Rules were
based upon the Commission’s findings
in 2003 that market-based rate sellers’
existing tariffs were unjust and
unreasonable without provisions to
prohibit market manipulation.92 Since
that time, circumstances have changed
significantly with enactment of EPAct
2005. Congress has provided the
Commission with an anti-manipulation
statute and expressly required that
manipulation include the requirement
of scienter. Consistent with this
Congressional mandate, the Commission
has adopted a comprehensive new rule
prohibiting energy market
manipulation.
50. The central reason for adopting
the Market Behavior Rules in 2003 was
90 NASUCA
at 14; PG&E at 4, 7; PJMICC at 6–7.
(reply) at 15; Cinergy at 4. EEI also argues
that the Commission has ample evidence to find
that retaining the Market Behavior Rules in marketbased rate tariffs would be unduly discriminatory
and, therefore, unjust and unreasonable. EEI (reply)
at 15.
92 Market Behavior Rules Order, 107 FERC
¶ 61,175 at P 162; order on reh’g, 107 FERC ¶ 61,175
at P 161.
91 EEI
PO 00000
Frm 00047
Fmt 4703
Sfmt 4703
the absence of any rules or regulations
concerning market manipulation. That
is no longer the case. Given the
adoption of implementing regulations
for the Commission’s new statutory antimanipulation authority, it would be
inappropriate to maintain a differently
worded tariff rule barring manipulation,
that is, a rule that may not fully comport
with Congressional intent. There should
not be any inconsistency or conflict
between two prohibitions governing the
same conduct. The protection from
manipulation of wholesale energy
markets needed for tariffs to be just and
reasonable is still in effect, but now
through a rule of general applicability
governing all entities, not just marketbased rate sellers. Circumstances have
changed. The protection needed to
assure that market-based rate
transactions are just and reasonable
remains, but in a new regulation
consistent with Congressional direction.
The Commission thus has retained
important protections for wholesale
energy markets, but has done so in a
way that reinforces regulatory certainty.
51. Likewise, there is no barrier to
removal of Market Behavior Rules 1, 3,
4, 5, and 6. Rules 1, 3, 4, and 5 will
remain in effect in another form, as we
are adopting the substantive provisions
of these rules in the Commission’s
regulations. To the extent these
provisions are incorporated elsewhere,
there is no substantive change and
therefore no need to address whether
these behavior rules are no longer just
and reasonable. Finally, there is no
barrier to rescinding Market Behavior
Rule 6. As discussed, this rule repeats
existing requirements to follow
applicable codes of conduct and the
Standards of Conduct in the
Commission’s regulations, and any
collusion to violate these requirements
would be in violation of the new antimanipulation rule. There is no
substantive change in regulatory
requirements.
2. Time Limits on Complaints
52. A few commenters ask the
Commission to retain the 90-day
requirement of the Market Behavior
Rules’ remedies and complaint
procedures.93 EEI says these are
important provisions that should be
preserved in the new anti-manipulation
rule.94 Similarly, EPSA argues that
93 In Appendix B to the Market Behavior Rules
Order, the Commission required that complaints
alleging a violation be filed within 90 days of the
end of the calendar quarter in which a transaction
occurred or, if the party could not then know of the
alleged violation, 90 days from when the party
should have known of the violation.
94 EEI at 7.
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Federal Register / Vol. 71, No. 38 / Monday, February 27, 2006 / Notices
absence of a 90-day limit on bringing
complaints will cause regulatory
uncertainty and present significant cost
and risks to market participants.95
Because the Market Behavior Rules are
being rescinded, the 90-day time limit
will no longer apply. In Order No. 670,
we noted that a five-year statute of
limitations is applicable to the
imposition of civil penalties, and
specifically rejected requests to retain
the 90-day period used for the Market
Behavior Rules.96 Consistent with the
discussion of this issue in Order No.
670, we reject requests to retain the 90day requirement and rescind Appendix
B of the Market Behavior Rules Order.
hsrobinson on PROD1PC70 with NOTICES
3. Additional Comments
53. A few parties requested an
additional opportunity to comment once
the Commission has finalized the
proposed new anti-manipulation rule.
The CEOB, for instance, asked that we
provide the final language of the new
anti-manipulation rule, then permit
another round of comments in this
proceeding on the appropriate scope
and nature of changes to the Market
Behavior Rules.97 Similarly, SCE asks
the Commission to institute a
comprehensive, omnibus proceeding to
adopt a new regulatory regime and, as
appropriate, eliminate the current
Market Behavior Rules.98 This is not
necessary. Order No. 670 adopted the
proposed anti-manipulation rule with
no substantive changes. As a result,
comments predicated on the proposed
anti-manipulation rule remain valid,
and there is no need to have yet another
round of comments on proposed
changes to the Market Behavior Rules.
III. Conclusion
54. The Market Behavior Rules played
a beneficial role as the Commission’s
oversight of wholesale energy markets
continued to evolve. With the
enactment of specific anti-manipulation
authority in EPAct 2005, however, the
time has come to shift our regulatory
tools to focus on the anti-manipulation
authority we now have under new FPA
section 222 and the new rule in part 1c
of our regulations. This will allow us to
continue to protect customers with
respect to manipulation by any entity,
but in a manner consistent with
Congressional guidance. The
Commission will continue to monitor
wholesale markets as they evolve and
will consider changes in its regulations
as may be necessary to assure that
95 ESPA
at 8.
No. 670, 114 FERC ¶ 61,047 at P 62–63.
97 CEOB at 6.
98 SCE at 3, 9.
96 Order
VerDate Aug<31>2005
14:15 Feb 24, 2006
Jkt 208001
wholesale markets are well-functioning
and result in just and reasonable energy
prices. With respect to the other
provisions of the Market Behavior
Rules, the substantive aspects of these
Rules are being codified in our
regulations and being made applicable
to market-based rate sellers.
The Commission Orders
(A) Market Behavior Rules 2 and 6
and Appendix B of the Market Behavior
Rules Order are hereby rescinded,
effective upon publication of this order
in the Federal Register. As discussed in
the body of this order, Market Behavior
Rules 1, 3, 4, and 5 are removed from
sellers’ market-based rate tariffs as of the
date they are codified in the
Commission’s regulations under the
Federal Power Act.
(B) Market-based rate sellers are
hereby notified that they need not refile
or amend their tariffs with respect to the
rescission and removal of the Market
Behavior Rules, unless we direct
otherwise in the future. In the absence
of any such direction, at such time as
sellers make any amendments to their
market-based rate tariffs or seek
continued authorization to sell at
market-based rates (e.g., in their threeyear update filings), sellers shall at that
time remove the Market Behavior Rules
from their tariffs. Notwithstanding this,
as of the date this order is published in
the Federal Register, Market Behavior
Rules 2 and 6 will be of no force or
effect in sellers’ tariffs, and Market
Behavior Rules 1, 3, 4, and 5 will be of
no force and effect in seller’s tariffs as
of the effective date of the Market
Behavior Rules Codification Order.
(C) The Secretary shall promptly
publish this order in the Federal
Register.
By the Commission.
Magalie R. Salas,
Secretary.
Appendix—List of Parties Filing
Comments and Reply Comments and
Acronyms
Ameren Services Company (Ameren).
American Public Power Association and the
Transmission Access Policy Study Group
(APPA/TAPS).
California Electricity Oversight Board
(CEOB).
California ISO (CAISO).
California Public Utilities Commission
(CPUC).**
Cinergy Services, Inc. and Cinergy Marketing
& Trading, LP (Cinergy).
Constellation Energy Group Inc., et al.
(Indicated Market Participants).
Edison Electric Institute (EEI).**
Electric Power Supply Association (EPSA).
ISO New England (ISO–NE).*
PO 00000
Frm 00048
Fmt 4703
Sfmt 4703
9819
National Association of State Utility
Consumer Advocates (NASUCA).
New England Conf. of Public Utilities
Commissioners and Vermont Department
of Public Service (NECPUC).
New Jersey Board of Public Utilities (NJBPU).
New York Independent System Operator, Inc.
(NYISO).
Pacific Gas and Electric Company (PG&E).
PJM Industrial Customer Coalition (PJMICC).
PJM Interconnection, L.L.C. (PJM).
PNM Resources (PNMR).
Sacramento Municipal Utility District
(SMUD).
Southern California Edison Company (SCE).
SUEZ Energy North America, Inc. (SUEZ).
Transmission Dependent Utility Systems
(TDUS).**
* Entities filing reply comments only.
** Entities filing reply comments in
addition to initial comments.
[FR Doc. 06–1720 Filed 2–24–06; 8:45 am]
BILLING CODE 6717–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
[Project No. 11858–002, California]
Elsinore Municipal Water District and
the Nevada Hydro Company, Inc.;
Notice of Availability of the Draft
Environmental Impact Statement for
the Proposed Lake Elsinore Advanced
Pumped Storage Project
February 17, 2006.
In accordance with the National
Environmental Policy Act of 1969 and
the Federal Energy Regulatory
Commission’s (Commission)
regulations, 18 CFR part 380 (Order No.
486, 52 FR 47897), the Office of Energy
Projects has reviewed the application
for license for the proposed Lake
Elsinore Advanced Pumped Storage
Project (FERC No. 11858), located on
Lake Elsinore and San Juan Creek, in the
Town of Lake Elsinore, Riverside
County, California, and has prepared a
Draft Environmental Impact Statement
(draft EIS) for the project.
In the draft EIS, Commission staff
evaluate the co-applicant’s proposal and
the alternatives for licensing the
proposed project. The draft EIS
documents the views of governmental
agencies, non-governmental
organizations, affected Indian tribes, the
public, the license applicants, and
Commission staff.
Comments should be filed with
Magalie R. Salas, Secretary, Federal
Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426.
All comments must be filed by April 25,
2006, and should reference Project No.
11858–002. Comments may be filed
electronically via the Internet in lieu of
E:\FR\FM\27FEN1.SGM
27FEN1
]]>Agencies
[Federal Register Volume 71, Number 38 (Monday, February 27, 2006)]
[Notices]
[Pages 9811-9819]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1720]
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. EL06-16-000]
Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly; Investigation of Terms and Conditions
of Public Utility Market-Based Rate Authorizations; Order Revising
Market-Based Rate Tariffs and Authorizations
Issued February 16, 2006.
1. The Commission has decided to rescind Market Behavior Rules 2
and 6 and to codify the substance of Market Behavior Rules 1, 3, 4, and
5 in the Commission's regulations under the Federal Power Act (FPA).\1\
The central purpose of the Market Behavior Rules \2\ was to prohibit
market manipulation by public utility sellers acting under market-based
rate authority. This prohibition is set out in Market Behavior Rule 2.
Subsequent to the issuance of the Market Behavior Rules, Congress
provided the Commission with specific anti-manipulation authority in
the Energy Policy Act of 2005 (EPAct 2005).\3\ To implement this new
authority, the Commission recently issued Order No. 670, adopting a
final rule making it unlawful for any entity, including public utility
market-based rate sellers, to engage in fraudulent or deceptive conduct
in connection with the purchase or sale of electric energy, natural
gas, or transmission or transportation services subject to the
jurisdiction of the Commission.\4\ In order to avoid regulatory
uncertainty and confusion, to assure that all market participants are
held to the same standard, and to provide clarity to entities subject
to our rules and regulations, we rescind Market Behavior Rule 2
effective upon publication of this order in the Federal Register.
---------------------------------------------------------------------------
\1\ 16 U.S.C. 791a et seq. (2000).
\2\ Investigation of Terms and Conditions of Public Utility
Market-Based Rate Authorizations, ``Order Amending Market-Based Rate
Tariffs and Authorizations,'' 105 FERC ] 61,218 (2003), reh'g
denied, 107 FERC ] 61,175 (2004) at Appendix A (Market Behavior
Rules Order). The Market Behavior Rules are currently on appeal.
Cinergy Marketing & Trading, L.P. v. FERC, Nos. 04-1168 et al. (DC
Cir. Filed April 28, 2004).
\3\ Energy Policy Act of 2005, Public Law No. 109-58, 119 Stat.
594 (2005). Congress prohibited the use or employment of ``any
manipulative or deceptive device or contrivance'' in connection with
the purchase or sale of electric energy or transmission services
subject to the jurisdiction of the Commission. Congress directed the
Commission to give these terms the same meaning as under the
Securities Exchange Act of 1934, 15 U.S.C. 78j(b) (2000).
\4\ Prohibition of Energy Market Manipulation, Order No. 670, 71
FR 4244 (Jan. 26, 2006), FERC Stats. & Regs. ] 31,202, 114 FERC ]
61,047 (Jan. 19, 2006) (Order No. 670).
---------------------------------------------------------------------------
2. In addition, we will remove Market Behavior Rules 1, 3, 4, and 5
from public utility market-based rate tariffs and instead codify them
in our regulations, rescind Market Behavior Rule 6 as no longer
necessary, and rescind Appendix B of the Market Behavior Rules Order as
no longer applicable. Contemporaneously herewith, the Commission is
issuing a Final Rule in Docket No. RM06-13-000 \5\ which is being made
effective immediately upon publication in the Federal Register. The
Market Behavior Rules Codification Order incorporates Rules 1, 3, 4,
and 5 into our FPA regulations with no substantive change. In light of
this action, Market Behavior Rules 1, 3, 4, and 5 will no longer be of
any force or effect in market-based rate tariffs as of the date the
Market Behavior Rules Codification Order is effective.\6\
---------------------------------------------------------------------------
\5\ Compliance for Public Utility Market-Based Rate
Authorization Holders, Docket No. RM06-13-000, issued February 16,
2006 (Market Behavior Rules Codification Order).
\6\ As provided for in the Market Behavior Rules Order, the
Market Behavior Rules have been included in tariff filings by a
number of market-based rate sellers. As a result of the changes
being made in this order and the contemporaneous Market Behavior
Rules Codification Order, the Market Behavior Rules no longer will
be part of seller's market-based rate tariffs. It would be
burdensome, however, to require sellers to make new tariff filings
for the sole purpose of removing the Market Behavior Rules from
their tariffs. Sellers need not do so, unless we direct otherwise in
the future. In the absence of any such direction, at such time as
sellers make any amendments to their market-based rate tariffs or
seek continued authorization to sell at market-based rates (e.g., in
their three-year update filings), sellers shall at that time remove
the Market Behavior Rules from their tariffs. Nonetheless, Market
Behavior Rules 2 and 6 will be of no force or effect in sellers'
tariffs as of the date this order is published in the Federal
Register, and Market Behavior Rules 1, 3, 4, and 5 will be of no
force and effect as of the effective date of the Market Behavior
Rules Codification Order.
---------------------------------------------------------------------------
I. Background
3. On November 17, 2003, acting pursuant to section 206 of the FPA,
the
[[Page 9812]]
Commission amended all market-based rate tariffs and authorizations to
include the Market Behavior Rules. We determined that sellers' market-
based tariffs and authorizations to make sales at market rates would be
unjust and unreasonable unless they included clearly-delineated rules
governing market participant conduct, and that the Market Behavior
Rules fairly apprised market participants of their obligations in
competitive power markets and were just and reasonable.\7\
---------------------------------------------------------------------------
\7\ Market Behavior Rules Order, 105 FERC ] 61,218 at P 3, 158-
74.
---------------------------------------------------------------------------
4. Market Behavior Rule 1 requires sellers to follow Commission-
approved rules and regulations in organized power markets. These rules
and regulations are part of the Commission-approved tariffs of
Independent System Operators (ISO) or Regional Transmission
Organizations (RTO), and, where applicable, market-based rate sellers'
agreements to operate within ISOs and RTOs bind them to follow the
applicable rules and regulations of the organized market.
5. Market Behavior Rule 2 prohibits ``actions or transactions that
are without a legitimate business purpose and that are intended to or
foreseeably could manipulate market prices, market conditions, or
market rules for electric energy or electricity products.'' Actions or
transactions explicitly contemplated in Commission-approved rules and
regulations of an organized market, or undertaken by a market-based
rate seller at the direction of an ISO or RTO, however, are not
violations of Market Behavior Rule 2. In addition, Market Behavior Rule
2 prohibits certain specific behavior: Rule 2(a) prohibits wash trades,
Rule 2(b) prohibits transactions predicated on submitting false
information, Rule 2(c) prohibits the creation and relief of artificial
congestion, and Rule 2(d) prohibits collusion for the purpose of market
manipulation.
6. Market Behavior Rule 3 requires sellers to provide accurate and
factual information, and not to submit false or misleading information
or to omit material information, in any communication with the
Commission, market monitors, ISOs, RTOs, or jurisdictional transmission
providers.
7. Market Behavior Rule 4 deals with reporting of transaction
information to price index publishers. It requires that if a seller
reports transaction data, the data be accurate and factual, and not
knowingly false or misleading, and be reported in accordance with the
Commission's Policy Statement on price indices.\8\ Rule 4 also requires
that sellers notify the Commission of whether they report transaction
data to price index publishers in accordance with the Price Index
Policy Statement, and to update any changes in their reporting status.
---------------------------------------------------------------------------
\8\ Price Discovery in Natural Gas and Electric Markets,
``Policy Statement on Natural Gas and Electric Price Indices,'' 104
FERC ] 61,121 (2003) (Price Index Policy Statement).
---------------------------------------------------------------------------
8. Market Behavior Rule 5 requires that sellers retain for a
minimum three-year period all data and information upon which they
billed the prices charged for electricity and related products in sales
made under their market-based rate tariffs and authorizations or in
transactions the prices of which were reported to price index
publishers.
9. Finally, Market Behavior Rule 6 directs sellers not to violate,
or to collude with others in actions that violate, sellers' market-
based rate codes of conduct or the Standards of Conduct under part 358
of our regulations.\9\
---------------------------------------------------------------------------
\9\ 18 CFR part 358 (2005). At the same time that the Market
Behavior Rules were adopted for jurisdictional wholesale electric
transactions, the Commission issued Order No. 644, which introduced
parallel provisions in part 284 of our regulations under the Natural
Gas Act governing pipelines and holders of blanket certificate
authority that sell natural gas at wholesale. 18 CFR 284.288 and
284.403 (2005). Not every aspect of the electric Market Behavior
Rules was applicable in the natural gas sales context, however. The
part 284 regulations encompass Market Behavior Rule 2, including
wash sales and collusion to manipulate, and Market Behavior Rules 4
and 5. Contemporaneously herewith, we also are issuing a final rule
in Docket No. RM06-5-000 making parallel changes in sections 284.288
and 284.403 of the Commission's regulations.
---------------------------------------------------------------------------
10. Following enactment of EPAct 2005, the Commission issued a
Notice of Proposed Rulemaking on October 20, 2005, in which we proposed
rules to implement the new statutory anti-manipulation provisions.\10\
In the Anti-Manipulation NOPR, we noted the overlap between Market
Behavior Rule 2 and the proposed EPAct 2005 regulations. We said that
we would retain Market Behavior Rule 2 for the time being, but also
indicated that we would seek comment on whether we should revise or
rescind Market Behavior Rule 2. In the meantime, we assured market
participants that we will not seek duplicative sanctions for the same
conduct in the event that conduct violates both Market Behavior Rule 2
and the proposed new anti-manipulation rule.\11\
---------------------------------------------------------------------------
\10\ Prohibition of Energy Market Manipulation, 113 FERC ]
61,067 (2005) (Anti-Manipulation NOPR).
\11\ Id. at P 15. See also Enforcement of Statutes, Orders,
Rules, and Regulations, ``Policy Statement on Enforcement,'' 113
FERC ] 61,068 at P 14 (2005).
---------------------------------------------------------------------------
11. In an order dated November 21, 2005,\12\ the Commission, acting
pursuant to section 206 of the FPA, proposed to rescind the Market
Behavior Rules once we issued final regulations implementing the anti-
manipulation provisions of EPAct 2005 and have had the opportunity to
incorporate certain other aspects of the Market Behavior Rules in
appropriate Commission orders, rules, and regulations. The Commission
also requested comment on whether the Market Behavior Rules should be
revised or rescinded. We noted that rescission of the Market Behavior
Rules will simplify the Commission's rules and regulations, avoid
confusion, and provide greater clarity and regulatory certainty to the
industry. We emphasized our belief that rescinding the Market Behavior
Rules is consistent with Congressional intent in EPAct 2005, which
provided the Commission with explicit anti-manipulation authority, and
that rescission will simplify and streamline the rules and regulations
sellers must follow, yet not eliminate beneficial rules governing
market behavior.\13\
---------------------------------------------------------------------------
\12\ Investigation of Terms and Conditions of Public Utility
Market-Based Rate Authorizations, 113 FERC ] 61,190 (2005) (November
21 Order).
\13\ November 21 Order, 113 FERC ] 61,190 at P 13. At the same
time we issued a Notice of Proposed Rulemaking in Docket No. RM06-5-
000 proposing similar changes to sections 284.288 and 284.403 of the
regulations under the Natural Gas Act, 18 CFR 284.288 and 284.403
(2005).
---------------------------------------------------------------------------
12. The Commission received 21 comments and four reply comments in
response to the November 21 Order.\14\ Many of the comments support the
Commission's overall objectives in this proceeding, that is, to
simplify the Commission's rules and regulations, avoid confusion, and
provide greater clarity and regulatory certainty to the industry, while
not eliminating beneficial rules governing market behavior by
addressing them in other rules and regulations.
---------------------------------------------------------------------------
\14\ Entities filing comments and reply comments are listed in
the Appendix to this order, along with the acronyms for such
commenters. The Commission has accepted and considered all comments
filed, including late-filed comments. With respect to commenters
that also filed motions to intervene, we are treating this
proceeding as a rulemaking seeking comments from all interested
entities. See Investigation of Terms and Conditions of Public
Utility Market-Based Rate Authorizations, ``Order Addressing
Application of Ex Parte Rule and Requests for Extension of Time,''
104 FERC ] 61,132 at P 5 (2003).
---------------------------------------------------------------------------
13. On January 19, 2006, the Commission issued Order No. 670,
adopting regulations implementing the EPAct 2005 anti-manipulation
provisions. In Order No. 670 the Commission adopted a new part 1c of
our regulations under which it is
[[Page 9813]]
``unlawful for any entity, directly or indirectly, 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 entity.''\15\
---------------------------------------------------------------------------
\15\ 18 CFR 1c.2(a), 71 FR 4244, 4258 (2006).
---------------------------------------------------------------------------
II. Discussion
A. Market Behavior Rule 2
14. In the November 21 Order the Commission sought comment on
whether there is a need or basis for retaining existing Market Behavior
Rule 2 in light of the then-proposed anti-manipulation rule, and
whether the Commission should retain any of the affirmative defenses
against a claim of manipulation, that is, actions or transactions
explicitly contemplated by Commission rules, or undertaken at the
direction of an ISO or RTO, or actions taken for a ``legitimate
business purpose.''
1. Should the Commission Retain or Rescind Market Behavior Rule 2?
a. Comments
15. Commenters were divided on the issue of whether Rule 2 should
be retained or rescinded in light of the anti-manipulation provisions.
Those in favor of retaining Rule 2 argue two principal points: first,
the foreseeability standard of Rule 2 reaches negligent conduct or
other conduct that falls short of being ``provably'' intentional but
nonetheless has a foreseeable impact on rates; and second, Rule 2 has
lasting utility because it provides a remedy for activities that may
not be fraudulent, but could nevertheless function to manipulate prices
for wholesale electric power and transmission services.\16\
---------------------------------------------------------------------------
\16\ CEOB at 4-7; CAISO at 3-7; CPUC at 5-9; NASUCA at 5-10;
NECPUC at 5-6; NJBPU at 5-7; NYISO at 7-12; PG&E at 7-12; PJMICC at
7-11; TDUS at 17-20.
---------------------------------------------------------------------------
16. Several commenters argue that Rule 2 should be retained because
it prohibits conduct that ``foreseeably could manipulate market
prices,'' and does not require the showing of scienter (intentional or
reckless conduct), which means that Rule 2 reaches a broader range of
conduct that may adversely affect consumers and energy markets than
would the proposed anti-manipulation rule alone.\17\ CPUC and others
argue that nothing in EPAct 2005 dictates or justifies the repeal of
Rule 2. They argue that, in determining whether rates are just and
reasonable, the Commission should only focus on the effect of a
seller's action and not on the seller's intent, and that relying solely
on intent may result in rates becoming unjust and unreasonable because
it would limit the Commission's ability to remedy conduct falling short
of being intentional but whose rate-altering effect is foreseeable.\18\
PG&E and others argue that there is no risk of confusion or double
jeopardy created by having both the Market Behavior Rules and the anti-
manipulation rule promulgated pursuant to EPAct 2005, and TDUS argues
that repeal of the Market Behavior Rules may well create confusion
rather than promote clarity.\19\ More generally, TDUS argues that the
need for vigilant consumer protection is just as strong today as it was
in 2003 when the Market Behavior Rules were adopted.\20\ NYISO comments
that the scienter standard of the proposed anti-manipulation
regulations will make extensive discovery a necessity and greatly
increase the cost of enforcement for all parties involved.\21\
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\17\ CAISO at 1-2, 8; CPUC at 4, 6-9; NASUCA at 5; NECPUC at 2,
6; NJBPU at 5-6; PJMICC at 3, 7-8, 10-11; TDUS (Reply) at 11-12.
\18\ CPUC at 7-8; CEOB at 4; NASUCA at 5, 8; NECPUC at 6; PJMICC
at 10.
\19\ PG&E at 12; NYISO at 14; TDUS at 14.
\20\ TDUS at 5.
\21\ NYISO at 11.
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17. APPA/TAPS (which argue that Rule 2 should be interpreted to
include a scienter requirement) and others comment that Rule 2 should
be retained because it prohibits the exercise of market power.\22\ SMUD
notes that a tariff condition that protects the rights of consumers to
refunds of charges that are the product of the exercise of market power
or collusion is critical to customers who may have no antitrust remedy
for such conduct.\23\ PJM supports repeal of the Market Behavior Rules
(including Rule 2), but encourages the Commission to amplify its
continuing authority to take action to curb the exercise of market
power in particular transactions in contexts not necessarily including
fraud.\24\
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\22\ APPA/TAPS at 3, 8-12; ISO-NE (Reply) at 11; PJM at 4-5;
TDUS at 2, 7.
\23\ SMUD at 2-3.
\24\ PJM at 1, 4-5.
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18. Commenters advocating rescission of Rule 2 argue three main
points. First, commenters argue that the Commission should not retain
the foreseeability standard of proof of Rule 2 because of the clear
Congressional intent in section 1283 of EPAct 2005, which directs the
Commission to adopt a standard of proof based upon scienter.\25\
Second, commenters supporting rescission argue that there should be
only one definition or standard to define what constitutes market
manipulation. Retaining two sets of proscriptions, they argue, could
lead to regulatory uncertainty and confusion, and would be unduly
discriminatory because of the dual standard applicable to market-based
rate sellers of electricity while the remaining industry participants
would be covered solely by the new standard of section 1c.2.\26\ Third,
the anti-manipulation regulations represent an improvement over Rule 2
because, among other things, the language of new section 1c.2 provides
stakeholders with clarity of language not present in Rule 2, and
similarly, the broad language of section 1c.2 means that any behavior
forbidden by Rule 2 would also act as a fraud within the meaning of the
anti-manipulation regulations.\27\
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\25\ Ameren at 7; Cinergy at 7-8; EEI at 4-5, 8-9; EPSA at 6-7;
PNMR at 8.
\26\ Cinergy at 6-7; EEI at 5; PJM at 1-2.
\27\ Ameren at 6, 9; Cinergy at 7.
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19. EEI disagrees with commenters who argue for retention of the
Market Behavior Rules in market-based rate tariffs on the theory that
they provide an additional check on unlawful exercise of market
power.\28\ To the contrary, EEI thinks the Commission has established
an increasingly sophisticated screening process to identify and require
mitigation of any potential market power a tariff applicant may
possess, prior to granting or reauthorizing market-based rate
authority, and has developed several other tools, including RTO market
rules and tariffs, market monitor oversight, and OMOI enforcement
capabilities, to prevent and remedy the exercise of market power.\29\
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\28\ EEI (Reply) at 7-8.
\29\ EEI (Reply) at 8.
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20. Some commenters supporting rescission of Rule 2, however, do so
with the qualification that the specifically prohibited activities in
Rule 2(a) through 2(d) (i.e. wash trades, transactions predicated on
submitting false information, transactions creating and relieving
artificial congestion, and collusion for the purpose of market
manipulation) be retained to provide clearer guidance to market
participants.\30\ SUEZ supports rescission, but thinks the Commission
should take steps to explain that it intends to retain the precedent
that has
[[Page 9814]]
accumulated under the Market Behavior Rules.\31\
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\30\ EEI at 6; Indicated Market Participants at 12-13; PNMR at
6-7; SCE at 4.
\31\ SUEZ at 6, 10, referring to Intertie Bidding in the
California Independent System Operator's Supplemental Energy Market,
``Order Authorizing Public Disclosure of Staff Report of
Investigation,'' 112 FERC ] 61,333 (2005); see generally EPSA at 9-
10, 13.
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b. Commission Determination
21. The Commission finds it unnecessary to retain Rule 2. Congress
prohibited market manipulation by any entity and defined manipulation
to include the requirement of scienter.\32\ It would be inconsistent
with Congress' direction if foreseeability were retained as a lesser
standard of proof for market manipulation perpetrated by public utility
market-based rate sellers. To avoid the potential for uneven
application of regulatory requirements based on whether an entity is a
public utility under the FPA and a ``non-jurisdictional'' entity, or
whether an entity is a public utility selling under market-based rate
authority or selling at cost-based rates, the same standard of proof
should apply to all entities and all jurisdictional sales for purposes
of determining whether market manipulation occurred. It is not
appropriate, as some commenters suggest, for the Commission to maintain
a lesser standard of proof for only certain market participants or
certain types of sales.
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\32\ In new section 222 of the FPA, Congress used the terms
``manipulative or deceptive device or contrivance'' and directed
that they be given the same meaning as used in section 10b of the
Securities Exchange Act of 1934. It is well settled that those terms
require a showing of scienter, that is, an intent to deceive,
manipulate or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185,
201 (1976). See Order No. 670, 114 FERC ] 61,047 at P 52-53.
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22. The Commission rejects comments that suggest Rule 2 has a
purpose other than to prevent market manipulation, that is, also to
curb market power or anti-competitive conduct that does not meet the
deceptive conduct criteria for manipulation. Rule 2 focused on actions
or transactions intended to manipulate market prices, conditions, or
rules, not the existence or use of market power absent some
manipulation. Market power, of course, can be used by a seller to
manipulate markets; in such cases it is the act of manipulation--
perpetrating a fraud or deceit of some kind--that is the violation of
Rule 2 or of the new anti-manipulation rule.
23. Generally speaking, however, market power is a structural issue
to be remedied, not by behavioral prohibitions, but by processes to
identify and, where necessary, mitigate market power that a tariff
applicant may possess or acquire. This occurs in the screening process
before the Commission grants an application for market-based rate
authority, on consideration of changes in the seller's status or
operations, and in the triennial review of market-based rate
authorization, all of which are designed to assure just and reasonable
rates. In addition, the Commission requires RTOs and ISOs to have
independent market monitors,\33\ and the Office of Market Oversight and
Investigations monitors market operations. When such monitoring detects
market abuse or structural problems, they will be addressed under FPA
sections 205 or 206 to assure that reliance on market mechanisms
produces just and reasonable rates.
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\33\ The Commission issued a policy statement on market monitors
which discussed, among other things, referrals by market monitors to
the Commission when a market monitor finds actions by a market
participant that may be a violation of the Market Behavior Rules.
Market Monitoring Units in Regional Transmission Organizations and
Independent System Operators, ``Policy Statement on Market
Monitoring Units,'' 111 FERC ] 61,267 at P 6 and Appendix A
(Protocols on Referrals). We clarify that this Policy Statement
applies to potential violations of the new Order No. 670 anti-
manipulation rule in lieu of Market Behavior Rule 2, and will apply
to the requirements of Market Behavior Rules 1, 3, 4, 5, and 6 to
the extent they are incorporated into other parts of the
Commission's regulations.
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24. With respect to the suggestion that the specific proscribed
behaviors in Market Behavior Rule 2(a)-(d) be retained, the Commission
finds this unnecessary. As we stated in issuing the new anti-
manipulation rule, the specifically prohibited actions in Rule 2 (i.e.,
wash trades, transactions predicated on submitting false information,
transactions creating and relieving artificial congestion, and
collusion for the purpose of market manipulation) all are prohibited
activities under new section 1c.2 of our regulations and are subject to
sanctions and remedial action.\34\ Furthermore, we recognize that fraud
is a very fact-specific violation, the permutations of which are
limited only by the imagination of the perpetrator. Therefore, no list
of prohibited activities could be all-inclusive. The absence of a list
of specific prohibited activities does not lessen the reach of the new
anti-manipulation rule, nor are we foreclosing the possibility that we
may need to amplify section 1c.2 as we gain experience with the new
rule, just as the SEC has done.\35\
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\34\ Order No. 670, 114 FERC ] 61,047 at P 59.
\35\ After considerable experience with Rule 10b-5, upon which
our new anti-manipulation rule is modeled, the SEC has expanded the
original Rule 10b-5 to add a number of specific provisions
describing prohibited conduct. See 17 CFR 240.10b-5-1 through
240.10b-5-14.
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25. In short, rescission of Rule 2 is consistent with Congressional
direction and will not dilute customer protection. If conduct occurs
that is not the result of fraud or deceit but nonetheless results in
unjust and unreasonable rates, a person may file a complaint at the
Commission under FPA section 206, or the Commission on its own motion
may institute a proceeding under section 206, to modify the rates that
have become unjust and unreasonable. In many respects customers are
better protected by section 1c.2's breadth and purposeful design as a
broad ``catch all'' anti-fraud provision.\36\
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\36\ 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).
---------------------------------------------------------------------------
2. Affirmative Defenses
a. Actions or Transactions Undertaken at the Direction of a Commission-
approved ISO or RTO
i. Comments
26. Several commenters argue that actions undertaken at the
direction of a Commission-approved ISO or RTO should have explicit safe
harbor status because market participants should be able to rely on the
directives of an ISO or RTO without fear of prosecution for market
manipulation for following such provisions.\37\ CEOB and PJM, however,
caution that such an affirmative defense should not be allowed in
circumstances where: (1) The market participant does not have ``clean
hands'' in creating the situation that necessitated the directions of
the ISO/RTO; (2) the rule/direction is general or ambiguous; or (3)
there is any associated fraudulent conduct because a market seller
should not be able to use the RTO as a shield for those activities not
explicitly permitted by market rules or where the RTO did not
specifically prohibit the behavior.\38\ Similarly, SCE, informed by its
experience during the California energy crisis of 2001-2002, argues
that actions which were individually contemplated by ISO/RTO rules
should not categorically be exempt from punishment should the
Commission find that, in combination, intentional, unlawful market
manipulation has nevertheless occurred.\39\
[[Page 9815]]
ii. Commission Determination
---------------------------------------------------------------------------
\37\ Ameren at 8; CAISO at 11; EEI at 6; Indicated Market
Participants at 11-12; NYISO at 16-17; PG&E at 14; SUEZ at 1, 7.
\38\ CEOB at 7; PJM at 6.
\39\ SCE at 4.
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27. Comments that market participants should be able to rely on the
directives of an ISO or RTO make a valid point. As the Commission
stated in Order No. 670, if a market participant undertakes an action
or transaction that is explicitly contemplated in Commission-approved
rules and regulations, we will presume that the market participant is
not in violation of section 1c.2. If a market participant undertakes an
action or transaction at the direction of an ISO or RTO that is not
approved by the Commission, the market participant can assert this as a
defense for the action taken.\40\ Of course, if a market participant
acting with the requisite scienter has provided inaccurate or
incomplete information to the ISO or RTO, and the ISO and RTO acts in
reliance on the false or incomplete information, following such ISO or
RTO directions is no defense to such manipulative conduct for that
market participant. Just as we reject calls for inclusion of a list of
prohibited conduct in section 1c.2, we similarly reject a list-type
approach to defenses. Instead, we will evaluate all of the facts and
circumstances of an allegation of market manipulation before deciding
how to proceed.
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\40\ Order No. 670 at P 67.
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b. Legitimate Business Purpose
i. Comments
28. Commenters are divided on whether the Commission should retain
the ``legitimate business purpose'' provision of Rule 2. CEOB and CAISO
oppose retention because in their view there is simply no manner in
which activity taken with intent to defraud can constitute a legitimate
business practice.\41\ CPUC argues that no such ``good faith'' defense
exists in the context of SEC Rule 10b-5.\42\ NASUCA argues that the
Commission should not keep only aspects of Rule 2 that are favorable to
market-based rate sellers.\43\ EEI, however, thinks the affirmative
defense of legitimate business purpose was part of a generic definition
of market manipulation that was vague and confusing to many in the
industry, but it believes that the concept of legitimate business
purpose should be maintained as an affirmative defense.\44\ NYISO says
it would be appropriate to continue the legitimate business purpose
defense now specified in Rule 2 because this defense would ensure
proper consideration of the economic, commercial and physical
complexities of competitive energy markets, including such practices as
valid arbitrage between real-time and forward markets.\45\ EPSA argues
that the legitimate business purpose affirmative defense should also be
preserved given the intent standard required by EPAct 2005.\46\
Similarly, Indicated Market Participants argue that a legitimate
business purpose should be a complete defense to an allegation of
market manipulation whether under Market Behavior Rule 2 or under the
anti-manipulation rule.\47\
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\41\ CEOB at 7; CAISO at 11-12.
\42\ CPUC at 11.
\43\ NASUCA at 20.
\44\ EEI at 11.
\45\ NYISO at 16-17.
\46\ EPSA at 10, 13-14.
\47\ Indicated Market Participants at 10-11.
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ii. Commission Determination
29. In promulgating section 1c.2, the Commission purposefully
modeled its anti-manipulation rule after SEC Rule 10b-5 to provide
stakeholders with as much regulatory certainty and clarity as possible,
given the large body of precedent interpreting SEC Rule 10b-5.\48\ SEC
Rule 10b-5 does not include provisions for ``good faith'' defenses.
However, in all cases, the intent behind and rationale for actions
taken by an entity will be examined and taken into consideration as
part of determining whether the actions were manipulative behavior. The
reasons given by an entity for its actions are part of the overall
facts and circumstances that will be weighed in deciding whether a
violation of the new anti-manipulation regulation has occurred.
Therefore, the Commission rejects calls for inclusion of a ``legitimate
business purpose'' affirmative defense.
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\48\ Order No. 670, 114 FERC ] 61,047 at P 30-31.
---------------------------------------------------------------------------
B. Remedies and Sanctions
1. Comments
30. A number of commenters arguing for retention of the Market
Behavior Rules express concern that the Market Behavior Rules provide
the Commission with remedies, such as disgorgement of unjust profits
for tariff violations, that may not be available under the anti-
manipulation regulations.\49\ These commenters also contend that civil
penalties may not be a sufficient deterrent and, regardless, such
sanctions are paid to the United States Treasury and not to the damaged
customers. NYISO seeks clarification on whether the Commission has
discretion to use monies it receives in the form of civil penalties to
compensate victims of market manipulation.\50\
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\49\ APPA/TAPS at 3, 13; CEOB at 3; NASUCA at 5, 7-8, 11-13;
NECPUC at 1, 3; NYISO at 10-13; PJMICC at 8-9; SMUD at 3; TDUS at
24-27, TDUS (Reply) at 14. ISO-NE, for instance, urges the
Commission to clarify that, under new FPA section 222, we are not
limited to imposing civil penalties in the event of market
manipulation, but may also order disgorgement of profits or other
economic benefits to be returned to ratepayers. ISO-NE (Reply) at
14-17.
\50\ NYISO at 13.
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31. Arguing for repeal of the Market Behavior Rules, EEI submits
that, under new FPA section 222, disgorgement of profits proximately
linked to well-defined acts of market manipulation is a remedy
available to the Commission and applicable to all, and not limited to
market-based rate sellers.\51\
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\51\ EEI (Reply) at 4-5, 12-14.
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2. Commission Determination
32. Concerns over the extent of the Commission's remedial powers
are misplaced. The Market Behavior Rules Order addressed a concern,
stemming from the abuses in Western markets in 2000-2001, that there
were not clear rules to deal with abusive market conduct. By fashioning
tariff rules prohibiting manipulation, we established a clear basis for
ordering disgorgement of unjust profits, along with other remedial
actions, in the event of violations of such rules.\52\ With the
issuance of Order No. 670 and the availability of significant civil
monetary penalties for violations, the Commission now has a more
complete set of enforcement tools--both rules and remedies and/or
sanctions--to deal with market manipulation. The Commission will use
these authorities as the facts and circumstances of each case indicate,
as our discretion is at its zenith in determining an appropriate remedy
for violations.\53\ Accordingly, if companies subject to our
jurisdiction violate the statutes, orders, rules, or regulations
administered by the Commission, the Commission can order, among other
things, disgorgement of unjust profits.\54\
[[Page 9816]]
The Commission also has the option of conditioning, suspending, or
revoking market-based rate authority, certificate authority, or blanket
certificate authority.\55\ Moreover, while section 206 of the FPA does
not permit the Commission to establish just and reasonable rates prior
to the refund effective date established under section 206, the
Commission clearly has authority to order disgorgement of profits
associated with an illegally charged rate, i.e., a rate other than the
rate on file or in violation of a Commission rule, order, regulation,
or tariff on file.\56\ Therefore, the Commission may use disgorgement
of unjust profits where appropriate, including to remedy a violation of
the new anti-manipulation regulations.
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\52\ Market Behavior Rules Order, 105 FERC ] 61,218 at P 149
(stating ``in approving these Market Behavior Rules and requiring
sellers to be fully accountable for any unjust gains attributable to
their violation, we do not foreclose our reliance on existing
procedures or other remedial tools, as may be necessary, including
generic rule changes or the approval of new market rules applicable
to specific markets''). See also Market Behavior Rules Order, order
on reh'g, 107 FERC ] 61,175 at P 129.
\53\ See Niagara Mohawk Power Corp. v. FERC, 379 F.2d 153, 159
(DC Cir. 1967); accord 16 U.S.C. 825h (2000); Mesa Petroleum Co. v.
FERC, 441 F.2d 182, 187-88 (DC Cir. 1971); Gulf Oil Corporation v.
FPC, 563 F.2d 588, 608 (3rd Cir. 1977), cert. denied 434 U.S. 1062,
reh'g denied, 435 U.S. 981 (1978); Consolidated Gas Transmission
Corp. v. FERC, 771 F.2d 1536, 1549 (DC Cir. 1985).
\54\ See, e.g., Transcontinental Gas Pipe Line Corp. v. FERC,
998 F.2d 1313, 1320 (5th Cir. 1993) (holding the remedy of
disgorgement of ill-gotten profits for a violation of the Natural
Gas Act ``well within [the Commission's] equitable powers'');
Coastal Oil & Gas Corp. v. FERC, 782 F.2d 1249, 1253 (5th Cir. 1986)
(profits from illegal intrastate sales of gas in excess of a just
and reasonable rate may be subject to disgorgement).
\55\ See, e.g., Enron Power Marketing, Inc., 103 FERC ] 61,343
at P 52 (2003); Fact-Finding Investigation of Potential Manipulation
of Electric and Natural Gas Prices, 99 FERC ] 61,272 at 62,154
(2002); San Diego Gas & Electric Company, 95 FERC ] 61,418 at
62,548, 62,565, order on reh'g, 97 FERC ] 61,275 (2001), order on
reh'g, 99 FERC ] 61,160 (2002); accord Enron Power Marketing, Inc.,
``Order Proposing Revocation of Market-Based Rate Authority and
Termination of Blanket Marketing Certificates,'' 102 FERC ] 61,316
at P 8 and n.10 (2003), and cases cited therein.
\56\ Transcontinental Gas Pipe Line Corp., 998 F.2d 1313 at
1320; see also Dominion Resources, Inc. et al., 108 FERC ] 61,110
(2004) (disgorgement for violations of the Commission's Standards of
Conduct); El Paso Electric Company, 105 FERC ] 61,131 at P35 (2003)
(finding disgorgement an ``appropriate and proportionate remedy''
for a violation of the Federal Power Act); Kinder Morgan Interstate
Gas Transmission LLC, 90 FERC ] 61,310 (2000) (disgorgement ordered
to remedy preferential discounts to affiliates); Stowers Oil & Gas
Company, 44 FERC ] 61,128 (1988), reh. denied in part and granted in
part, 48 FERC ] 61,230 at 61,817 (1989), appeal dismissed sub nom.
Northern Natural Gas Co. v. FERC, Case Nos. 89-1512 et al., (DC Cir.
1992) (Commission ``properly exercised its broad equitable power''
in requiring disgorgement of unjust enrichment resulting from
illegal sales of gas).
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33. EPAct 2005 has enhanced the Commission's civil penalty
authority.\57\ Civil penalties, however, serve a different purpose from
disgorgement or other equitable remedies. As we have said, the purpose
of civil penalties is to ``encourage compliance with the law.'' \58\
The purpose of disgorgement, on the other hand, is to remedy unjust
enrichment. The Commission will choose from the full range of available
remedies and penalties--revocation, suspension, or conditioning of
authority, disgorgement, and civil penalties--according to the nature
of the violation and all of the facts presented. The imposition of both
remedies and civil penalties in tandem may be necessary under certain
circumstances to reach a fair result.\59\ These are separate powers
available to the Commission, as they arise under different provisions
of the FPA.\60\
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\57\ EPAct 2005 expanded the Commission's FPA civil penalty
authority to encompass violations of all provisions of FPA part II
(EPAct 2005 section 1284(e)(1), amending FPA section 316A(a)), and
established the maximum civil penalty the Commission can assess
under FPA part II as $1 million per day per violation. EPAct 2005
section 1284(e)(2), amending FPA section 316A(b).
\58\ Procedures for the Assessment of Civil Penalties under
Section 31 of the Federal Power Act, Order No. 502, 53 FR 32035
(Aug. 23, 1988), FERC Stats. & Regs. ] 30,828 (Aug. 17, 1988).
\59\ Policy Statement on Enforcement, 113 FERC ] 61,068 at P 12
(2005) (``Our enhanced civil penalty authority will operate in
tandem with our existing authority to require disgorgement of unjust
profits obtained through misconduct and/or to condition, suspend, or
revoke certificate authority or other authorizations, such as
market-based rate authority for sellers of electric energy'').
\60\ The authority to order disgorgement and other equitable
remedies arises under the ``necessary or appropriate'' powers of
section 309 of the FPA. Towns of Concord v. FERC, 955 F.2d 67, 73
(DC Cir. 1992). The authority to impose civil penalties arises under
section 316A of the FPA as amended by EPAct 2005.
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34. We note that other agencies also impose civil penalties and
equitable remedies in tandem. For example, the SEC can require an
accounting and disgorgement to investors for losses and also impose
penalties for the misconduct, and the CFTC can order restitution or
obtain disgorgement and also impose fines for violations.\61\
Similarly, in the environmental context, the government is free to seek
an equitable remedy in addition to, or independent of, civil
penalties.\62\ When we impose disgorgement as a remedy, we have broad
discretion in allocating monies to those injured by the violations. As
we noted in our Policy Statement on Enforcement, each case depends on
the circumstances presented, and the Commission will not predetermine
which remedy and/or sanction authorities it will use.\63\
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\61\ See sections 21-21C of the Securities Exchange Act, 15
U.S.C. 78u-78u-3 (2000); SEC v. Happ, 392 F.3d 12, 31-33 (1st Cir.
2004) (upholding SEC's imposition of both disgorgement and a civil
penalty equal to the amount of disgorgement; further, the court
noted that the wrongdoer bears the risk of uncertainty in
calculating the amount of disgorgement). The CFTC can revoke or
suspend a registration, suspend or prohibit certain trading, issue
cease and desist orders, order restitution, and seek equitable
remedies (injunction, rescission, or disgorgement), all in addition
to imposing a monetary fine. 7 U.S.C. 13a and 13b (2000); Comm. Fut.
L. Rep. (CCH) ] 26,265 at 42,247 (1994).
\62\ See, e.g., Tull v. United States, 481 U.S. 412, 425 (1987)
(holding that the Clean Water Act does not intertwine equitable
relief with the imposition of civil penalties; instead, each kind of
relief is separately authorized in distinct statutory provisions).
\63\ Policy Statement on Enforcement, 113 FERC ] 61,068 at P 13
(2005) (``[W]e will not prescribe specific penalties or develop
formulas for different violations. It is important that we retain
the discretion and flexibility to address each case on its merits,
and to fashion remedies appropriate to the facts presented,
including any mitigating factors.'').
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C. Market Behavior Rules 1, 3, 4, 5, and 6
35. In the November 21 Order, we indicated that some provisions of
the Market Behavior Rules, such as Rules 1 and 6, restate existing
obligations, and that other parts of the Market Behavior Rules, such as
Rule 3 and the first part of Rule 4, would be covered by the new anti-
manipulation rule. Other rules, we noted, should be incorporated into
other regulatory requirements. \64\ We indicated that action on the
Market Behavior Rules would be taken in such a way as to assure there
would be no gap in regulatory requirements.
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\64\ November 21 Order at P 19-23.
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1. Comments
36. Some commenters addressed Rule 1, arguing that a requirement to
comply with organized market rules should be retained because these
markets may not have adequate remedies for violations of their rules,
or that such rules can be violated without fraudulent behavior.\65\
NASUCA argues that Rule 1 provides a disgorgement remedy when a
seller's conduct violates the tariff rules of another utility (the
RTO).\66\ On the other hand, Indicated Market Participants support
elimination of Rule 1, but ask the Commission to make clear that
compliance with the requirements of an organized market is an
affirmative defense to a claim of manipulation.\67\
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\65\ APPA/TAPS at 3; CAISO at 10; CPUC at 3, 5-6; NYISO at 14-
15.
\66\ NASUCA at 6-7. NASUCA notes that disgorgement is available
as a remedy when a seller violates its own tariff but, absent Rule
1, it is not clear that the disgorgement remedy (as opposed to
penalties that may apply under the RTO tariff) would be available
for a seller's violation of RTO tariff provisions or rules.
\67\ Indicated Market Participants at 15-16.
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37. Other commenters addressed Rule 3, suggesting that the
requirement of providing accurate and factual information in
communications is broader than prohibiting manipulation. NASUCA
believes that Rule 3 covers misinformation that could be harmful but
that does not amount to intentional misrepresentation, such as
negligent transaction reporting that could manipulate index prices.\68\
NYISO agrees and urges the Commission to retain a broad requirement for
accurate and complete information provided to RTOs, ISOs, and the
Commission.\69\ PJM likewise says that Rule 3 is needed to impose an
affirmative duty to provide accurate information even in circumstances
involving no intent to
[[Page 9817]]
deceive.\70\ CAISO argues that Rule 3 prohibits submitting any false
information, not just material information.\71\ SCE argues that Rule 3
is a superior formulation to the anti-manipulation rule and urges that
it be used instead of the Rule 10b-5 language.\72\
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\68\ NASUCA at 21.
\69\ NYISO at 19.
\70\ PJM at 7-8; TDUS at 21.
\71\ CAISO at 12.
\72\ SCE at 6; see also Ameren at 11; PG&E at 14.
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38. Some commenters believe Rule 4 is unnecessary, arguing that
false reporting to an index publisher would be a violation of the new
anti-manipulation rule. EPSA, for instance, urges the Commission to
repeal Rule 4 but reaffirm the applicability of the Policy Statement on
price indices.\73\ Ameren, on the other hand, proposes that Rule 4 be
added to the anti-manipulation regulations to explicitly require any
entity to provide accurate and factual information to price index
publishers.\74\ CAISO believes that it is necessary to maintain a
separate requirement in Rule 4 to report transaction information
accurately to the extent a seller reports such information to price
index publishers, because the accuracy of the information published
should not depend upon whether the provider of the information had an
intent to defraud.\75\ EEI sees value in the guidance provided by Rule
4 and suggests that it be adopted as a Commission rule, thereby
applying to all market participants.\76\ TDUS calls for the retention
of requirements to report changes in reporting status.\77\
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\73\ EPSA at 11-12, 15-16. See also SUEZ at 10-11; Indicated
Market Participants at 16-19.
\74\ Ameren at 11; SCE at 6.
\75\ CAISO at 12.
\76\ EEI at 12-13.
\77\ TDUS at 27.
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39. There was little controversy over Rule 5, as parties generally
recommended that the record retention requirement be retained. CAISO
says the data retention requirement is crucial to the Commission's
enforcement powers.\78\ The Indicated Market Participants say that the
record retention requirement more appropriately belongs in the
Commission's general regulations so that it will be applicable to more
than just market-base rate sellers.\79\ EEI supports keeping the three-
year retention requirement, noting that otherwise the default ten-year
period of part 125 of the Commission's regulations might be deemed to
apply.\80\ NASUCA, however, is concerned that moving the record
retention requirement to another rule might limit ``remedies for the
benefit of consumers when records are not kept.''\81\
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\78\ CAISO at 10. See also CPUC at 9; TDUS at 27.
\79\ Indicated Market Participants at 17-18.
\80\ EEI at 13.
\81\ NASUCA at 7.
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40. There also was general agreement that Rule 6, for the most
part, restates requirements independently applicable to market-based
rate sellers under each seller's code of conduct or by the Standards of
Conduct in Part 358 of the Commission's regulations. PJM, EEI, and EPSA
think Rule 6 may be rescinded as duplicative and unnecessary.\82\ APPA/
TAPS, however, believes that Rule 6 should be retained because market-
based rate sellers' codes of conduct and the Standards of Conduct do
not identify remedies for violations, thus potentially leaving the
Commission without an appropriate remedy.\83\ SCE, on the other hand,
expresses concern that aspects of Rule 6, particularly its prohibition
of collusion, may not be captured by the proposed anti-manipulation
regulations because there are collusive activities that do not amount
to fraud.\84\
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\82\ PJM at 8; EEI at 13; EPSA at 16.
\83\ APPA/TAPS at 13. APPA/TAPS agrees that Rule 6 does not
itself impose any new obligation, but notes that the Market Behavior
Rules also provide for remedies for rule violations. Id.
\84\ SCE at 7. SCE is concerned that market participants could
collude, through a combination of lawful means, to accomplish an
unlawful purpose. Id.
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2. Commission Determination
41. The Commission already indicated that certain requirements of
the Market Behavior Rules would be recast in other Commission rules or
regulations. Upon consideration of the comments, we have determined
that there is benefit to incorporating most of the non-manipulation
provisions of the Market Behavior Rules into the Commission's
regulations, and we do so contemporaneously in the Market Behavior
Rules Codification Order. While the basis for incorporating Rules 1, 3,
4, and 5 in our regulations is discussed there, we note the value
provided by these rules briefly below. We also discuss the reason for
rescinding Rule 6 as unnecessary.
42. Market Behavior Rule 1 is applicable in organized RTO or ISO
markets. While it is essentially a restatement of existing obligations
that are in the tariffs of the RTOs and ISOs, applicable to market
participants through their participant agreements, there is value to
customers in reinforcing the obligation to operate in accordance with
Commission-approved rules and regulations by placing this expectation
in the Commission's regulations. Accordingly, the Market Behavior Rules
Codification Order includes Market Behavior Rule 1 in the Commission's
regulations.
43. Market Behavior Rule 3 requires accurate and factual
communications with the Commission, Commission-approved market
monitors, Commission-approved RTOs and ISOs, or jurisdictional
transmission providers. In the November 21 Order we commented that this
requirement would be covered by the new anti-manipulation rule, and it
could be confusing to have a duplicate rule regarding accurate and
factual information.\85\ As commenters point out, however, this rule is
somewhat broader than the new anti-manipulation rule, as it applies to
all communications, not just those that are material in furtherance of
a fraudulent or deceptive scheme. Accordingly, we believe the substance
of Rule 3 can be incorporated in our regulations without duplicating or
causing undue confusion with respect to the new anti-manipulation rule.
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\85\ November 21 Order at P 19.
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44. Market Behavior Rule 4 requires sellers to provide accurate
data to price index publishers, if the seller is reporting transactions
to such publishers, and includes a requirement that sellers notify the
Commission of their price reporting status and of any changes in that
status. While a deliberate false report would be a violation of the new
anti-manipulation rule, there is no confusion in stating this in our
regulations and thereby reinforcing the importance of the Price Index
Policy Statement. The second aspect of Market Behavior Rule 4,
notification to the Commission of the market participant's price
reporting status and of any changes in that status, is not otherwise
provided for. This is a simple and non-burdensome way for the
Commission to be informed of the prevalence of price reporting to price
index developers, and is included in the Market Behavior Rules
Codification Order.\86\
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\86\ As is discussed in the Market Behavior Rules Codification
Order, codification of the notification requirement does not mean
that sellers who have previously provided notifications pursuant to
Rule 4 now must repeat that notification. Only sellers who have not
previously provided a notification of their price reporting status,
and sellers who have a change in their reporting status, are
required to notify the Commission. In other words, codification of
Rule 4 does not increase the burden of, or requirements for,
notification in any way.
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45. Market Behavior Rule 5 requires sellers to maintain certain
records for a period of three years to reconstruct prices charged for
electricity and related products. This is different from the record
retention requirements in part
[[Page 9818]]
125 of our regulations, which largely are related to cost-of-service
rate requirements.\87\ Given the importance of records related to
charges under market-based rate authority to any investigation of
possible wrongdoing, a separate record retention requirement
specifically for market-based transactions is necessary. We include the
Rule 5 record retention requirement in the Market Behavior Rules
Codification Order.\88\
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\87\ 18 CFR Part 125 (2005).
\88\ Order No. 670, 114 FERC ] 61,047 at P 62-63. In a Notice of
Proposed Rulemaking in Docket No. RM06-14-000, issued
contemporaneously herewith, we propose to extend the record
retention period to five years. We encourage sellers to take the
proposed change into account in their record retention policies.
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46. Market Behavior Rule 6 requires adherence to a market-based
rate seller's code of conduct and to the Order No. 2004 Standards of
Conduct, and prohibits collusion to violate codes of conduct or the
Standards of Conduct. The Standards of Conduct are already in our
regulations. Many market-based rate sellers have a code of conduct in
their tariff as a result of the authorization granted by the Commission
to make market-based rate sales.\89\ As for collusion, to the extent a
seller colludes to violate either a code of conduct or the Standards of
Conduct, the collusion would be a violation of the new anti-
manipulation rule. In light of these facts, we find it unnecessary to
codify Rule 6. Accordingly, we will rescind Market Behavior Rule 6
effective upon publication of this order in the Federal Register.
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\89\ To safeguard against affiliate abuse, the Commission
requires affiliates of public utilities, when they request market-
based rate authority, to submit a code of conduct to govern their
relationship with the affiliated utility. See, e.g., Potomac
Electric Power Company, 93 FERC ] 61,240 at 61,782 (2000); Heartland
Energy Services, Inc., 68 FERC ] 61,223 at 62,062-63 (1994). Not all
market-based rate sellers have codes of conduct. In addition, the
Commission may waive the code of conduct requirement where there are
no captive customers and, therefore, no potential for affiliate
abuse. Alcoa, Inc. 88 FERC ] 61,045 at 61,119 (1999).
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D. Miscellaneous Issues
1. The Commission Can Rescind the Market Behavior Rules in a Section
206 Order
a. Comments
47. A few commenters advocating retention of the Market Behavior
Rules argue that the Commission has not found the Market Behavior Rules
unjust and unreasonable. NASUCA, PG&E, and PJMICC contend that such a
finding is a necessary prerequisite to acting under FPA section 206 to
remove the Market Behavior Rules from market-based tariffs and
authorizations. These commenters contend that there have been no
changed circumstances warranting rescission of the Market Behavior
Rules.\90\ Other commenters, however, argue that it is unduly
discriminatory, confusing, and duplicative to retain the Market
Behavior Rules given the implementation of the new anti-manipulation
rule applicable to all entities, not just market-based rate
sellers.\91\
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\90\ NASUCA at 14; PG&E at 4, 7; PJMICC at 6-7.
\91\ EEI (reply) at 15; Cinergy at 4. EEI also argues that the
Commission has ample evidence to find that retaining the Market
Behavior Rules in market-based rate tariffs would be unduly
discriminatory and, therefore, unjust and unreasonable. EEI (reply)
at 15.
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b. Commission Determination
48. The Commission is acting within the scope of its authority
under section 206 of the FPA in rescinding the Market Behavior Rules 2
and 6. Although the Commission in most circumstances would need to find
that existing rates, terms or conditions are unjust, unreasonable,
unduly discriminatory or preferential in order to modify them under
section 206, here such a finding is not necessary because, as discussed
in greater detail below, we are basing our changes to public utility
tariffs on the change in law in EPAct 2005 and the incorporation of
substitute anti-manipulation provisions in our regulations.
Additionally, were we not to modify public utility tariffs to delete
Market Behavior Rule 2, public utilities would be subject to two
differing standards for manipulative practices while other market
participants would be subject to one standard for manipulative
practices. We do not believe this non-comparable treatment is
justified.
49. The Market Behavior Rules were based upon the Commission's
findings in 2003 that market-based rate sellers' existing tariffs were
unjust and unreasonable without provisions to prohibit market
manipulation.\92\ Since that time, circumstances have changed
significantly with enactment of EPAct 2005. Congress has provided the
Commission with an anti-manipulation statute and expressly required
that manipulation include the requirement of scienter. Consistent with
this Congr
