

[Federal Register: November 29, 2005 (Volume 70, Number 228)]
[Notices]               
[Page 71484-71487]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no05-47]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL06-16-000]

 
Investigation of Terms and Conditions of Public Utility Market-
Based Rate Authorizations; Order Proposing Revisions to Market-Based 
Rate Tariffs and Authorizations

Issued November 21, 2005.

    Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly
    1. The Commission issues this order pursuant to section 206 of the 
Federal Power Act (FPA) \1\ to propose repeal of the Market Behavior 
Rules, which are currently included in all public utility sellers' 
market-based rate tariffs and authorizations.\2\ The central purpose of 
the Market Behavior Rules is to prohibit market manipulation. In the 
Energy Policy Act of 2005 (EPAct 2005),\3\ Congress enacted new section 
222 of the FPA which specifically bars manipulation in connection with 
the purchase or sale of wholesale electric energy or transmission 
services and authorizes the Commission to promulgate rules and 
regulations prohibiting market manipulation. In a Notice of Proposed 
Rulemaking (NOPR) issued October 20, 2005, the Commission has proposed 
rules to implement the new statutory anti-manipulation provisions.\4\ 
We propose repealing the Market Behavior Rules once we have issued 
final regulations implementing the anti-manipulation provisions of 
EPAct 2005 and have incorporated other aspects of the Market Behavior 
Rules in appropriate Commission orders, rules, and regulations. We are 
also requesting comment on whether the Market Behavior Rules should be 
repealed prospectively.
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    \1\ 16 U.S.C. 824e (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 (the Market Behavior 
Rules Order). The Market Behavior Rules are currently on appeal. See 
Cinergy Marketing & Trading, L.P. v. FERC, Nos. 04-1168 et al. (DC 
Cir., appeal filed April 28, 2004).
    \3\ Energy Policy Act of 2005, Public Law No. 109-58, 119 Stat. 
594 (2005).
    \4\ Prohibition of Energy Market Manipulation, 113 FERC ] 61,067 
(2005) (NOPR).
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Background

    2. On November 17, 2003, acting pursuant to section 206 of the FPA, 
we 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.\5\
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    \5\ Market Behavior Rules Order, 105 FERC ] 61,218 at PP 3, 158-
74.
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    3. 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 tariffs of Independent System Operators 
(ISO) or Regional Transmission Organizations (RTO), and sellers' 
agreements to operate within ISOs and RTOs bind them to follow the 
applicable rules and regulations of the organized market.
    4. Market Behavior Rule 2 prohibits ``actions or transactions that 
are without a legitimate business purpose and that are intended to or 
foreseeably could

[[Page 71485]]

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.
    5. 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.
    6. 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.\6\ Rule 4 also requires 
that sellers notify the Commission of whether they report transaction 
data to price index publishers in accordance with the Policy Statement, 
and to update any changes in their reporting status.
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    \6\ Policy Statement on Natural Gas and Electric Price Indices, 
104 FERC ] 61,121 (2003).
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    7. 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.
    8. 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.\7\
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    \7\ 18 CFR part 358 (2005).
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    9. 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.\8\ 
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.
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    \8\ 18 CFR 284.288 and 284.403 (2005).
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EPAct 2005 and Proposed New Rules

    10. As noted, section 1283 of EPAct 2005 amended the FPA to add a 
new section 222, which prohibits 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. In order to implement 
the anti-manipulation provisions of FPA section 222, we issued the NOPR 
proposing new regulations (proposed part 47 regulations) to make it 
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 person.\9\
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    \9\ The proposed part 47 regulations are also provided in 
Attachment A hereto.
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    11. In the NOPR we recognized that Market Behavior Rule 2 also 
prohibits manipulative conduct. We noted that conduct that violates 
both Market Behavior Rule 2 and the proposed part 47 regulations will 
be treated as one violation of anti-manipulation rules, and that we 
will not apply duplicative penalties for the same conduct in the event 
that conduct were to violate both Market Behavior Rule 2 and the 
proposed part 47 regulations. We also indicated that we would seek 
comment on whether Market Behavior Rule 2 should be revised or repealed 
in light of the proposed part 47 regulations.

Discussion

    12. Our goal is to provide firm but fair enforcement of the 
statutes, orders, rules, and regulations we administer. To do so, it is 
important that our rules be as clear as possible so that market 
participants and entities subject to our rules and regulations 
understand what conduct is proscribed and can act accordingly.\10\ We 
propose to repeal the Market Behavior Rules in light of the proposed 
part 47 regulations to implement the new anti-manipulation provisions 
contained in section 222 of the FPA and of the Commission's other rules 
and regulations.\11\ All market-based rate sellers are ``entities'' 
subject to EPAct 2005 and therefore will be subject to the new 
regulations prohibiting manipulation, deceit, and fraud in connection 
with wholesale electricity transactions. Other aspects of the Market 
Behavior Rules either reflect existing requirements or can be 
incorporated into other rules, making it unnecessary to retain the 
separate list of rules in each seller's tariff.
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    \10\ As discussed in the NOPR (at P 14), section 222 of the FPA, 
as added by section 1283 of EPAct 2005, and the proposed part 47 
regulations are patterned after section 10(b) of the Securities 
Exchange Act of 1934 and related regulations, which provides a level 
of certainty as to how the proposed rules will operate that is not 
typically available.
    \11\ Concurrently with this order, we are issuing a Notice of 
Proposed Rulemaking in Docket No. RM06-5-000 to consider similar 
changes in our part 284 regulations promulgated in Order No. 644.
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    13. We think that repeal 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. At the same 
time, we think that the behaviors described in the Market Behavior 
Rules will still be addressed through other rules and regulations. We 
emphasize our belief that repeal of the Market Behavior Rules is 
intended to take into account the passage of EPAct 2005, which has 
provided the Commission with expanded anti-manipulation authority, and 
to simplify and streamline the rules and regulations sellers must 
follow, not to eliminate beneficial rules governing market behavior.
    14. The heart of the Market Behavior Rules are Rules 2 and 3, 
prohibiting manipulation and requiring complete, accurate, and factual 
representations. We recognize that there is overlap between Market 
Behavior Rules 2 and 3 and the proposed part 47 regulations. We are 
concerned that this could cause unnecessary confusion and regulatory 
uncertainty once the proposed part 47 regulations are in place. It is 
our view that the scope of the new statutory prohibition on 
manipulation and the reach of the proposed part 47 regulations 
eliminate the need for Market Behavior Rules 2 and 3.
    15. We recognize there are some differences, but the differences do 
not seem to require keeping the Market Behavior Rules once the new part 
47

[[Page 71486]]

regulations are final.\12\ For instance, there is a difference in the 
standard of proof between Market Behavior Rule 2 and the proposed part 
47 regulations. 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.\13\ Those terms have been interpreted to require 
a showing of scienter, that is, an intent to deceive, manipulate or 
defraud.\14\ In other words, knowing, intentional, or reckless conduct 
is proscribed.\15\ In contrast, Market Behavior Rule 2 does not require 
a showing of scienter, as it prohibits actions or transactions that 
``foreseeably'' could manipulate market prices, conditions, or rules. 
The ``foreseeably'' requirement has generated controversy and 
uncertainty, however. We believe the use of a scienter standard, given 
the precedent in other regulatory contexts, will draw a clearer line 
between acceptable and prohibited behavior.
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    \12\ The timing of proposed repeal is important. We do not 
intend to leave any gap in our regulations prohibiting manipulation 
of energy markets or other requirements of the Market Behavior 
Rules.
    \13\ 15 U.S.C. 78j(b)(2005).
    \14\ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201 (1976).
    \15\ Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th 
Cir.), cert. denied, 434 U.S. 875 (1977) (defining recklessness in 
the section 10(b) and Rule 10b-5 context as ``a highly unreasonable 
omission, involving not merely simple, or even inexcusable 
negligence, but an extreme departure from the standards of ordinary 
care, and which presents a danger of misleading buyers or sellers 
that is either known to the defendant or is so obvious that the 
actor must have been aware of it.''); accord In Re Silicon Graphics 
Securities Litigation, 183 F.3d 970, 977 (9th Cir. 1999).
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    16. We also note that the new authority granted to the Commission 
in section 222 of the FPA and our proposed part 47 regulations cover 
more transactions and more entities than is the case for Market 
Behavior Rule 2, which governs only market-based rate sellers. More 
precisely, Congress made the anti-manipulation provisions of section 
222 applicable to ``any entity'' and in connection with both the 
purchase and sale of electric energy, as well as the purchase and sale 
transmission services subject to our jurisdiction. Market Behavior Rule 
2, on the other hand, is applicable only to sales by ``public 
utilities'' that have market-based rate authority, a smaller subset of 
the entities and types of transactions subject to the section 222 
prohibition of manipulation.
    17. Market Behavior Rule 2 also includes a statement that 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, are not violations of 
Market Behavior Rule 2. Actions or transactions pursuant to Commission-
approved rules and regulations of an organized market, or pursuant to 
the direction of a Commission-approved RTO or ISO, are an affirmative 
defense to a claim of manipulation under the proposed part 47 
regulations, and therefore we will presume that such actions or 
transactions are not a violation of the proposed part 47 regulations. 
However, we seek comment on whether it is necessary to retain this 
provision in market-based rate tariffs.
    18. Similarly, it is our view that it is not necessary to retain 
the explicit prohibitions against certain conduct set forth in Market 
Behavior Rule 2 (wash trades, transactions predicated on submitting 
false information, transactions creating and relieving artificial 
congestion, and collusion for the purpose of market manipulation). 
These are examples of prohibited manipulation, all of which are 
manipulative or deceptive devices or contrivances. Thus, all would be 
barred by the proposed part 47 regulations. For example, wash trades or 
transactions to create and relieve artificial congestion would be 
devices or schemes to defraud (proposed Sec.  47.1(a)(1)). Transactions 
predicated on false information would also involve untrue statements of 
material facts (proposed Sec.  47.1(a)(2)). It is our view that market 
participants are on notice that these are prohibited activities under 
the proposed part 47 regulations, subject to penalty and remedial 
action.
    19. Similarly, with respect to Market Behavior Rule 3, if a seller 
fails to provide accurate and factual information, or acts in a 
misleading way, that conduct would be a deceit or fraud and would be a 
violation of the proposed part 47 regulations. Our view is that, like 
Market Behavior Rule 2, conduct subject to Market Behavior Rule 3 would 
also be covered by the proposed part 47 regulations. Here too, it would 
be confusing to retain a duplicative set of rules governing market 
conduct.
    20. Turning to the other Market Behavior Rules, it appears that the 
requirements imposed there either are duplicative of other rules or 
regulations or can be incorporated into other rules of general 
applicability. For instance, Market Behavior Rule 1 is essentially a 
restatement of existing obligations to comply with Commission rules and 
regulations in organized markets. These are tariff requirements of the 
ISOs and RTOs, and failure of a market participant to follow these 
rules and regulations is enforceable through the organized market's 
tariff and related agreements.
    21. The first part of Market Behavior Rule 4, requiring sellers to 
provide accurate data to price index publishers if the seller is 
reporting transactions to such publishers, calls for accurate and 
truthful representations. It is our view that failure to do so would be 
a violation of the proposed part 47 regulations. Market Behavior Rule 4 
also includes a requirement that sellers notify the Commission of their 
price reporting status and any changes in that status. This does not 
appear elsewhere in our current or proposed regulations. We note, 
however, that price transparency is also addressed by EPAct 2005, which 
adds new section 220 to the FPA.\16\ Section 220 gives us authority to 
promulgate rules and regulations necessary to facilitate price 
transparency. We intend to address market transparency issues in a 
separate proceeding, and anticipate that rules adopted in that 
proceeding will address the Market Behavior Rule 4 requirements for 
providing transaction information to price index publishers and 
informing the Commission of price reporting status.
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    \16\ In addition, EPAct 2005 section 1282 enacted new FPA 
section 221, which contains a new prohibition on providing false 
information. No entity, including an FPA section 201(f) entity, 
``shall willfully and knowingly report any information relating to 
the price of electricity sold at wholesale or the availability of 
transmission capacity * * * to a Federal agency with intent to 
fraudulently affect the data being compiled by the Federal agency.'' 
This prohibition is wider in scope than current Market Behavior Rule 
4 because it applies to any ``entity'' and is not restricted to 
jurisdictional sales or transmission services.
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    22. 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. The Commission has a number of 
specific record retention requirements applicable to public utilities 
subject to the jurisdiction of the Commission in part 125 of our 
regulations.\17\ In many cases, these requirements are for time periods 
longer than three years. The part 125 requirements are largely related 
to cost-of-service rate requirements, however. We believe it is 
important that all market-based rate sellers retain the data and 
information described in Market Behavior Rule 5. We intend to address 
this retention requirement in the context of our rules under the FPA, 
such that there will be no gap in the retention

[[Page 71487]]

requirement. We believe that doing so would eliminate the need to 
retain Market Behavior Rule 5.
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    \17\ 18 CFR part 125 (2005).
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    23. Finally, Market Behavior Rule 6 requires adherence to codes of 
conducts and the Standards of Conduct, and prohibits collusion to 
violate the codes of conduct or the Standards of Conduct. The codes of 
conduct are issued specifically to each market-based rate seller as 
part of their authorization, and the Standards of Conduct are 
applicable by rule to all market-based rate sellers engaged in or 
having affiliates engaged in transmission services. Our view is that 
Market Behavior Rule 6 restates requirements independently applicable 
to market-based rate sellers, except for the prohibition on colluding 
to violate the codes of conduct or Standards of Conduct. But collusion 
is a type of fraud,\18\ and thus collusion to violate codes of conduct 
or Standards of Conduct would be subject to the proposed part 47 
regulations.
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    \18\ Fraud and collusion are often used interchangeably. See, 
e.g., Martin v. Wilks, 490 U.S. 755, 772 (1989). The Supreme Court 
long ago found fraud to be implicit in collusion. Wheeler v. Denver, 
229 U.S. 342, 350 (1913) (``of course, the existence of collusion 
implies the existence of fraud''); Dickerman v. Northern Trust Co., 
176 U.S. 181, 190 (1900) (``Collusion * * * implies the existence of 
fraud of some kind, the employment of fraudulent means, or lawful 
means for the accomplishment of an unlawful purpose * * *.'').
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    24. In addition to simplifying our behavior rules, avoiding 
confusion, and providing more regulatory certainty, it is also our view 
that a smooth transition from the existing Market Behavior Rules to the 
proposed part 47 regulations and other rules and regulations achieves 
our original goal in adopting the Market Behavior Rules, that is, to 
assure that wholesale market rates for electric energy are just, 
reasonable, and not unduly discriminatory or preferential. In EPAct 
2005, Congress has provided broad and strong prohibitions of market 
manipulation, and reliance on rules implementing these statutory 
prohibitions will likewise assure that wholesale markets reflect 
competitive forces and produce just and reasonable rates.
    25. We seek comment on whether the Market Behavior Rules should be 
repealed prospectively, including responses to the following questions:
    1. Are there any aspects of the Market Behavior Rules that should 
be retained in market-based rate sellers' tariffs and authorizations, 
or can all substantive provisions of the Market Behavior Rules be 
reflected in the proposed part 47 regulations and other Commission 
rules and regulations?
    2. Is there a need or basis for retaining existing Market Behavior 
Rule 2 in light of the anti-manipulation provisions set forth in the 
proposed part 47 regulations?
    3. Should the Commission incorporate the qualification that no 
action or transaction explicitly contemplated by Commission rules, or 
undertaken at the direction of an ISO or RTO, is a violation of Market 
Behavior Rule 2 into the proposed part 47 regulations?
    4. Should the affirmative defense of ``legitimate business 
purpose'' in existing Market Behavior Rule 2 be retained in any form?
    5. Is there any aspect of behavior forbidden by Market Behavior 
Rule 3 that would not act as a fraud or deceit in connection with the 
purchase or sale of electric energy or transmission services subject to 
the Commission's jurisdiction?
    6. Is the requirement of Market Behavior Rule 4 to report 
transaction information accurately, to the extent a seller reports such 
information to price index publishers, necessary in light of the 
proposed part 47 regulations?
    7. Is there any aspect of Market Behavior Rule 6 that is not 
covered directly and explicitly by each seller's code of conduct as 
contained in tariff authorizations, or by the Standards of Conduct in 
part 358 of our regulations, or by the proposed part 47 regulations?
    26. We encourage responses to the specific questions above as well 
as additional relevant comments regarding whether the Market Behavior 
Rules should be repealed.
    27. The Commission invites interested persons to submit comments on 
the matters, issues, and specific questions identified in this order. 
Comments are due thirty (30) days from the date of publication of this 
order in the Federal Register, and reply comments are due fifteen (15) 
days from the date that initial comments are due. To facilitate the 
Commission's review of the comments, the Commission requests that 
commentors provide an executive summary of their position. In addition, 
the Commission requests that commentors identify each specific question 
addressed by their comments and use appropriate headings.

The Commission Orders

    (A) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Commission by section 402(a) of the 
Department of Energy Organization Act and by the FPA, particularly 
section 206 thereof, and pursuant to the Commission's Rules of Practice 
and Procedure and the regulations under the FPA (18 CFR Chapter I), the 
Commission proposes to revise all public utility sellers' market-based 
rate tariffs and authorizations as discussed in the body of this order.
    (B) Interested entities may file comments and reply comments 
regarding the proposed prospective repeal of the Market Behavior Rules 
set forth herein. Initial comments will be due 30 days from the date 
this order is published in the Federal Register, and reply comments 
will be due 15 days from the date that initial comments are due to be 
filed.
    (C) The Secretary shall promptly publish this order in the Federal 
Register.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 05-23467 Filed 11-28-05; 8:45 am]

BILLING CODE 6717-01-P
