Market Manipulation Statutes and Rules

• Pages: 211-258

211

CHAPTER 8

MARKET MANIPULATION STATUTES AND

RULES

A principal focus of the antitrust laws is to ensure that markets are

not distorted through the unlawful accumulation or maintenance of

market power. The Sherman Act does not reach the unilateral exercise of

monopoly power through charging high prices or similar conduct, nor

does it reach fraudulent or deceptive conduct unless it also has the effect

of foreclosing competitors. Other statutes and rules reach market

manipulation through fraudulent or deceptive conduct. Market

manipulation in the energy industry is subject to scrutiny by three federal

agencies with specific statutory authority and rules designed to proscribe

such conduct. The Federal Energy Regulatory Commission (FERC), the

Commodity Futures Trading Commission (CFTC), and the Federal Trade

Commission (FTC) have anti-manipulation authority in the physical and

financial energy markets. The boundaries of each agency’s jurisdiction

over market manipulation are not clearly delineated. In general, FERC

covers electric power and natural gas, the CFTC focuses on commodity

exchanges, and the FTC handles crude oil, gasoline, and petroleum

distillates. Some practices that could be characterized as manipulative

may also be covered by the antitrust laws. For instance, collusive activity

in wholesale energy markets, if it involved fraud or deceit, could be

subject to antitrust enforcement by the FTC or DOJ and could also be

targeted by multiple agencies exercising anti-manipulation authority.

This chapter describes the specific anti-manipulation rules of the three

agencies charged with administering these regulatory regimes. The

relatively nascent market manipulation regulatory regimes continue to

evolve and readers should carefully review the current status of each

regulation and recent judicial interpretations discussed herein.

A. FERC Rules

1. Background

FERC’s statutory anti-manipulation authority is a direct outgrowth of

the Western energy crisis of 2000-2001, in which several energy

companies allegedly used a variety of means to manipulate the natural

gas and power markets in California and other western states. At the

212 Energy Antitrust Handbook

time, FERC did not possess explicit anti-manipulation authority and

relied instead on the anti-manipulation provisions of the tariffs on file for

the California Independent System Operator (CAISO) and t he California

Power Exchange (CalPX). Because FERC lacked authority to impose

civil penalties under the relevant provisions of the Federal Power Act

(FPA) and the Natural Gas Act (NGA), FERC’s remedies for

manipulation were limited to disgorgement of unjust profits and

revocation of electric market-based rate authority and natural gas blanket

marketing authority. In response to the crisis, FERC adopted a set of

Market Behavior Rules in 2003.

1

It subsequently rescinded those Rules

after Congress enacted the Energy Policy Act of 2005 (EPAct 2005),

2

which clarified and enhanced FERC authority to police manipulative

conduct in electricity and natural gas markets, and then adopted the

current Anti-Manipulation Rule to implement its new authority.

a. FERC Jurisdiction

FERC’s current Anti-Manipulation Rule prohibits manipulation in

connection with FERC-jurisdictional transactions. A brief overview of

FERC’s jurisdiction over natural gas and electricity follows.

(1) Natural Gas

The NGA provides FERC with jurisdiction over the interstate

transportation of natural gas and over wholesale natural gas for resale in

interstate commerce.

3

However, the Natural Gas Wellhead Decontrol Act

amended the Natural Gas Policy Act (NGPA) to eliminate FERC’s

authority over the prices charged for “first sales” of natural gas,

4

which

are defined in section 2(21)(A) of the NGPA to include all sales from the

producer to the consumer, unless and until the gas is purchased by an

interstate pipeline, intrastate pipeline, local distribution company (LDC),

or an affiliate thereof.

5

Section 2(21)(B) of the NGPA provides that any

sale of natural gas by an interstate pipeline, intrastate pipeline, or LDC,

1

. See 18 C.F.R. § 35.41.

2

. Energy Policy Act of 2005, Pub. L. No. 109 -58, §§ 315, 1283, 119 Stat.

594 (codified at 15 U.S.C. § 717c-1, 16 U.S.C. § 824v) [hereinafter

EPAct 2005].

3

. 15 U.S.C. § 717(b) [hereinafter NGA].

4

. Id. § 3431(a).

5

. Id. § 3301(21)(A).

Market Manipulation Statutes and Rules 213

or any of their affiliates (other than sales of their own production) is not a

“first sale”

6

and is therefore subject to FERC’s NGA jurisdiction.

7

In Order No. 636, FERC effectively lifted all remaining price

restrictions on FERC-jurisdictional wholesale gas sales, except those by

interstate pipelines.

8

All sellers of FERC-jurisdictional natural gas at

wholesale are granted authority to make all sales at market-based rates

pursuant to a “blanket marketing certificate.”

9

(2) Electric Power

Under the FPA, FERC has exclusive jurisdiction over transmission

of electric energy in interstate commerce and the sale of electric energy

at wholesale in interstate commerce.

10

As discussed in Chapter 2, FERC

traditionally regulated wholesale rates based on the cost of service, but

since the beginning of the 1990s it has authorized public utilities to make

sales at market-based rates if the public utility demonstrates it, along

with all of its affiliates, lacks horizontal and vertical market power. A

public utility that fails to make this showing in a given geographic

market must sell at cost-based rates in that market. These company-

specific determinations are supplemented by additional market power

monitoring and mitigation measures in organized markets administered

by Independent System Operators (ISOs) and Regional Transmission

Organizations (RTOs).

11

6

. Id. § 3301(21)(B).

7

. Order No. 644 also asserts jurisdiction over sales by entities that are not

affiliated with any pipeline or LDC, namely, sales for resale by such non-

affiliated entities of gas that was previously purchased by an interstate

pipeline, intrastate pipeline, or LDC or retail customer. Order No. 644,

Amendments to Blanket Sales Certificates, 68 Fed. Reg. 66,323, 66,325

(Nov. 26, 2003) [hereinafter Order No. 644] (codified at 18 C.F.R. pt.

284).

8

. Order No. 636, P ipeline Service Obligations and Revision s to

Regulations Governing Se lf-Implementing Transportation under Part 284

of the Commission’s Regulations, Regulation of Natural Gas Pipelines

after Partial Wellhead Decontrol, 5 7 Fed. Reg. 13,267 (Apr. 8, 1992)

[hereinafter Order No. 636].

9

. 18 C.F.R. § 284.284.

10

. 16 U.S.C. § 824(b)(1).

11

. Order No. 697, Market-Based Rates For Wholesale Sales Of Electric

Energy, Capacity and Ancillary Services By Public Utilities, 72 Fed. Reg.