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.
It subsequently rescinded those Rules
after Congress enacted the Energy Policy Act of 2005 (EPAct 2005),
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.
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,
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.
Section 2(21)(B) of the NGPA provides that any
sale of natural gas by an interstate pipeline, intrastate pipeline, or LDC,
. 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].
. 15 U.S.C. § 717(b) [hereinafter NGA].
. Id. § 3431(a).
. 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”
and is therefore subject to FERC’s NGA jurisdiction.
In Order No. 636, FERC effectively lifted all remaining price
restrictions on FERC-jurisdictional wholesale gas sales, except those by
interstate pipelines.
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.”
(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.
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).
. Id. § 3301(21)(B).
. 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.
. 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].
. 16 U.S.C. § 824(b)(1).
. Order No. 697, Market-Based Rates For Wholesale Sales Of Electric
Energy, Capacity and Ancillary Services By Public Utilities, 72 Fed. Reg.

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