Market Manipulation Statutes and Rules

• Pages: 189-233

189

CHAPTER IX

MARKET MANIPULATION STATUTES AND

RULES

Apart from the antitrust laws, market manipulation in the energy

industry is the subject of scrutiny by three federal agencies with special

statutory authority and rules. The Federal Energy Regulatory

Commission (FERC), the Commodities Futures Trading Commission

(CFTC), and now the Federal Trade Commission (FTC) have anti-

manipulation authority in the physical and financial energy markets. 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. Many practices that could be characterized as

manipulative may also be covered by the antitrust laws. For instance, a

price fixing conspiracy in wholesale energy prices would almost

certainly be subject to enforcement by multiple agencies. This chapter

will describe the specific anti-manipulation rules of the three agencies

charged with administering these regulatory regimes. Because the

regulatory regime relating to market manipulation is evolving at a rapid

pace, however, readers should carefully review the current status of the

statutes and regulations discussed herein.

A. FERC Rules

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 different means to manipulate the

natural gas and power markets i n California and other western states. At

the time, FERC did not have 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 the 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.

190 Energy Antitrust Handbook

This section will first briefly describe FERC’s gaming proceedings,

the Market Behavior Rules

1

that FERC adopted in response to the

Western Energy Crisis of 2000-2001, and FERC’s proceeding in Energy

Transfer Partners, L.P.

2

for violation of Market Behavior Rule 2.

Second, it will discuss the current Anti-Manipulation Rule in Part 1c of

FERC’s regulations adopted pursuant to the Energy Policy Act of 2005

(EPAct 2005)

3

and the Commission’s show cause proceedings regarding

alleged violations of the Anti-Manipulation Rule in Amaranth Advisors

L.L.C.,

4

Seminole Energy Services, LLC,

5

and National Fuel Marketing,

LLC.

6

Finally, it will describe the sanctions for market manipulation,

including FERC’s enhanced civil authority to assess penalties of up to $1

million per day per violation, disgorgement of unjust profits, revocation

of authority to sell power at market-based rates and/or pursuant to a

blanket marketing certificate for natural gas, and referral for criminal

prosecution.

7

1. Background

a. FERC Jurisdiction

FERC’s currently effective Anti-Manipulation Rule prohibits

manipulation in connection with FERC-jurisdictional transactions.

Therefore, a brief overview of FERC’s jurisdiction over natural gas and

electricity follows.

1. See 18 C.F.R. § 35.41.

2. 120 F.E.R.C. ¶ 61,086 (2007) (order to show cause).

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

594 (2005) (codified at 15 U.S.C. § 717c-1, 16 U.S.C. § 824v).

4. 120 F.E.R.C. ¶ 61,085 (order to show cause), reh’g denied, 121 F.E.R.C.

¶ 61,224 (2007), reh’g denied, 124 F.E.R.C. ¶ 61 ,050 (2008).

5. 126 F.E.R.C. ¶ 61,041 (2009) (order to show cause).

6. 126 F.E.R.C. ¶ 61,042 (2009) (order to show cause). In E nergy Transfer,

Amaranth, Seminole, and Nati onal Fuel, FERC issued an “Order to Show

Cause and Notice of Proposed P enalties.” In these orders, FERC initiated

an enforcement action by setting forth its allegations and directing these

entities to s how cause why they did not violate FERC’s rules prohibitin g

market manipulation. They are not final orders and do not make any

findings that violations in fact occurred or impose p enalties.

7. Energy Policy Act of 2005 §§ 314(b), 1285(e), 15 U.S.C. § 717t-1, 16

U.S.C. § 825o-1.

Market Manipulation Statutes and Rules 191

(1) Natural Gas

The NGA provides FERC with j urisdiction over the interstate

transportation of natural gas and over the wholesale sale of natural gas

for resale in interstate commerce.

8

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,

9

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.

10

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

that any sale of natural gas by an interstate pipeline, intrastate pipeline,

or LDC, or any of their affiliates (other than sales of their own

production) is not a “first sale”

11

and is therefore subject to FERC’s

NGA jurisdiction.

12

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

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

interstate pipelines.

13

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.”

14

8. 15 U.S.C. § 717(b).

9. Id. § 3431(a).

10. Id. § 3301(21)(A).

11. Id. § 3301(21)(B).

12. 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 b y an interstate

pipeline, in trastate pipeline, o r 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).

13. Order No. 636, Pipeline Service Obligations and Revisions to

Regulations Governing Self-Implementing Transportation under Part 284

of the Commission's Reg ulations, Regulation of Natural Gas Pipelines

after Partial Wellhead Decontrol, 57 Fed. Reg. 13,267 (Apr. 8, 1992)

[hereinafter Order No. 636].

14. 18 C.F.R. § 284.284.