The Federal Energy Regulatory Commission should require “all sellers of natural gas,” not just a few select industry sectors, to adhere to the agency’s proposed code of conduct aimed at curbing manipulative behavior and transactions in gas markets, the American Gas Association (AGA) said last week.

Separately, EnCana Marketing (USA) Inc. called “highly vague” the proposed code’s standard for what would constitute prohibited behavior in gas markets in the future. It urged the agency not only to reject the proposed standard, but to defer further action on it until the investigations into the market behavior of gas suppliers have been completed.

By not requiring all gas sellers to comply with the code of conduct, “not only will the proposed code of conduct have little effective impact on the marketplace for natural gas sales, but it will also produce anomalous results because part of the market will be impacted by the rule’s provisions and part will not,” the AGA told FERC.

AGA last week asked the Commission to clarify which segments of the gas market would be subject to the proposed code, pointing out that the proposed rule appeared to contain conflicting statements on this issue.

“If the proposed code of conduct applies only to affiliates of pipelines, LDCs and their affiliates, then most interstate transactions would be outside of the proposed code of conduct…Very little of the overall volume of sales in the natural gas market will be under the proposed code of conduct. This does not further the Commission’s interest in ensuring that published price indices represent a fair and accurate measure of actual prices and trading volumes,” said the trade group, which represents local distribution companies (LDCs).

“Unless the Commission can ensure that the proposed regulations would apply to substantially all sellers of gas in this market, it should forego issuing a final rule that would disadvantage certain market participants and undermine the Commission’s stated objective to restore confidence in the nation’s energy markets.”

In response to the manipulation of western energy markets, the Commission in late June issued proposed rules aimed at preventing market manipulation and tightening the reporting requirements for trade transactions in both the natural gas and electric markets. With respect to gas, FERC is seeking to amend blanket gas sales certificates to include a code of conduct on trading practices, transaction reporting and record retention. Violators could face disgorgement of unjust profits and/or the suspension or revocation of market-based rate authority or blanket certificate authority [RM03-10].

AGA also agreed with EnCana Marketing that the proposed code’s standard for what constitutes prohibited behavior in gas markets is “far too vague.” FERC instead should tie its proposed code of conduct to a standard of legality, the LDC group noted.

The proposed standard, which would prohibit actions or transactions lacking a “legitimate business purpose,” is “little more than an amorphous legal standard that lacks the details and explanations necessary for market participants to understand what behavior is prohibited or how the Commission intends to police compliance,” said EnCana Marketing, a U.S. subsidiary of Canadian independent producer EnCana Corp.

FERC’s proposal is a “well intentioned, but vastly oversimplified approach for dealing with manipulation in gas commodity markets, and one that is likely to do more harm than good if adopted,” the marketer noted in comments filed at the agency.

In the proposed gas rule, the Commission identified prohibited behavior as “actions or transactions without a legitimate business purpose that manipulate or attempt to manipulate market prices, market conditions, or market rules for natural gas or that result in prices that do not reflect legitimate forces of supply and demand.”

Those three words — “legitimate business purpose” — are “highly problematic,” according to EnCana. The agency rule “suggests that 1) a ‘legitimate business purpose’ is one that is consistent with competitive market behavior and that does not involve manipulation; and 2) manipulation exists when an action is not supported by a ‘legitimate business purpose.’ This explanation is circular and fails to provide market participants with any guidance with regard to what transactions are, in fact, prohibited.”

The proposed rule raises more questions than it answers, said EnCana. It “may result in uncertainty and market disruption and a disincentive for parties to enter into fixed price transactions for fear that such transactions may be alleged to be evidence of collusion,” the marketer noted. Buyers and sellers instead may resort more frequently to index-based deals, further “jeopardizing the depth and even availability of published indices.”

EnCana called on FERC to deep-six its proposed “legitimate business purpose” standard, and to hold off from crafting generic rules on prohibited behavior and manipulation until ongoing investigations are completed.

The proposed remedy — disgorgement of unjust profits — also needs to be better clarified, particularly what is meant by “unjust profits,” the marketer said. “How, for example, would the Commission go about distinguishing the ‘just’ portion of a profit from the ‘unjust’ portion?” It suggested that FERC adopt a presumption that unjust profits will be defined as the “difference between a reported transaction’s fixed price and the published index price for the market and time period in question.”

EnCana said it didn’t object to the Commission’s requirement that companies retain relevant data and information submitted to published price indexes for a period of three years. But it suggested that FERC confer with the Commodity Futures Trading Commission (CFTC), which has its own record-retention requirements, to make sure the two agencies are consistent on this score.

EnCana said it supported FERC’s proposal that requires a complaint to be filed within 60 days after the end of a quarter in which an alleged violation occurs. An exception would be made if a person could not have known of the alleged violation during this time frame, in which case the clock would start running at the time the violation is detected.

The proposed deadline would provide “a measure of certainty” to market participants, and would bring “finality and closure” to market transactions, the marketer noted.

The AGA also called on FERC to include a “safe harbor” provision in the proposed rule to protect companies from prosecution and/or penalties in the event they make “inadvertent errors” when reporting prices.

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