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FERC Urged to Tread Cautiously in Repealing Existing Anti-Manipulation Rules

The natural gas industry has urged FERC to tread cautiously as it proceeds to repeal market behavior rules that were adopted in the wake of the California energy crisis and replace them with proposed broader anti-manipulation regulations.

Given the "precarious state" of the gas markets over the past months, "the Commission must proceed with great caution in any effort to eliminate or pare down existing regulations that were designed to protect against market manipulation," the American Public Gas Association (APGA), which represents municipal gas utilities, advised FERC.

"APGA does not object to the proposed elimination of the requirements of existing [anti-manipulation] regulations if its only effect will be to eliminate duplicative requirements. The Commission, however, must take other actions in this and other rulemaking dockets to ensure that the proposed elimination of the existing regulations will have no adverse impact," the municipal group said.

In mid-November, the Federal Energy Regulatory Commission proposed repealing market behavior rules adopted in November 2003 that prohibited holders of market-based rate tariffs for wholesale power, interstate pipelines that hold blanket certificates for unbundled gas sales, and holders of blanket marketing certificates for making gas sales for resale from engaging in manipulative transactions or practices. FERC at the time requested that the industry submit comments on the twin orders [RM06-5, EL06-16].

This action came nearly a month after FERC, subject to its new authority under the Energy Policy Act of 2005 (EPACT), proposed the adoption of new rules that would broaden its anti-manipulation reach in the natural gas and electricity markets. Under the proposed rules, FERC would have the authority to police any potential market manipulation by energy companies, even by firms over which the agency does not have jurisdiction (see Daily GPI, Oct. 21, 2005).

The agency is seeking to repeal the older market behavior rules to make room for the proposed broader, tougher anti-manipulation rules and prevent any overlap that could cause confusion in the energy markets.

"The concern that immediately arises is that the [FERC action] assumes that the EPACT proposed [anti-manipulation] rule will be implemented unchanged. However, various market participants have filed comments that seek to substantially change the requirements of the EPACT proposed rule," the APGA said. "[We] would strongly object to the elimination of the substantive requirements of the existing regulations if the Commission were to change any of the requirements of the EPACT proposed rule," the group noted.

Moreover, "it is critical that, in promulgating the EPACT proposed rule, the Commission put market participants on notice of its intent that the rule would bar the specific behavior that is prohibited by the existing rules -- specifically, all wash trades and collusive sales, and anything less than full and accurate reporting of price information to entities that establish natural gas and electric prices," the APGA said.

The group also objected to the elimination of provisions in the existing regulations that subject gas pipelines and any other entities that sell gas under FERC's blanket certificates to disgorgement of unjust profits, as well as suspension or revocation of the blanket certificate, if they engage in manipulative conduct. "The Commission must not eliminate that provision unless a similar provision is inserted in the EPACT proposed rule."

The California Public Utilities Commission (CPUC) argues that FERC's existing anti-manipulation regulations "should be retained to ensure that FERC has the broadest necessary authority and remedial power to protect natural gas consumers from unjust and unreasonable rates and practices."

The Commission's existing anti-manipulation rules "prohibit conduct that 'foreseeably could manipulate market prices' and do not require the showing of scienter (intentional or reckless conduct) required for a violation [under] the Securities Exchange Act of 1934," which FERC intends to apply to the new anti-manipulation regulations based on EPACT, the CPUC said.

"Nothing in EPACT 2005 or the [Natural Gas Act] requires FERC to limit it regulation of unjust and unreasonable rates and practices to only intentional or reckless conduct," the California regulatory agency noted. "The purpose of EPACT 2005 was to provide additional and stronger consumer protections, not to diminish the existing protections under the NGA."

It also believes "FERC's [existing] regulations should be retained because they identify known manipulative conduct, such as prearranged offsetting trades or false reports to publishers of natural gas indices." This would avoid disputes over whether the Commission's proposed regulations are "impermissibly vague" when it comes to specific anti-manipulative conduct.

The Natural Gas Supply Association (NGSA), which represents major gas producers, said it supported FERC's proposal to repeal existing anti-manipulation regulations, noting that it "will benefit market participants by making it clear that there is only one set of rules governing market behavior," However, the group asked FERC to reaffirm that the agency's existing policy statement governing price reporting will remain in effect.

The content of the policy statement is consistent with the proposed market manipulation rules, continues to provide much-needed guidance to reporters of prices and offers a "safe harbor" for those parties, and provides a "critical measure of protection" for price-reporting entities by making clear that inadvertent errors in the reporting process will not be punished, the NGSA told FERC.

Likewise, the American Gas Association (AGA), while supporting FERC's proposed repeal, called on the Commission to "clarify that repeal of these regulations does not in any fashion undermine the policy statement with regard to price reporting."

Absent a repeal, there would be an overlap between the existing and proposed anti-manipulation rules that would "undoubtedly cause uncertainty" and would promote "inefficiency in markets," said the AGA, which represents local gas distribution companies. "AGA believes that repeal of the existing regulations and adoption of the proposed regulations will result in the most appropriate substantive standard of conduct. Additionally, Congress' and the Commission's linking of the prohibition on market manipulation to the [Securities] Exchange Act...will have a highly salutary effect for natural gas markets because the long-standing, well-defined body of law under those provisions will go far in resolving potential uncertainties in delineating prohibited from permissible conduct."

The Interstate Natural Gas Association of America, an interstate gas pipeline group, also said it supported FERC's proposal to repeal existing anti-manipulation rules, but it recommended that the agency clarify that the "pertinent" legal precedent developed under the existing regulations can be used in interpreting and applying the proposed market manipulation rules based on EPACT. It further asked the Commission to retain the existing statute of limitations for filing complaints dealing with market manipulation.

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