With the implementation of the Energy Policy Act of 2005 (EPAct), a "fundamental shift" in the balance of power between FERC and the energy industry occurred, giving the Commission significant civil penalty authority and expanding its jurisdiction over energy companies that had not historically been subject to its jurisdiction, according to a review by a top energy law firm.

Fulbright & Jaworski LLP reviewed the recent government probes of market manipulation in its latest "Trends in Energy Litigation 2007," the third in a series. Among other things, the voluminous report reviewed the myriad of changes since market manipulation came into play seven years ago.

Before EPAct was adopted, the report noted that the Federal Energy Regulatory Commission (FERC) only had jurisdiction to address market manipulation by market-based rate sellers, natural gas pipelines providing unbundled service or holders of blanket certificate authority. After EPAct was adopted, FERC issued Order No. 670 in January 2006, adopting regulations to implement the anti-manipulation provisions.

"Now, FERC has authority to prohibit market manipulation by 'any entity,'" the report stated. "Any entity" includes "any person or form of organization, regardless of its legal status, function or activities." The new anti-manipulation rules apply to entities that are not otherwise jurisdictional, as long as manipulative conduct is "in connection with" or otherwise affects a jurisdictional transaction.

"While there have yet to be any public enforcement orders interpreting Order No. 670, FERC Chairman Joseph Kelliher recently warned that 'it's a new day' when it comes to complying with FERC orders," the report noted. "In response to its authority, FERC has significantly increased its enforcement and market monitoring capabilities and is aggressively monitoring energy markets."

The report noted that FERC "is clearly investing in this area, and the lack of enforcement cases to date should not be taken as a sign that FERC does not intend to use its new authority."

Until FERC develops a body of case law that interprets Order No. 670, prior Commission cases "offer some insight into activities that will likely be considered manipulative." For example, the report noted that following the California energy crisis in 2000-2001, FERC staff issued a report that conducted that "significant market manipulation" had occurred. FERC staff paid "particular attention" to "wash trades; rapid-fire trading; physical and economic withholding; and intentional false reporting to trade publications that report price indices."

More recently, the report noted that FERC and other agencies are investigating whether companies are taking positions in the physical market to the benefit of a financial position. Specifically, investigations are ongoing relating to the disconnect of the physical and financial markets at the Houston Ship Channel. Allegedly, at least one company, in the last hour of the last day prior to the expiration of the prompt-month New York Mercantile Exchange contract, sold physical gas in the monthly market at prices well below market.

"It remains to be seen how FERC will wield the very large regulatory hammer bestowed upon it by the EPAct," the report said. "Because of the lack of recent FERC jurisprudence regarding anti-market manipulation enforcement, it is helpful to consider how a sister agency, the Commodity Futures Trading Commission (CFTC), has enforced anti-market manipulation regulations."

In the past year, there have been three bills and one Senate subcommittee report addressing energy manipulation, with the most significant being the CFTC Reauthorization Act and bills that provide for increased surveillance of off-exchange contracts and increased market oversight by the CFTC.

"It remains to be seen how new legislative proposals will impact the ability of CFTC to further regulation market manipulation and whether over-the-counter trades and the IntercontinentalExchange will be brought under the agency's jurisdiction," the authors noted. "However, even if no new legislation comes to fruition, the CFTC and FERC can still be expected to aggressively enforce the anti-manipulation provisions of the Commodity Exchange Act and the EPAct."

To read the report, visit www.fulbright.com/pdfs/energytrendsreport2007.pdf.

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