FERC has rejected requests for rehearing of a February order in which the federal agency rescinded two market behavior rules following the promulgation of new regulations prohibiting the employment of manipulative or deceptive devices or contrivances in wholesale electricity and natural gas transactions.

In the February decision, the Commission rescinded two “redundant” market behavior rules and adopted a final rule to codify four other existing market behavior rules included in individual electric tariffs (see Daily GPI, Feb. 17).

Specifically, the Federal Energy Regulatory Commission (FERC) eliminated market behavior Rules 2 and 6 for the electric market, which include a general prohibition against market manipulation and require regulated companies to comply with the agency’s standards of conduct. On the gas side, the Commission rescinded the market behavior rule prohibiting market manipulation.

In response to that order, the California Public Utilities Commission (CPUC) and the California Electricity Oversight Board (CEOB) argued that FERC committed legal error by rescinding Rule 2 because nothing in the Energy Policy Act of 2005 (EPAct 2005) mandated such a rescission.

The CPUC argued that rescission cannot be reconciled with the Commission’s obligation to ensure that rates are just and reasonable, and that the Commission committed legal error by not first finding that former Rule 2 was unjust and unreasonable before rescission. CPUC also argues that the Commission lacks jurisdiction to rescind Rule 2, when orders relating to the promulgation of Rule 2 are currently under judicial review.

The CPUC and CEOB further expressed concern that the new anti-manipulation rule will not reach all of the conduct that had been prohibited under Rule 2. The CPUC and CEOB sought clarification or rehearing on the scope of remedies available for violations of the rules and regulations administered by FERC. CEOB also argued that rescission of Rule 2 is inconsistent with the retention and codification of other market behavior rules.

In an April 17 order, FERC said it is important to recognize that Rule 2 and the Commission’s new anti-manipulation rule have the same purpose — to prohibit manipulation of energy markets subject to the jurisdiction of the Commission.

“Before Congress enacted EPAct 2005, we fashioned a market manipulation rule specific to certain jurisdictional entities, relying on our ability to place conditions on market-based rate authorizations,” FERC noted. “Passage of EPAct 2005, however, brought about a fundamental change in circumstances because Congress specifically prohibited market manipulation by any entity in connection with a jurisdictional transaction, not just those entities over whom the Commission has rate jurisdiction.”

FERC said that while the terminology differs between Rule 2 and FERC’s new anti-manipulation rule, both rules are aimed at market manipulation. “Replacing the Commission’s tariff-based prohibition of market manipulation appropriately implements congressional intent.”

Congress directed that market manipulation includes the requirement of scienter, “that is, intentional or reckless conduct,” FERC went on to say. “Therefore, CEOB’s argument that Congress did not impose the requirement of scienter is without merit. The question is whether the Commission should retain two rules prohibiting manipulation, using two different standards of proof.”

FERC said that in recognizing and adapting to the changed circumstances presented by EPAct 2005, it decided that it would promote regulatory certainty “yet still assure customer protection to rely on the language of FPA [Federal Power Act] Section 222, which directs that the terms manipulative or deceptive device or contrivance be used as they are in Section 10(b) of the Exchange Act. This approach applies a consistent standard of proof for market manipulation to all entities.

“Nevertheless, as we said in the February 16 order, the Commission will continue to monitor wholesale markets as they evolve and will consider changes in our regulations as may be necessary to assure that wholesale markets are well functioning and result in just and reasonable energy prices.”

CPUC’s and CEOB’s approach “would subject market-based rate sellers to a different set of rules than other market participants. The Commission reiterates its concern about the potential for uneven application of anti-manipulation provisions based on whether an entity is a public utility engaged in jurisdictional transactions under the FPA or a ‘nonjurisdictional’ entity, or whether an entity is a public utility selling under market-based rate authority or selling at cost-based rates.”

FERC pointed out that Congress barred manipulation by “any entity” in connection with a jurisdictional transaction. “Applying the same rule to all entities to determine whether market manipulation occurred is sound practice and is consistent with congressional intent. This is not a situation in which different rules should apply depending on the regulatory status of a market participant.”

The Commission’s new anti-manipulation rule “implements clear statutory authority prohibiting market manipulation, and while the new anti-manipulation rule, unlike Rule 2, requires a showing of scienter, it is a ‘catch-all’ provision reaching all manner of fraud perpetrated by any entity in connection with a transaction subject to the jurisdiction of the Commission.”

FERC also rejected the CPUC’s argument that the Commission lacked jurisdiction to rescind Rule 2. The Commission said petitions for review before the U.S. Court of Appeals for the District of Columbia Circuit in Cinergy Marketing & Trading, L.P. v. FERC, et al., give the Court “exclusive” jurisdiction “to affirm, modify, or set aside” the orders adopting the Commission’s market behavior rules.

“The pending appeal does not, however, prevent the Commission from deciding, as we did in the February 16 order, to rescind rules prospectively based on a new record in a newly instituted proceeding,” FERC said.

“Moreover, this proceeding is at its core a rulemaking for electric market-based rate sellers, not an adjudication in which parties have specific rights and as to which the decision on the underlying record, once filed with the court, cannot be changed by the agency.”

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