Despite numerous attempts to water down its final anti-manipulation order, the Federal Energy Regulatory Commission last Wednesday upheld the bulk of its November 2003 ruling that barred companies holding natural gas blanket marketing certificates from acting in a way that would manipulate energy prices and markets.

In the final rule establishing a code of conduct for jurisdictional gas sellers, FERC expressly prohibited sellers from engaging in actions that are “intended or foreseeably could manipulate” market rules, prices or conditions, such as wash trades and collusion. It also required jurisdictional sellers who report information on gas trades to index publishers to provide “complete and accurate” data, and directed them to keep records for three years of “all relevant data and information” on gas sold under their blanket certificates or reported to price indexes. FERC said violators would face “disgorgement of unjust profits, suspension or revocation” of their blanket certificates or other remedies.

On rehearing, Cinergy Marketing & Trading argued that FERC failed to justify under the Natural Gas Act (NGA) its action to attach these new conditions to existing blanket gas sales certificates [RM03-10-001]. The Commission responded that blanket certificates always have “implicitly prohibited” manipulative action in the natural gas market, but the agency “found it necessary, in order to ensure the competitiveness of the market, to explicitly prohibit actions intended to manipulate the natural gas market in its final rule.”

The final rule “explicitly places jurisdictional sellers of gas on notice of the type of actions that are prohibited in an effort to maintain a competitive marketplace for gas,” the order said.

Nicor Gas complained the new code of conduct placed a “limited group of sellers” — namely, jurisdictional gas sellers — at a competitive disadvantage with gas sellers who are not regulated by FERC. But the order countered that the Commission “determined that the benefits of [the new] rules outweighed any potential market disruptions or burdens on jurisdictional sellers.”

Moreover, it said, “requiring jurisdictional sellers of natural gas to refrain from abusive or manipulative acts will not place jurisdictional sellers of natural gas at any disadvantage in the marketplace other than the disadvantage of being prohibited from engaging in anticompetitive behavior.”

The Commission last November said the code of conduct applied only to sales of domestic gas for resale, not to first sales of natural gas. On rehearing, FERC further clarified what it meant by first sales. “If the gas is produced by an interstate pipeline, intrastate pipeline, LDC, or any affiliate of an interstate pipeline, intrastate pipeline or LDC, the sale of those volumes by any other affiliated entity qualifies as a non-jurisdictional first sale of natural gas.”

This was consistent with a 1987 court ruling (City of Farmington, New Mexico vs. FERC) in which the court held “a seller (whether an interstate pipeline, an intrastate pipeline, a local distribution company or an ‘affiliate thereof’) is engaged in a ‘first sale’ if it is selling gas produced either by the seller itself…or by its affiliate,” the FERC order noted.

But for gas not produced by sellers, the order noted that while sales to interstate pipelines, intrastate pipes or LDCs are considered non-jurisdictional first sales, subsequent sales of gas by the entities to others are jurisdictional resales.

FERC rejected pleas by companies and the American Gas Association (AGA) for more guidance on the types of manipulation acts that would be barred. “We decline commenters’ request to prohibit only specifically enumerated acts of market manipulation. The general prohibition on market manipulation in these rules is consistent with the dictates of constitutional due process.” The rules “are not unduly vague,” the order added.

The National Association of State Utility Consumer Advocates requested that jurisdictional sellers be forced to bear the burden for showing that their actions were not intended to manipulate the market. But FERC said the burden of proof would rest with the party or parties bringing a complaint to show otherwise.

Avista Corp. argued that the ban on collusion appeared to duplicate the agency’s general ban on market manipulation, but again the Commission disagreed, saying, “the anti-collusion provision merely expands on the general manipulation prohibition in these rules by explicitly prohibiting acts taken in concert with another party for the purpose of manipulating natural gas markets.”

FERC also rejected a plea to limit the scope of voluntary reporting to price indexes, specifically the extent to which it requires the reporting of all natural gas transactions. BP America Production suggested that the reporting requirement not extend to transactions conducted at trading locations where volumes were de minimis or trading was spotty.

“The Commission’s interest in robust price formation, as well as accurate, reliable and transparent price indices, dictates that we reject these requests for exceptions to our reporting requirements for points with de minimis or sporadic trading,” the order said.

As for maintaining records of gas trades, FERC clarified that jurisdictional sellers must keep both primary records — confirmations, metering data and settlement documents — and secondary records, such as e-mails and internal memos, for a three-year period. “If a record was relied upon to bill counterparties, regardless of the medium in which the record is maintained (whether a contractual document, e-mail or other form) it must be retained for three years,” the order noted.

Energy companies argued that FERC’s disgorgement remedy for violators was too stiff, while consumer advocates said the agency should have done more and adopted the “make-the-market-whole” approach.

“In the Commission’s view, it is not necessary to meet its objective of maintaining a competitive marketplace by utilizing a remedy that would make the market whole as some parties suggest. However, the Commission [believes] that any finding of an appropriate remedy will depend on the circumstances of the case before it and that the Commission would not pre-determine which remedy or remedies it will utilize,” the rehearing order said.

Commissioner Suedeen Kelly disagreed with the FERC majority on this issue, saying “I do not believe that the Commission should exclude a make-the-market-whole remedy as a possible monetary remedy for rule violations.”

The agency rejected Duke Energy’s request to limit refunds to the quarterly period in which a violation was found to have occurred. “While we are mindful of the sellers’ need for transaction finality…the balance of interests in this particular context may require us to extend our disgorgement remedy to the entirety of the seller’s improperly obtained revenues.”

However, when deciding the appropriate remedy to be assessed, “we will take into account factors such as how self evident the violation is and whether such violation is part of a [wider] pattern of manipulative behavior.”

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