The Federal Energy Regulatory Commission’s “rules of the road,” designed to maintain market integrity and eliminate manipulation (Order 644), instead will put a wrench in the works of efficient market operations, a number of market participants said in asking the Commission for further clarifications.

FERC’s rules, approved in November (see Daily GPI, Nov. 14, 2003) “are not sufficiently targeted or clear to make them legally enforceable or to promote a more effective and competitive structure for the wholesale energy markets,” according to a request for rehearing filed by Merrill Lynch Capital Services Inc.

Among other things Merrill Lynch objected to “Behavior Rules that are unduly vague, overly broad and redundant” and which “do not consider the seller’s intent or the market consequences of the activity,” and which would apply retroactive penalties for activities which are not expressly prohibited. The last constitutes denial of due process.

The American Gas Association (AGA) also called on FERC to further define prohibited behavior. A key phrase in the order particularly requires clarification, AGA said. The phrase:

“Any person making natural gas sales for resale in interstate commerce pursuant to § 284.402 is prohibited from engaging in actions or transactions that are without legitimate business purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules for natural gas.”

FERC should clarify the “legitimate business purpose” test so that it offers a “safe harbor” against sanctions under the rules, AGA said. Also, it would help if the Commission listed various commonly held business rationales for particular trading activities such as “(a) maximizing operational flexibility, (b) providing additional credit support (as with the “sleeve” type of transaction), (c) avoiding cash out or penalty exposure under a pipeline’s tariff, and (d) engaging in price arbitrage through the use of storage service. This list is far from exhaustive, but confirmation of the type of reasoning that will be accepted as a legitimate.”

AGA also requests FERC remove the “Forseeability” concept from the final rule and regulations. “Foreseeability that an action may move the markets without intent should not be enough to make an otherwise legal transaction actionable.”

FERC also should clarify that it will “apply a definition of manipulation in accord with judicial and other regulatory precedent, and modify the Final Rule by deleting ‘Market Conditions’ and ‘Market Rules’ or at a minimum offering further clarification as to the intended meaning of these phrases.”

Without these clarifications or modifications, AGA said the rule fails to afford sufficient notice to affected parties.

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