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Commission Watch

How far will FERC go to restore market confidence?
Fortnightly Magazine - September 15 2003

a market response to supply and demand imbalance. She asks what constitutes "legitimate forces of supply and demand," and what defines scarcity pricing. "I also fear that as the precise definition of manipulation develops over time we will end up with overly proscriptive 'rules of the road' that will dampen innovative, legitimate business tools," she warns.

Brownell also is concerned that the proposed regulations could lead to the segmentation of the gas commodity market. "Could blanket certificate holders face a competitive disadvantage due to compliance with the code of conduct, or could there by any negative impact on natural gas prices?" she asks.

At press time only two entities-American Gas Association (AGA) and EnCana Marketing (USA) Inc.-had filed comments in the gas proceeding. The AGA points to difficulty in determining who sells gas under blanket certificates, since the certificates were granted by operation of law. AGA says that if the proposed code of conduct only applies to affiliates of pipelines, LDCs and their affiliates, then most interstate wholesale transactions would fall outside the code of conduct.

"This would not further the Commission's interests in ensuring that published price indices represent a fair and accurate measure of actual prices and trading volumes, on which comment was directly sought in the companion electric docket," says AGA.

AGA makes clear it is not defending illegal conduct. But it argues that the mere risk of disgorgement of profits for conduct tied to a very broad definition of "legitimate" will create a disadvantage for LDCs in the capital markets.

EnCana argues that its main concern in the proceeding is FERC's proposed "legitimate business purpose" standard applied to jurisdictional gas sales. It finds the proposal "highly vague, consisting of little more than an amorphous legal standard that lacks the details and explanations necessary for market participants to understand what behavior is prohibited or how the Commission intends to police compliance."

Electric Market Rules. In a companion order to its gas code of conduct, FERC seeks comments on similar rules for electric transactions and practices that would be prohibited under electric sellers' market-based rate tariffs. FERC proposes six rules: unit operation; market manipulation; communications; reporting; record retention; and related tariffs. The market behavior rules would be broadly applied to any market-based sale, whether in a bilateral market or in an organized market administered by an RTO or ISO.

Penalties would include disgorgement of unjust profits, as well as revocation of a seller's market-based rate authority.

The proposal would place a time limit on complaints initiated by market participants, but not on complaints initiated by FERC. That limit would be set at 60 days after the end of the calendar quarter in which the violation allegedly occurred, and it would not begin to run until the time when the market participant knew, or should have known, of the behavior.

Industry players so far are concerned penalties are too light and time frames too short for complaint filing. The Montana Consumer Counsel (MCC) agrees with Commissioner Massey that limiting the monetary penalty to profit disgorgement is not a sufficient remedy. The