"We view the [Entergy-ITC] transaction [as] an attempt to extract excess value."-Mississippi PSC
How far will FERC go to restore market confidence?
Despite keen industry interest in FERC's proposed "rules of the road," aka new codes of conduct, it appears the industry will have to wait. FERC recently granted extensions for filings, and the commission will not gather all reply comments until Sept. 18. Filings so far point to differences over the proposals, especially in time frames for reporting bad behavior, appropriate monetary penalties, and defining to whom the rules apply.
References to the codes of conduct can be found in FERC's July 24 policy statement setting forth guidelines for reporting and developing price indexes for natural gas and electric transmission transactions. In the order, FERC touts a price index providing price developers with guidance on how their products can enhance both fixed-price and index-based trading, while increasing market awareness of liquidity conditions (Docket No. PL03-3-000, 104 FERC 61,121). But at the same time, FERC laments the recent decrease in reporting transaction prices, noting the voluntary nature of the July 24 guidelines. In the July 24 order, FERC says "if voluntary reporting does not increase to the point that indices are sufficiently robust to support a healthy market, or if the standards recommended by the commission herein are not widely adopted, the commission will consider further action."
FERC already is moving ahead, as seen in two June 26 orders-its proposed rule to set a code of conduct for unbundled gas sales service and holders of blanket marketing certificates (Docket No. RM03-10-000) and a related proposal seeking comment on adoption of electric market behavior rules (Docket Nos. EL01-118-000 and EL01-118-001).
Gas Code of Conduct. FERC would amend blanket certificates for unbundled gas sales services held by interstate natural gas pipelines, and the blanket marketing certificates held by resellers of gas, to require that pipelines and all sellers adhere to a code of conduct. The proposed rule aims to stem market abuse by preventing market manipulation while strengthening communication and reporting requirements. Docket No. RM03-10-000, 103 FERC 61,350, 18 CFR Part 284, June 26, 2003 (FERC).
FERC wants to prohibit such sellers from engaging in actions or transactions without a legitimate business purpose that manipulate, or attempt to manipulate, market prices, market conditions, or market rules for natural gas, or that result in prices that do not reflect the legitimate forces of supply and demand. FERC would consider a "legitimate business purpose" to be an action consistent with appropriate behavior in a competitive market, which is taken to further a firm's business objectives without engaging in manipulative, illegal, or otherwise competitive acts.
But there is disagreement even among FERC commissioners as to how far the codes of conduct should go. Commissioner William Massey, in keeping with previous dissents in similar cases, argues against limiting penalties for tariff violations to disgorgement of unjust profits. Because market manipulation can raise market-clearing prices to all players, he says manipulative sellers should be forced to make the market whole.
Commissioner Nora Mead Brownell in both cases expresses concern with the codes of conduct, noting that scarcity pricing is