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FERC's Tough New Rules: Survival Skills for A New Era

The nation’s first energy “top cop” and his colleague discuss important compliance implications of EPACT 2005.
Fortnightly Magazine - April 2006

from engaging in the business of buying or selling electric energy, natural gas, or jurisdictional transmission services if that person violates new FPA §221, which prohibits false price reporting.

Market Manipulation

In addition to increasing the penalties for non-compliance, Congress also expanded the scope of FERC’s jurisdiction and added substantive provisions that will bring sweeping changes to the energy industry. EPACT gave FERC the authority to ban market manipulation by “any entity” engaged in the purchase or sale of natural gas, electric energy, or jurisdictional transmission and transportation services, including banning the use of any manipulative or deceptive device or contrivance, as those terms are used in Section 10(b) of the Securities Exchange Act of 1934. Congress also authorized FERC to adopt regulations to carry out this provision.

FERC Chairman Joseph T. Kelliher has characterized the collective market manipulation provisions as “one of the most important and challenging provisions of the Energy Policy Act.” 3 On Jan. 19, 2006, FERC issued its regulations, which underscore the importance that the chairman and, indeed, the entire commission place on the market manipulation provisions. Those regulations make it unlawful for “any entity,” directly or indirectly, “in connection with” the purchase or sale of natural gas, transportation services, electric energy, or transmission services subject to FERC’s jurisdiction:

(1) To use or employ any device, scheme, or artifice to defraud;

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.

The implications for the industry are many and varied. Perhaps the most far-reaching is FERC’s greatly expanded jurisdiction to reach “any entity.” In its market manipulation regulations, FERC has taken note of the expansive reach of the anti-manipulation provisions, saying that the law “gave the commission broad jurisdiction over the entities that engage in certain conduct affecting [its] subject matter jurisdiction.” 4 Consistent with that expanded jurisdiction, FERC’s market manipulation regulations “apply to the conduct of ‘any entity,’ not just jurisdictional market-based rate sellers, natural-gas pipelines, or holders of blanket certificate authority.” 5

Securities Exchange Act

Consequently, entities previously thought to be outside of FERC’s jurisdiction are now at risk.

Additionally, EPACT directs the commission to use Section 10(b) of the Securities Exchange Act as its model. The case law surrounding Section 10(b) and the SEC’s Rule 10b-5 is extensive. The Supreme Court has described that body of law as “a judicial oak which has grown from little more than a legislative acorn.” 6 Market participants will now need to understand that law and how it applies to energy markets and transactions.

To further complicate things, FERC has signaled that it is likely to take an expansive approach in identifying the kinds of conduct that constitute manipulation. In this regard, the commission has stated that it “defines fraud generally, that is, to include