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 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 MCC believes consumers will be insufficiently protected since higher prices paid to nonperpetrators will not be subject to recapture.
The Sacramento Municipal Utility District (SMUD) agrees. To illustrate the need for making the market whole, it uses the example of collusive conduct found in rotating bids, where a would-be seller stays on the sidelines to inflate the prices earned by other sellers, with the promise that other sellers will do likewise at the next bidding opportunity. In other words, the conspirators take turns withholding supply. SMUD notes that in such a case, the party withholding supply may not have benefited from the higher resulting market price and so would have no refund obligation. The seller would profit only when it benefited from the agreement of other sellers to withhold the next time.
SMUD wants Massey's option enacted, but if not, it offers an alternative remedy previously used by FERC-a refund of the time value of the charges imposed unlawfully, plus disgorgement of any unlawful profits.
The Connecticut Department of Utility Control (DPUC) called the proposed monetary penalty a "timid" response to anticompetitive behavior. "At a minimum, the monetary penalty should be double or triple the unjust profits obtained so that sellers risk their normal profits if they choose to engage in anticompetitive behavior," the DPUC says. Also, in making that calculation, the DPUC wants the term "seller" to include affiliates.
The California ISO (Cal-ISO) notes that profit disgorgement "only puts the market participant back in the position it would have been had it not engaged in the improper behavior." Cal-ISO urges a remedy based on market impacts and/or harm to customers, plus disgorgement of profits.
The ISO also wants FERC to allow independent transmission providers (ITPs) to include market behavior rules in their tariffs.
The proposed time frame for filing complaints also is an issue of contention. The MCC finds the 60-day complaint window too short to allow a reasonable opportunity to detect, identify, and evaluate suspected abuses. The group lobbies for a window of at least 12 months.
SMUD wants FERC to clarify what it means by "market participant," and it urges FERC to give all such market participants 180 days to file a complaint from the date they knew or should have know of a violation.
But Southern Company Services Inc. attacks FERC's authority to impose remedies on an earlier action, regardless of date, since no time restriction would apply to them. Southern Co. argues that Section 206 of the Federal Power Act prohibits open-ended, retroactive liability.
However, the New England Conference of Public Utility Commissioners (NECPUC) feels that FERC, to effectively prosecute tariff violations, should not face artificial time limits.
NECPUC says, "It is a virtual certainty that, in cases of collusion, market participants will not know of the violation until some time after it has occurred." NECPUC urges FERC to adopt a rebuttable presumption that the complainant did not know, and should not have known, of the conspiracy or collusion until after the details had become known to the public.
Articles found on this page are available to subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.