Day of Decision for FERC


How will the commission answer Congress’ call for energy market transparency?

Fortnightly Magazine - December 2005

With the Energy Policy Act of 2005 (EPACT), Congress gives a big boost to Federal Energy Regulatory Commission (FERC) efforts to encourage greater transparency of price formation and restore confidence in wholesale energy markets.1

Determined to forestall repeats of the 2001 crises in the California and Midwest energy markets, FERC already had been encouraging market participants to improve wholesale price formation transparency, accuracy, and reliability. FERC considered both guidance on desirable price index minimum characteristics and standard terms for industry players to report prices to index developers.2

Following the EPACT promulgation of rigorous criminal and civil penalties, FERC has acted to promote price transparency, among other statutory objectives, by issuing a market manipulation notice of proposed rulemaking and an enforcement policy statement.

In addition, of the more than dozen EPACT-provided rulemakings, two would enable FERC to prescribe wholesale price transparency rules for the country’s interstate natural gas and electricity industries.

Given EPACT’s plain emphasis on improving gas and electric price transparency in an effort to restore market confidence, implemention of the transparency rules should not be delayed.

Regarding price transparency for energy markets, Congress correctly understood FERC to be saying, in Prime Minister Winston Churchill’s 1941 words: “Give us the tools and we will finish the job.” Congress has.

A Bird’s-Eye View

EPACT § 316 adds a new Natural Gas Act (NGA) provision, § 23, which directs FERC, without setting a deadline, to facilitate price transparency in markets for physical natural gas sales or transportation in interstate commerce by necessary and appropriate rules. Parallel EPACT § 1281 adds a new Federal Power Act (FPA) § 220, which similarly directs FERC to facilitate price transparency in markets for sale and transmission of electric energy in interstate commerce.

Those NGA and FPA market transparency statutes also command due regard for the public interest, gas and electric markets’ integrity, fair competition, and consumer protection. FERC’s work in recent years to promote wholesale price transparency, accuracy, and reliability constitutes a running start for the multi-tasking mandated by EPACT. Backing up those statutory purposes to promote market transparency are EPACT §§ 315 and 1283 prohibitions on market manipulation. EPACT §§ 314 and 1284(d) & (e), which declare very substantially increased criminal and civil penalties, enforce both the market transparency purposes and the market manipulation prohibitions.

In short, price transparency matters to Congress.

Gas and Electric Transparency Laws Are Parallel

With few exceptions, EPACT sets out identical NGA and FPA market transparency rule requirements. Under longstanding precedent,3 courts thus may be willing to interpret the new NGA § 23 and FPA § 220 in the same manner, with legal rulings for one industry possibly interchangeable as precedents for the other industry.

The heart of this statutory transparency initiative is that FERC is permitted to prescribe gas- and electric-industry rules that provide for timely dissemination of information, obtained from any market participant, concerning availability and prices both for gas sold at wholesale and transported in interstate commerce, and also for wholesale electric energy and transmission service. Those availability and price data are to be disseminated to FERC and state commissions, wholesale gas and wholesale electric energy buyers and sellers, users of transmission services, and the public. FERC needs to navigate appropriately between fidelity to EPACT to achieve those intended effects and practical concerns of not hamstringing gas and electric markets with excessive bean counting.

FERC will proceed to implement those directives by relying first on existing price publishers and trade-processing services providers as much as possible, and evaluating the degree of price transparency they provide. Certainly, the agency has started a substantial way down that path.

Should FERC determine that adequate price discovery or market transparency is not being provided, it may establish an electronic bulletin board (“electronic information system”) for information dissemination purposes.4 That single statutory authorization by itself guarantees rapt industry attention to market-price transparency rulemakings. The 2003 Policy Statement on Natural Gas and Electric Price Indexes telegraphed that if voluntary reporting does not increase to the point where indexes are sufficiently robust to support a healthy market, or if FERC-recommended standards were not widely adopted, further action would be considered.5 Whatever route the agency takes, it would be appropriate to avoid ambiguous rules and procedures so that industry participants will not be confused about what they are required to do, about why and when they are required to do it, and about how the rules will be applied.

Whether it establishes an EPACT bulletin board, FERC is required to exempt from disclosure information it determines to be detrimental to operating an effective market, or information jeopardizing system security. As to what information will be made available, and when, consumers and competitive markets are to be protected from potential collusion or other anticompetitive behaviors facilitated by untimely public disclosure of transaction-specific information.

One deadline embedded in the EPACT market transparency provisions that has been met required FERC and the Commodity Futures Trading Commission (CFTC), without limiting or affecting the latter’s exclusive jurisdiction over contracts for sale of commodities for future delivery, to agree by early 2006 on information sharing, including coordinating information requests to minimize duplication, and treating proprietary trading information appropriately. On Oct. 12, 2005, a FERC/CFTC memorandum of understanding was signed and made effective and available on FERC’s Web site. Finally, gas producers, gas processors, and those users or entities with de minimis market presence are not required to comply with market transparency rule reporting requirements.6

Market Manipulation Laws Mirror One Another

Under EPACT §§ 315 and 1283, new NGA § 4A, and FPA § 222, market manipulation statutes declare unlawful the direct or indirect use or employment of manipulative or deceptive devices or contrivances. Such devices or contrivances are forbidden in connection either with the purchase or sale of gas or FERC-jurisdictional transportation services, or with the purchase or sale of electric energy or FERC-jurisdictional transmission services, if their use or employment contravenes FERC’s rules and regulations prescribed in the public interest or to protect ratepayers. In an Oct. 20, 2005, NOPR on market manipulation, FERC proposes after public comment to implement the new statutes through rules and regulations to be issued in the winter of 2005-2006.7

While creating no private right of action to bring a case in court, Congress declared that the NGA § 4A and FPA § 222 “manipulative or deceptive devices or contrivances” phrase protects both the public interest and gas and electric ratepayers just as the same phrase is used in Securities Exchange Act of 1934 § 10(b) in the public interest and for the protection of investors. The U.S. Supreme Court explains that the phrase, in securities law, refers to practices intended to mislead investors by artificially affecting market activity.8

By analogy across industries, those new NGA and FPA terms now might be understood to refer generally to practices intended to mislead gas and electric ratepayers by artificially affecting market activity for purchase or sale either of gas or FERC-jurisdictional transportation services, or of electric energy or FERC-jurisdictional transmission services. After careful FERC review of Securities Exchange Act § 10(b) precedents, the market manipulation NOPR proposes to add gas and electric regulations declaring it unlawful for “any entity,” directly or indirectly to: (i) use or employ any device, scheme, or artifice to defraud; (ii) make any untrue statement of a material fact or omit to state a material fact that is necessary to make the statements made, in light of the circumstances under which they were made, not misleading; or (iii) engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on any person.9 Governmental utilities and other market participants are included as entities in the ambit of those regulatory market manipulation prohibitions, not just NGA and FPA jurisdictional entities.

Taking a Person’s Job Away

At trial, in a FERC enforcement action for injunction, EPACT § 318 provides the U.S. District Court with significant new NGA authority. The enforcing court can prohibit individuals engaged in practices violating the NGA § 4A market manipulation statute, including related FERC rules and regulations, either from acting as interstate pipeline officers or directors, or from engaging in the energy trader business of purchasing or selling gas or FERC-jurisdictional gas transmission services. The prohibition thus removes individuals from gas-industry workplaces. Certainly, FERC’s Division of Enforcement Staff should have access to appropriate technical evaluation expertise before asking a court for that forcible remedy.

Similar FPA authority to take away people’s jobs is provided by EPACT § 1288, but apparently from a different statutory angle. As EPACT reads, the enforcing court can punish individuals engaged in practices violating not the FPA § 222 market manipulation statute, but the new FPA § 221 prohibition on reporting false information relating to electricity wholesale prices or transmission capacity availability, including violations related to rules and regulations. Violators apparently can be prohibited either from acting as electric utility officers or directors, or from engaging in the business of purchasing or selling electric energy or FERC-jurisdictional electric transmission services.

However, such a black-letter reading of EPACT § 1288 may not reflect Congress’s intent. According to the public statement of a key congressional legislative staff member, EPACT § 1288 instead should have referenced FPA § 222 market manipulation, and should not have referenced FPA § 221 reporting of false information.10 The staff member predicts that subsequent, congressional technical corrections legislation could change the assertedly erroneous reference from § 221 to § 222. If and when that occurs, under EPACT § 1288 the enforcing court would be able to take away people’s jobs for FPA § 222 market manipulation violations, parallel to NGA § 4A.

Penalties Encourage Transparency, Deter Manipulation

NGA and FPA criminal and civil penalties apply to EPACT market price transparency policy and market manipulation prohibition violations. In fact, EPACT §§ 314 and 1284 (d) & (e) enormously increase those penalties, and similar Natural Gas Policy Act of 1978 (NGPA) penalties. Concurrently with its market manipulation NOPR, FERC issued a policy statement on enforcement to provide guidance and regulatory certainty for the enforcement of statutes, orders, rules, and regulations, as well as provide notice to entities subject to FERC jurisdiction of the consequences of violations.11 Again, FERC enforcement staff should have access to sufficient gas and electric market technical expertise to evaluate the appropriateness of such remedies in individual situations.

For NGA, FPA, and NGPA violations, limits on criminal fines are raised from $5,000 to $1 million—or 19,900 percent (see table “Stiff New Penalties”). Maximum imprisonment increases from two to five years for an NGA, FPA, or NGPA criminal violation. For criminal violations of a rule, regulation, restriction, condition, or order under the NGA, or a rule or order under the NGPA, the fine increases from $500 to $50,000, or 9,900 percent, for each day the offense occurs. For such FPA violations, the fine increases from $500 to $25,000, or 4,900 percent, for each such day. FERC can refer such violations to the U.S. Department of Justice for criminal prosecution where warranted.12

New NGA § 22 civil penalty authority also is established, with a limit of $1 million per day per violation, after notice and opportunity for public hearing, for any NGA violation or any violation of a rule, regulation, restriction, condition, or order under the NGA. FERC is to consider the violation’s nature and seriousness, and efforts to remedy it.13 EPACT § 1284(e) amends FPA § 316A to raise the civil penalty limit for violations of FPA part II or of any rule or order under FPA part II from $10,000 to $1 million, or 9,900 percent, for each day the violation continues.

Retroactive penalty application can be limited by NGA § 23(e) and FPA § 220(e), which place time limits on liability for any person under any civil penalty for a violation under the gas or electric market transparency sections. No penalty may be assessed if the violation occurred more than three years before the date the person is provided notice of the proposed civil penalty under NGA § 22(b) or FPA § 316A(b). The limitation on penalties does not operate, however, where FERC finds a seller has contracted either to transport or sell gas subject to FERC jurisdiction, or to sell electric energy at wholesale or for transmission service subject to FERC jurisdiction, and has engaged in fraudulent market manipulation activities materially affecting the contract in violation of NGA and FPA market manipulation prohibitions.

FERC’s enforcement policy statement sets out factors for possible consideration in determining the severity of penalties, including the harm caused, whether manipulation, deceit, or artifice was present, whether the action was willful or a repeat offense, the extent of senior management involvement, how the wrongdoing came to light, and the effect of penalties on the violator’s financial viability.14 Points taken in mitigation can include the presence of internal compliance tools, self-reporting of violations, and cooperation.15 FERC declares that in circumstances of egregious conduct full use of its penalty authorities may be necessary regardless of other factors.

Ball in FERC’s Court

The importance of efficient, trustworthy energy markets always has been evident, and especially so since 2001. Congress, apparently with significant appreciation for FERC’s recent work under pre-EPACT statutes, has presented the gas and electric industries with laws that potently promote market price transparency.

EPACT also commissions FERC to act on rules with due regard for the public interest, the integrity of those markets, fair competition, and the protection of consumers. In theory, FERC could rest on the laurels of its last few years of market-price transparency work if it concludes that present voluntary industry measures are adequate. Or, FERC can consider further action given the EPACT focus on market-price transparency, market manipulation, and the large size of the new fines and penalties to promote the former and prevent the latter. Further agency action of substance seems much more likely.



1. FERC’s July 6, 2005, Order Further Clarifying Policy Statement on Natural Gas and Electric Price Indices, 112 FERC ¶ 61,040, Para. 3 & nn. 2-5, summarizes those FERC efforts.

2. Policy Statement on Natural Gas and Electric Price Indices, 104 FERC ¶ 61,121, PP 13-15, 39-47 (2003)(“Price Indices Policy Statement”).

3. Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 577 n.7 (1981).

4. Under the FPA only, FPA § 220 shall not affect any FPA electronic information filing requirements as of the EPACT’s Aug. 8, 2005, enactment. Nor shall FPA § 220 apply to a purchase or sale of wholesale electric energy or transmission services in the geographic area of the Electric Reliability Council of Texas.

5. Price Indices Policy Statement, supra, 104 FERC ¶ 61,121, P 42.

6. Under NGA § 23(d)(1), FERC shall not condition access to interstate pipeline transportation on NGA § 23 market transparency rule reporting requirements.

7. Notice of Proposed Rulemaking, Prohibition of Energy Market Manipulation, 113 FERC ¶ 61,067 (2005)(“Market Manipulation NOPR”). Dkt. RM06-3 amending errata notice issued Nov. 8, 2005. See also FERC’s contemporaneous notice of proposed rulemaking permitting audited persons to challenge FERC staff operational audit findings, as well as financial audit findings, before a FERC order issues. Procedures for Disposition of Contested Audit Matters, 113 FERC ¶ 61,069 (2005).

8. Santa Fe Industries v. Green, et al., 430 U.S. 462, 471-77 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197-215 (1976).

9. Market Manipulation NOPR, supra, 113 FERC ¶ 61,067, PP 8-9.

10. Sam E. Fowler, Democratic Chief Counsel, U.S. Senate Comm. On Energy & Nat. Resources, Remarks at the Energy Bar Ass’n Legislative Program on the Energy Policy Act of 2005, Wash., D.C. (Sept. 29, 2005).

11. Policy Statement on Enforcement of Statutes, Orders, Rules, and Regulations, 113 FERC ¶ 61,068, P 1 (2005) (“Enforcement Policy Statement”). The market manipulation NOPR states that the “principles discussed in the policy statement on enforcement … will also apply to ‘any entity’ as defined herein.” 113 FERC ¶ 61,067, supra, P 9 n.12. The scope of such guidance on principles for any entity may be greater than the scope of notice of consequences of violation for jurisdictional entities.

12. Enforcement Policy Statement, supra, 113 FERC ¶ 61,068, PP 4-5 & 15.

13. NGPA civil penalties are increased to a FERC-assessed limit of $1 million for a violation, and to a President-assessed limit of $1 million, for gas supply emergency purchase or emergency allocation violations.

14. Enforcement Policy Statement, supra, 113 FERC ¶ 61,068, PP 2, 17-20.

15. Id., PP 21-29.