FERC asked on November 21 whether it should repeal its Market Behavior Rules in light of its new authority under the Energy Policy Act of 2005 (EPAct 2005) to prevent market manipulation. FERC adopted the Market Behavior Rules approximately two years ago, and required them to be a part of all electric and gas market-based rate tariffs, in an effort to curb market manipulation. The cornerstone is Market Behavior Rule 2, which prohibits "actions or transactions that are without a legitimate business purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules." Public comments on whether repeal is in order are due 30 days after publication of FERC's proposal in the Federal Register, probably sometime in late December.
EPAct 2005 amended the Federal Power and Natural Gas Acts to grant FERC broader authority to prohibit any entity from using or employing "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of wholesale electricity or natural gas and jurisdictional transmission or transportation services. Pursuant to that authority, FERC initiated procedures last month to implement this new authority in rulemakings aimed at preventing market manipulation [see FERC Seeks Comments for Competition Task Force] and establishing new audit procedures [see Rulemaking to Establish Procedures for Challenging FERC Operational Audits], and a policy statement interpreting FERC's enforcement authority [see FERC Explains Its Policy on New Penalty Authority]. In these rulemakings, FERC has proposed to adopt a more specific intent or "scienter" standard of proof, which is modeled on the SEC's enforcement of Rule 10b-5 under the Securities Exchange Act of 1934, and has been interpreted by courts as requiring a showing of knowing, intentional or reckless conduct with intent to manipulate, deceive, or defraud.
In light of FERC's new EPAct 2005 authority, some commentators have suggested that the Market Behavior Rules are redundant, if not superfluous. In particular, these critics point to the fact that the new anti-fraud rules of EPAct 2005 may be enforced against "any entity," including entities not usually subject to FERC's jurisdiction, while the Market Behavior Rules are applicable only to public utilities possessing market-pricing authority. But notwithstanding this broader coverage, the Market Behavior Rules and specifically Market Behavior Rule 2 impose a stricter standard than the more-punitive new rules under EPAct 2005: They proscribe actions or transactions that "foreseeably" could manipulate market prices, conditions, or rules, while the EPAct 2005 rules will require proof of intent. [Investigation of Terms and Conditions of Public Utility Market-Based Rate Authoriziations, 113 FERC ¶ 61,190 (2005)]