• FERC Imposes Tough New Market Manipulation and Fraud Prohibitions; Proposes Eliminating PURPA Mandatory Purchase Obligation
  • January 26, 2006 | Authors: Jonathan W. Gottlieb; Tamir Ben-Yoseph
  • Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Washington Office
  • On January 19, 2006, the Federal Energy Regulatory Commission (FERC) issued two major Orders as part of its continuing process of implementing the changes mandated by Congress in the Energy Policy Act of 2005 (EPAct 2005). In the first Order, FERC issued a final rule that imposes tough new standards prohibiting market manipulation and deceit in transactions subject to FERC's jurisdiction. In the second Order, FERC proposes new rules that will ease the requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA) and lift electric utilities' obligation to purchase electricity from qualified cogeneration facilities and qualifying small power production facilities (QFs). These two Orders will have major impacts on all companies that are subject to FERC jurisdiction and on the owners of QFs.

    FERC Adopts Market Manipulation and Fraud Prohibition
    FERC's final rule on market manipulation is modeled on a similar rule developed by the Securities and Exchange Commission to deal with securities fraud. The new rule prohibits manipulation and fraud in the electricity and natural gas markets. The new rule adds language to both the Natural Gas Act and the Federal Power Act, making it unlawful for any entity, directly or indirectly, in connection with FERC jurisdictional purchase or sale of natural gas or electricity, transportation services, electric energy or transmission service "(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 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 person."

    Following the submission of comments to the proposed rule, FERC made an important change and substituted "entity" for "person" so as to have the effect of prohibiting deceit upon any person. FERC, in its final rule, provides clarifications requested by several commenters. Such clarifications include FERC's explanations that: the final rule is not intended to expand the types of transactions subject to FERC's jurisdiction; "any entity" is a deliberately inclusive term that includes any person or form of organization; since the rule is based on securities law, FERC intends to adopt analogous securities precedents as appropriate to specific facts, circumstances and situations that arise in the energy industry; and since the final rule and FERC's market behavior rules both prohibit fraud and manipulative conduct, FERC will not seek duplicative sanctions for the same conduct in the event that conduct violates both the market behavior rules and the final rule. The final rule also clarifies the elements that FERC will look for in enforcing the rule. Finally, FERC concluded that certain recommendations made by commenters, such as affirmative defenses or safe harbors to the market manipulation or deceit under the final rule, are more appropriately dealt with in the separate pending proceeding in which FERC is proposing to repeal the existing market behavior rules for unbundled sales service and for persons holding blanket marketing certificates.

    FERC Proposes Rule Allowing Termination of PURPA Obligation to Purchase From QFs
    EPAct 2005 amended PURPA by adding new Section 210(m), which provides for termination of an electric utility's mandatory obligation to purchase electricity from QFs if the FERC finds that there is a sufficiently competitive market for the QF to sell its power. Section 210(m) also provides a procedure for an electric utility to file an application for relief from the mandatory purchase obligation on a service territory-wide basis, provides a procedure for any affected entity or person to apply to FERC for an order reinstating the electric utility's obligation to purchase energy, protects existing rights and remedies under any contract or obligation in effect or pending approval involving the purchase or sale of energy or capacity to a QF, and allows FERC to issue and enforce regulations to ensure that an electric utility recovers all prudently incurred costs associated with the purchase of energy from a QF.

    FERC's January 19 notice of proposed rulemaking seeks to implement Section 210(m) and, in doing so, among other things, provides FERC's interpretation of the rule and finds that utilities will not be required to enter into contracts with QFs if the QF is interconnected with a utility that is a member of the Midwest Independent Transmission System Operator, PJM Interconnection, ISO New England and New York Independent System Operator, because QFs with access to these open markets are presumptively participating in open markets. However, FERC is seeking comments either supporting or refuting this preliminary finding. FERC's January 19 notice of proposed rulemaking also seeks comments as to the rule's application including comments as to:

    • the circumstances from which nondiscriminatory access is discerned;

    • whether the purchase obligation should be maintained for small power production facilities with a capacity over 5 MW and up to 20 MW;

    • whether there are other categories of QFs that lack nondiscriminatory access to wholesale markets for which the purchase obligation should be retained; and

    • whether and what additional regulations are necessary to ensure that an electric utility that is required to purchase electric energy or capacity from a QF recovers all prudently incurred costs associated with the purchase.