[Federal Register Volume 68, Number 131 (Wednesday, July 9, 2003)]
[Notices]
[Pages 40924-40932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17421]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket Nos. EL01-118-000 and EL01-118-001]
Before Commissioners: Pat Wood, III, Chairman; William L. Massey,
and Nora Mead Brownell--Investigation of Terms and Conditions of Public
Utility Market-Based Rate Authorizations; Order Seeking Comments on
Proposed Revisions to Market-Based Rate Tariffs and Authorizations
Issued: June 26, 2003.
1. In an order dated November 20, 2001, the Commission, acting
pursuant to Section 206 of the Federal Power Act (FPA), \1\ proposed to
condition all new and existing market-based rate tariffs and
authorizations to include a provision prohibiting the seller from
engaging in anticompetitive behavior or the exercise of market
power.\2\ This market behavior standard, we indicated, was intended to
establish a clear benchmark governing market
[[Page 40925]]
participant conduct, with the penalties for violations clearly spelled
out.
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\1\ 16 U.S.C. 824e (2000).
\2\ 97 FERC ] 61,220 (2001) (November 20 Order).
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2. Commenters in this proceeding argued that the Commission's
proposed tariff provision was overly-proscriptive or vague and would,
if implemented, create uncertainty in the marketplace. Others argued
that the tariff provision did not go far enough in protecting against
the unjust and unreasonable rates that may result from anticompetitive
behavior or the exercise of market power. To address these concerns,
Commission Staff convened a public conference in this proceeding to
determine whether, and how, the tariff provision proposed in the
November 20 Order could, or should, be modified.
3. In the meantime, in conjunction with its investigation of the
Western energy markets, in Docket No. PA02-2-000, Commission Staff
issued its Final Report on Price Manipulation in Western Markets
(Western Markets Report).\3\ Among other things, Staff recommended that
the Commission condition all electric market-based rate tariffs and
authorizations (and all natural gas blanket marketing certificates) to
prohibit a number of specifically-enumerated transactions and market
behaviors. Staff also recommended that the Commission provide for the
imposition of penalties for violations of these market behavior rules.
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\3\ Final Report on Price Manipulation in Western Markets: Fact-
Finding Investigation of Potential Manipulation of Electric and
Natural Gas Prices, Docket No. PA02-2-000 (March 2003). The Western
Markets Report is available on the Commission's Web site.
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4. Since our November 20 Order, the Commission has been informed
not only by the comments received from the public in this proceeding,
but also by what we have learned about the types of behavior that
occurred in the Western markets during 2000 and 2001. We also have
gained additional experience in other competitive markets, particularly
those with organized spot markets in the East.
5. As part of our ongoing responsibility to provide regulatory
safeguards to ensure that customers are protected from potential market
abuses, we believe it is important to take steps within our statutory
authority that balance three goals: first, the need to provide for
effective remedies on behalf of customers in the event anticompetitive
behavior or other market abuses occur; second, the need to provide
clearly-delineated ``rules of the road'' to market-based rate sellers
while, at the same time, not impairing the Commission's ability to
provide remedies for market abuses whose precise form and nature cannot
be envisioned today; and third, the need to provide reasonable bounds
within which conditions on market conduct will be implemented, so as
not to create unlimited regulatory uncertainty for individual market
participants or harm to the marketplace in general. A stable
marketplace with clearly defined rules benefits both customers and
market participants and creates an environment that will attract much-
needed capital.
6. Based on these three objectives, we propose to modify the tariff
provision set forth in the November 20 Order by identifying more
precisely and comprehensively than we did in the November 20 Order the
transactions and practices that would be prohibited under sellers'
market-based rate tariffs and authorizations. We propose six specific
rules relating to: (1) Unit operation; (2) market manipulation; (3)
communications; (4) reporting; (5) record retention; and (6) related
tariffs.\4\ Should a seller be found to have engaged in the
transactions or behavior prohibited under our proposed market behavior
rules, it would be subject to disgorgement of unjust profits obtained
in contravention of the seller's tariff, and appropriate non-monetary
remedies such as revocation of seller's market-based rate authority and
revisions to seller's code of conduct. We seek comments on these
proposed market behavior rules and related matters, as discussed
below.\5\
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\4\ In a Notice of Proposed Rulemaking being issued today, in
Docket No. RM03-10-000, we are also proposing, consistent with the
recommendations made by Staff in the Western Markets Report, to
modify natural gas market blanket certificates under subpart G of
part 284 of the Commission's regulations, to contain many of the
standards proposed herein, where applicable.
\5\ Because the proposals made herein would have the effect of
revising sellers' market-based rate tariffs, and thus would not
constitute an amendment to the Commission's regulations, we are
proposing to proceed in this forum rather than in a rulemaking
proceeding governed by the Administrative Procedures Act, 5 U.S.C.
553 (2000). However, in doing so, we are mindful of the generic
effect that our proposal will have on the industry as a whole, and
the importance of seeking full public input regarding our proposal.
In this regard, we seek comments from all interested entities on a
broad range of issues, as discussed below, and are directing that
this order be published in the Federal Register.
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7. The balance struck in formulating these proposed market behavior
rules has presented a difficult task. We have been required to make
judgments, for example, which necessarily include trade-offs--between
broad and unlimited rights of parties to allege violations and obtain
financial remedies, on the one hand, while at the same time providing
transaction finality to sellers and the market in general. While our
proposal represents our best judgment of the proper balance between
these competing interests, we hope and expect that, in addition to the
specifics of our proposal, commenters will fully address whether we
have achieved the appropriate balance.
8. We also note that the market behavior rules we are proposing
would apply to any market-based sale, whether in the bilateral market
or in an organized market, i.e., in the markets administered by a
regional transmission organization (RTO) or by an independent system
operator (ISO). These market behavior rules would be intended to
complement any RTO or ISO tariff conditions and market rules that may
apply to sellers in these markets.
Background
The November 20 Order
9. In the November 20 Order, we instituted a proceeding pursuant to
Section 206 of the FPA, in which we proposed to condition our grant of
market-based rate authority to public utilities that sell electric
energy and ancillary services at wholesale in interstate commerce, by
expressly prohibiting sellers from engaging in anticompetitive behavior
or abuses of market power.\6\ We found that the implementation of this
market behavior standard was made necessary, in part, by the lessons
learned from the California energy crisis and our on-going
investigation of that market in the California Refund Proceeding.\7\
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\6\ The November 20 Order proposed to include the following
provision in all market-based rate tariffs and authorizations: ``As
a condition of obtaining and retaining market-based rate authority,
the seller is prohibited from engaging in anticompetitive behavior
or the exercise of market power. The seller's market-based rate
authority is subject to refunds or other remedies as may be
appropriate to address any anticompetitive behavior or exercise of
market power.'' See November 20 Order, 97 FERC at 61,976.
\7\ See, e.g., San Diego Gas & Electric Company v. Sellers of
Energy and Ancillary Service, et al., 97 FERC ] 61,275 (2001).
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10. In a series of orders issued in the California Refund
Proceeding, we had determined, prior to our issuance of the November 20
Order, that the electric market structure and market rules for
wholesale sales of electric energy in California were seriously flawed,
and that these market flaws had created an environment ripe for
anticompetitive conduct and the abuse of market power. We noted in the
November 20 Order that as a response, we had, among other things,
established market behavior conditions applicable to the Western
markets, including refund liability, on sellers' market-based rate
authority to
[[Page 40926]]
prevent anticompetitive bidding behavior.\8\
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\8\ November 20 Order, 97 FERC at 61,975, citing San Diego Gas &
Electric Company v. Sellers of Energy and Ancillary Service, et al.,
95 FERC ] 61,115, order on reh'g, 95 FERC ] 61,418 (2001).
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11. In the November 20 Order, however, we also noted that this
potential for market manipulation was not limited to the California
market.\9\ In fact, the potential for market abuse and the exercise of
market power may exist in any region where the evolution towards a
competitive market is not yet complete; or where the design structure
of the market is otherwise ill-equipped to promote competition; or
where the supply/demand imbalance causes the market to be in
disequilibrium.\10\ In the November 20 Order, therefore, we proposed to
apply to all public utilities authorized to sell energy and ancillary
services at market-based rates, the same conditions we had applied to
market-based rate sellers in the western markets.
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\9\ Id. at 61,975-76.
\10\ In addition, sellers may have the opportunity to exercise
market power even in markets which are typically (and on most
occasions) competitive. For example, extreme supply or demand
conditions to which the market cannot quickly adapt, such as the
loss of significant hydropower capacity because of drought, or force
majeure events such as a major transmission line outage could
provide opportunities to exercise market power even in a market that
is normally workably competitive.
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Hearing Procedures and Responsive Pleadings
12. The November 20 Order established paper hearing procedures to
address the Commission's proposed tariff provision, with interested
entities invited to file comments and reply comments. Numerous
responsive pleadings were filed. In addition, a public conference was
convened in this proceeding on March 11, 2002, to discuss issues raised
in the comments and reply comments. Comments on the technical
conference were filed on March 22, 2002.
Staff's Investigation of Market Manipulation in the Western Markets
13. Commission Staff addressed a broad range of market power issues
and the need for market behavior rules, in its investigation of the
Western energy markets, in Docket No. PA02-2-000.\11\ In Staff's
Initial Report, issued in August 2002, Staff made a number of findings
regarding, among other things, the possible misconduct by Enron
Corporation (Enron) and its affiliates, and the use, by Enron and its
affiliates, of the so-called Enron trading strategies.\12\ These
trading strategies, Staff found, included efforts to game the market in
ways that were either fraudulent or otherwise anticompetitive.
Moreover, Staff found that similar trading strategies were being
utilized by a broad cross-section of the industry.
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\11\ Staff's investigation was initiated pursuant to our
February 13, 2002 order in Fact-Finding Investigation of Potential
Manipulation of Electric and Natural Gas Prices, 98 FERC ] 61,165
(2002).
\12\ See Initial Report on Company-Specific Separate Proceedings
and Generic Reevaluations; Published Natural Gas Price Data; and
Enron Trading Strategies: Fact-Finding Investigation of Potential
Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2-
000 (August 2002).
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14. Subsequently, in the Western Markets Report, Staff recommended
that the Commission condition all electric market-based rate tariffs
and authorizations and all natural gas blanket marketing certificates
on specific market behavior rules.\13\ Staff proposed that market-based
rate sellers be required by their tariffs to: (1) Provide complete,
accurate, and honest information to any entity that publishes price
indices; (2) retain all relevant data and information needed to
reconstruct a published price index for a period of 3 years; (3)
explicitly prohibit the use of false information as a condition for
granting all market-based rate authorizations; (4) require that data
sent to firms publishing price indices be provided by the risk
management office of the company, not the trading desk or a trader, and
be certified by the chief risk officer; (5) ban any form of prearranged
wash trading and prohibit the reporting of any affiliate trading
activities through industry indices; (6) require that sellers who use
trading platforms use only those trading platforms that agree to
provide the Commission with full access to trade reporting and order
book information for the trading systems and agree to adhere to
appropriate monitoring requirements; and (7) prohibit the submission of
false information or the omission of material information to the
Commission or to an entity such as an independent system operator, a
regional transmission organization, or an approved market monitor.
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\13\ The Final Report also recommended that several entities
participating in the California market (including Enron) be required
to show cause why their authority to sell power at market-based
rates should not be revoked by the Commission in light of their
apparent involvement in market manipulation and gaming activities.
Orders directed to these issues were subsequently issued by the
Commission on March 26, 2003. See Enron Power Marketing, Inc., et
al., 102 FERC ] 61,316 (2003); Reliant Energy Services, Inc., et
al., 102 FERC ] 61,315 (2003).
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Discussion
Procedural Issues
15. A number of entities request rehearing of the November 20
Order. However, rehearing may not be sought in this case until the
Commission issues a final decision or other final order.\14\ Because
the November 20 Order initiated an investigation and thus was not a
final order, we will not consider requests for rehearing of the
November 20 Order. However, we will treat these requests as comments to
the degree they are relevant to our current proposal.
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\14\ See Rule 713 of the Commission's Rules of Practice and
Procedure, 18 CFR 385.713 (2003).
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Proposed Tariff Revisions
16. Consistent with the findings and recommendations of the Western
Markets Report and the comments filed in this proceeding, we propose
new market behavior rules applicable to all market-based rate tariffs
and authorizations. As set forth in the Attachment to this order, these
market behavior rules would prohibit market manipulation and more
clearly outline sellers' responsibilities and duties with respect to
communications to regulatory authorities and market operators. Should a
seller be found to have engaged in the transactions or behavior
prohibited under our proposed market behavior rules, it would be
subject to disgorgement of unjust profits obtained in contravention of
the seller's tariff, and appropriate non-monetary remedies such as
revocation of seller's market-based rate authority and revisions to
seller's code of conduct.
17. As noted above, in proposing these market behavior rules we
have attempted to strike a careful balance. On the one hand, it is
essential, for all the reasons outlined in the November 20 Order and in
the Western Markets Report, that our market behavior rules be clear and
enforceable. Market conduct which is anticompetitive or which
constitutes an abuse of market power must be prohibited and made
subject to remedial action under the circumstances outlined herein. On
the other hand, transactions and practices which are consistent with
the normal operation of supply, demand, and true scarcity, or which
otherwise have a legitimate business purpose, should neither be
discouraged nor impeded. Further, while our proposal is designed to
give the Commission and interested parties an enhanced ability to
undertake effective enforcement and to require appropriate remedies, we
understand that market participants need some level of certainty, that
is, they need to know that they will not be exposed to open-ended
uncertainty. Our proposal attempts to balance these two valid concerns
by proposing appropriately-tailored complaint procedures and by
[[Page 40927]]
providing clarity regarding sellers' potential liability.\15\
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\15\ See supra PP. 37-42 (complaint procedures and scope of
liability).
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Market Behavior Rule 1: Unit Operation
Seller will operate and schedule generating facilities, undertake
maintenance, declare outages, and commit or otherwise bid supply in a
manner that complies with the rules and regulations of the applicable
power market.
18. The integrity of an organized market operated by an RTO or ISO
and the integrity of other markets as well, depends in part upon
generators and other sellers fully and accurately providing all
information to market operators and complying with market rules,
particularly those relating to bidding. In Market Behavior Rule
1, therefore, the Commission proposes to require that Sellers
operate and schedule generating facilities, undertake maintenance,
declare outages, and commit or otherwise bid supply in a manner that
complies with the rules and regulations of the applicable power market.
This requirement contemplates that sellers will follow these rules and
regulations by providing complete and honest information, as may be
required.\16\ Market Behavior Rule 1 is consistent with our
view that ex ante rules are superior to ex post regulatoryaction.
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\16\ We note that EPSA, in its code of ethics and sound trading
practices, has developed a standard which includes elements of
Market Behavior Rule 1.
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19. While we understand that market participants may become subject
to additional requirements through tariff service agreements and other
market participation agreements, we believe that a specific requirement
in each seller's market-based rate tariff addressing unit operation
issues is necessary in order to give the Commission and interested
parties direct remedial authority for violations that may not exist
without such a condition. We request comment on the inclusion of this
condition in market-based tariffs.
Market Behavior Rule 2: Market Manipulation
Actions or transactions without a legitimate business purpose which
manipulate or attempt to manipulate market prices, market conditions,
or market rules for electric energy, or result in market prices for
electric energy and/or electric energy products which do not reflect
the legitimate forces of supply and demand, are prohibited. Prohibited
actions and transactions include, but are not limited to: (A) Pre-
arranged offsetting trades of the same product among the same parties,
which trades involve no economic risk, and no net change in beneficial
ownership (sometimes called ``wash trades''); (B) transactions
predicated on submitting false information to transmission providers or
other entities responsible for operation of the transmission grid (such
as inaccurate load or generation data; scheduling non-firm service or
products sold as firm; or conducting ``paper trades'' where an entity
falsely designates resources and fails to have those resources
available and feasibly functioning); (C) transactions in which an
entity first creates artificial congestion and then ``relieves'' such
artificial congestion; (D) collusion with another party for the purpose
of creating market prices at levels differing from those set by market
forces; and (E) bidding the output of or misrepresenting the
operational capabilities of generation facilities in a manner which
raises market prices by withholding available supply from the market.
20. Our reliance upon competitive markets to establish just and
reasonable rates requires that we have the tools necessary to ensure
that prices created in these markets continue to fall within a just and
reasonable zone. The tools we have relied upon include non-
discriminatory transmission access, an efficient and pro-competitive
wholesale market platform, and effective market monitoring and
enforcement.
21. In formulating the conditions to be added to public utility
sellers' tariffs, the Commission is fulfilling its obligation to
appropriately monitor markets and is thus taking steps to ensure that
market-based rates remain within the zone of reasonableness required by
the FPA. In a market-based rate regime, this means that public utility
sellers will not be permitted to exercise market power or take anti-
competitive actions that may increase market prices and that the
Commission will take appropriate remedial steps. Such steps may include
market rules designed to prevent exercises of market power as well as
conditions placed on market-based rate authorizations to prohibit
conduct that adversely affects competitive market outcomes.\17\
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\17\ The Court of Appeals for the DC Circuit has held that,
while the Commission ``enjoys substantial discretion in ratemaking
determinations * * * by the same token, this discretion must be
bridled in accordance with the statutory mandate that the resulting
rates be 'just and reasonable.''' Farmers Union Cent. Exch. Inc. v.
FERC, 747 F.2d 1486 at 1501 (D.C. Cir. 1984). In addition, the
regulatory regime itself must contain some form of monitoring to
ensure that rates remain within a zone of reasonableness and to
check rates that depart from this zone. Id. at 1509. See also
Louisiana Energy and Power Authority v. FERC, 141 F.3d 364 (D.C.
Cir. 1998); Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C. Cir.
1993).
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22. Accordingly, we propose in Market Behavior Rule 2 to
prohibit activities that adversely affect competitive outcomes, that
is, that result in rates that do not reflect legitimate market forces.
Such rates would fall outside the zone of reasonableness.\18\ In making
this proposal, we note that just and reasonable rates created through
competitive markets is our goal. We believe that by providing further
clarity concerning prohibited actions and transactions, and by
undertaking judicious enforcement of these standards, we will help to
enhance confidence in, and the integrity of, our jurisdictional markets
for both customers and market participants.
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\18\ In prohibiting transactions such as those involving false
congestion, the Commission does not intend to prohibit transactions
taken consistent with market rules in ISO or RTO markets such as
virtual bidding or day ahead markets where ``simulated'' congestion
may be reflected in pricing as part of market design.
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23. In crafting Market Behavior Rule 2, we have also
attempted to provide specificity by including a non-exclusive list of
prohibited activities that illustrates the types of activities that
adversely affect competitive market outcomes. However, we have also
included a generic standard which will allow us to take remedial action
if we discover additional activities of a seller taken in contravention
of our market behavior rules affecting the justness and reasonableness
of rates. In the event that Staff, or a third party in a timely
complaint, demonstrates that a transaction or behavior not expressly
prohibited in our market behavior rules appears to be in violation of
this rule (i.e., that a given transaction or behavior is causing prices
to reflect outcomes not reflective of market forces), we will require
the identified seller to show cause why it should not be required to
disgorge unjust profits obtained through such transaction or behavior,
or and be subject to appropriate non-monetary remedies. In evaluating
responses to such show cause orders, we will take into account such
matters as whether the seller can establish a legitimate business
purpose consistent with prices set by market forces relative to its
conduct.\19\
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\19\ The Commission considers a legitimate business purpose to
be an action consistent with behavior in a competitive market which
is taken to further a firm's business objectives without engaging in
manipulative, illegal, or otherwise anticompetitive acts. Engaging
in manipulation, for example, in order to maximize profits, is not a
legitimate business purpose.
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[[Page 40928]]
24. Our market behavior rules would not supersede or replace
parties' rights under Section 206 of the FPA to file a complaint
contending that a contract should be revised by the Commission
(pursuant to either the ``just and reasonable'' or ``public interest''
test as required by the contract). Rather, any party seeking contract
reformation or abrogation based on a violation of one or more of the
market behavior rules would be required to demonstrate that such a
violation had a direct nexus to contract formation and tainted contract
formation itself. If a jurisdictional seller enters into a contract
without engaging in behavior that violates its tariff with respect to
the formation of such contract, we do not intend to entertain contract
abrogation complaints predicated on our market behavior rules.
25. Finally, in undertaking our enforcement decisions, we will
focus on the best outcome for assuring just and reasonable rates in our
jurisdictional markets. In some instances, significant remedial action
may be warranted. In other instances, we may use a specific set of
facts and circumstances to clarify our requirements for acceptable
public utility activities. As such, it is our expectation that through
this proposed tariff revision, we will appropriately balance our need
to remedy anticompetitive behavior with the legitimate needs of market
participants for clear rules. We seek comment on these issues and any
other issues of concern relating to Market Behavior Rule 2.
Market Behavior Rule 3: Communications
Seller will provide complete, accurate, and factual information,
and not submit false or misleading information, or omit material
information, in any communications with the Commission, market
monitors, regional transmission organizations, independent system
operators, or similar entities.
26. In the Western Markets Report, Staff proposes that all market-
based rate tariffs include a specific prohibition against the
submission of false information or the omission of material information
to the Commission or to an entity such as an ISO, an RTO, or an
approved market monitor.\20\
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\20\ See Western Markets Report at ES-17. In this regard, EPSA,
in its code of ethics and sound trading practices, requires its
members to ``provide market and transaction information to
regulators and market monitors in compliance with all applicable
rules and requirements and [to] continue to cooperate with
regulators and market monitors as reasonably necessary to assist in
their understanding of market operations.''
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27. Based on Staff's recommendation, we propose and seek comment on
Market Behavior Rule 3. Specifically, we seek comment on
whether this proposed rule would be sufficient in its scope and breadth
to cover any and all matters relevant to wholesale markets, including
maintenance and outage data, bid data, price and transaction
information, and load and resource data. In addition, we seek comment
on whether this remedial authority would serve as a useful and
appropriate tool in ensuring just and reasonable rates.
Market Behavior Rule 4: Reporting
To the extent Seller engages in reporting of transactions to
publishers of electricity or natural gas price indices, Seller shall
provide complete, accurate and factual information to any such
publisher. Seller shall notify the Commission of whether it engages in
such reporting for all sales. In addition, the seller shall adhere to
such other standards and requirements for price reporting as the
Commission may order.
28. In the Western Markets Report, Staff proposes that all electric
market-based rate tariffs and authorizations be conditioned to
expressly require that sellers provide complete, accurate, and honest
information to any entity that publishes price indices and to require
that data sent to firms publishing price indices be provided by the
risk management office of the company, not the trading desk or a
trader, and be certified by the chief risk officer.\21\
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\21\ Id. Similarly, EPSA, in its code of ethics and sound
trading practices, requires its members to ``ensure that any
information disclosed to the media, including market publications
and publishers of surveys and price indices, is accurate and
consistent.''
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29. Based on Staff's recommendation, we propose and seek comment on
Market Behavior Rule 4. In the Western Markets Report, Staff
found that the markets for natural gas and electricity in California
are inextricably linked, that there were dysfunctions in these markets
that fed off each other, and that the dysfunctions in the natural gas
market appear to have stemmed, at least in part, from efforts to
manipulate price indices compiled by trade publications--by fabricating
trades, inflating the volume of trades, omitting trades, and adjusting
the price of trades.\22\
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\22\ Id. at III-2 (noting that, to date, five major traders--
Wiliams, Dynegy, AEP, CMS, and El Paso Merchant Energy--have
admitted that their employees falsified information provided to
compilers of natural gas price indices).
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30. Staff further found that the predominant motives for reporting
false information were to influence reported gas prices, to enhance the
value of financial positions or purchase obligations, and to increase
reported volumes to attract participants by creating the impression of
more liquid markets. In light of these findings, we seek comment on
whether Market Behavior Rule 4, as proposed, would remedy the
abuses outlined by Staff in the Western Markets Report by ensuring that
published price indices represent a fair and accurate measure of actual
prices and trading volumes.
31. With regard to standards and requirements for price reporting,
on April 24, 2003, we convened a public conference in Docket No. AD03-
7-000, together with the Commodity Futures Trading Commission (CFTC),
to consider natural gas price formation issues, including the
development of alternative index formation models. At that conference
and from comments submitted thereafter, we have received valuable input
helping us refine the options available. To that end, we have conducted
a follow-up conference, also with CFTC participation, for both natural
gas and electricity indices.
32. While we are considering requiring jurisdictional entities to
report transactions to an entity responsible for index creation, we
note that our efforts towards resolution of this issue will be in
Docket No. AD03-7-000. Market Behavior Rule 4 states that
sellers will be required to adhere to other standards or requirements
as the Commission may order. Based upon our review of the record
developed in Docket No. AD03-7-000, we may issue such an order to be
implemented at the same time as the market-based tariff rules proposed
herein.
Market Behavior Rule 5: Record Retention
Seller will retain all data and information necessary for the
reconstruction of energy or energy products prices it charges, or the
prices it reports for use in published price indices, for a period of
three years.
33. In the Western Markets Report, Staff recommends that all
electric market-based rate tariffs and authorizations be expressly
conditioned to require sellers to retain data and information needed to
reconstruct a published price index for a period of three years.\23\
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\23\ See Western Markets Report at ES-14 and III-52. EPSA, in
its code of ethics and sound trading practices, requires its members
to ``maintain documentation on all transactions for an appropriate
period of time as required under applicable laws and regulations.''
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[[Page 40929]]
34. Based on Staff's recommendation, we propose and seek comment on
Market Behavior Rule 5. In the Western Markets Report, Staff
found that companies had little, if any, formal procedures in place to
ensure the accuracy of the data reported to the trade press. Staff also
found that companies had reported inaccurate information. Staff found
that these inaccuracies were attributable to unstructured or
nonexistent processes for reporting (e.g., taking the simple arithmetic
average of the high and low trades), making up trades to come up with
an average that was the midpoint of the traders' perceived range, and
entering fictitious trades (both prices and volumes) to replicate
prices reported to trading platforms. We seek comments on whether
Market Behavior Rule 5, as proposed, would ensure that
companies adopt suitable retention policies that would permit the
Commission and interested entities to better monitor these transactions
and practices, to the extent necessary and appropriate.
Market Behavior Rule 6: Related Tariffs
Seller shall not violate or collude with another party in actions
that violate Seller's code of conduct or Order No. 889 standards of
conduct.
35. In the Western Markets Report, Staff found that sellers had
failed to abide by their market-based rate codes of conduct and their
Order No. 889 standards of conduct. These tariff provisions, among
other things, require the functional separation of transmission and
wholesale merchant personnel. In one case, Staff found that a power
marketer used a third party to circumvent the Commission's prohibition
on affiliate sales.\24\
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\24\ See also Idaho Power Company, et al. (Docket No. IN03-9-
000).
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36. To better monitor and deter these tariff violations, we propose
and seek comment on Market Behavior Rule 6. Specifically, we
seek comment on whether the standard as proposed is sufficient in its
scope and breadth to cover any and all matters relating to violations
of the market-based rate codes of conduct and the Order No. 889
standards of conduct. We seek comment on whether this compliance rule
would be an effective way for the Commission to better ensure that the
conduct of public utilities is consistent with the public interest.
Complaint Procedures and Limitations on Disgorgement Liability
37. As noted above, in crafting the market behavior rules proposed
herein, we have attempted to balance our interest in providing adequate
certainty for market participants to encourage fair, robust
competition, with our equal commitment to protecting customers from the
abuses of market power and other anticompetitive behavior. Looking
ahead, we want to formalize both our market rules and their
consequences for greater market certainty. Accordingly, we further seek
comment on the procedural limitations proposed below.
38. First, we propose to limit the applicability of potential
disgorgement of unjust profits exposure by requiring that any violation
alleged by a market-participant be made on a transaction-specific basis
and that any market participant request for such a remedy be made no
later than 60 days after the end of the calendar quarter in which the
violation is alleged to have occurred. If a market participant can show
that it did not know and should not have known of the behavior which
forms the basis for the complaint, within the period proscribed above,
then the 60-day period will run from the time when the market
participant knew or should have known of the behavior. In addition, we
propose to restrict remedies sought in market participant complaints to
the specific transactions which are the subject of these
complaints.\25\
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\25\ Such claims, moreover, would be required to comply with the
Commission's revised complaint procedures in 18 CFR Sec. 385.206
(2003). See Lester C. Reed v. Georgia Power Co., 94 FERC ] 61,100
(2001).
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39. For example, the backward-looking scope of remedial action due
to an allegation made by a market participant concerning a violation of
the behavioral rules contained in a market-based rates tariff would be
limited to the period reaching to the beginning of the calendar quarter
referenced above. Thus, an allegation could be made up to 60 days after
March 31 of a calendar year seeking disgorgement of unjust profits for
a transaction taking place in the quarter ending March 31. Any other
action taken by the Commission on the basis of such allegation would be
prospective only.
40. These time limits will apply to complaints initiated by market
participants and not to those initiated by the Commission. The
Commission has broad remedial authority to act in the event of
violations of statutory or regulatory requirements or rules in
applicable tariffs.\26\ Where there is a violation of the market
behavior rules that are adopted for all new and existing market-based
rate tariffs and authorizations, the Commission is proposing to retain
the full scope of its authority to provide remedies upon its own
motion. Thus, the Commission and its staff will not be subject to the
time limitation on allegations of tariff violations. The Commission
believes that this properly balances the interest of market
participants in finality with the need to be able to take action
against tariff violations.
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\26\ San Diego Gas & Electric Co., 96 FERC ] 61,120 at 61,507-08
(2001), citing Washington Water Power Co., 83 FERC ] 61,282 (1998).
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41. Other limitations proposed by commenters in this proceeding
have not been included in our proposal. For example, while several
commenters have argued that sales into markets with Commission-approved
market monitoring and mitigation should be exempt from any market
behavior rules approved herein we are not including this limitation in
our proposal. The findings made by Staff in the Western Markets Report
illustrate that organized, bid-based markets, even those with approved
market monitoring and mitigation procedures, remain vulnerable to
anticompetitive behavior and the exercise of market power. Accordingly,
Staff thus recommended that market behavior rules be adopted for all
markets without exception.
42. Other commenters have suggested that entities such as power
marketers and small generators should be exempted from our market
behavior rules because entities such as these are unable to exercise
market power in the markets in which they operate. We disagree. In the
Western Markets Report, Staff found that power marketers and small
generators can and have engaged in practices and transactions which our
proposed market behavior rules are designed to prohibit. Accordingly,
we propose to apply our market behavior rules to all sellers with
market-based rate tariffs and authorizations.
Additional Tariff Revisions Proposed By Staff
43. In addition to the tariff revisions discussed above, Staff, in
the Western Markets Report, also proposed tariff revisions relating to
a seller's use of trading platforms, based on Staff's review of Enron's
trading platform, Enron Online. Staff found that Enron Online lacked
transparency and was subject to manipulation by Enron.\27\ Accordingly,
Staff recommended that
[[Page 40930]]
future trading platforms be designed to provide a sufficient level of
transparency to enable users to understand the movements of the market.
Staff also recommended that the Commission condition electric power
market-based rate tariffs and authorizations to require that sellers
who use trading platforms use only those trading platforms that employ
a ``credit change monitor,'' i.e., a monitor that could be used to
evaluate unusual patterns in credit changes in the platform. Staff
found that without these safeguards, the credit structure could be used
to manipulate access to other traders and the perceived market price.
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\27\ See Western Markets Reports at ES-17.
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44. Staff also recommended conditioning electric power market-based
rate tariffs and authorizations to require that sellers who use trading
platforms use only those trading platforms that agree to provide the
Commission with full access to trade reporting and order book
information for the trading systems and agree to adhere to appropriate
monitoring requirements. To the extent the Commission promulgates
standards for trading platforms, the Commission is considering
conditioning electric power market-based rate sellers to use only those
platforms that meet certain standards. The Commission seeks comment on
this issue. We will not propose a market behavior rule relating to this
recommendation at this time, however, pending our further review of
this matter.
Legal Authority
45. A number of commenters in this proceeding have challenged the
Commission's legal authority under the FPA to condition sellers' market
based rate tariffs and authorizations, as proposed in the November 20
Order. These commenters have asserted, among other things, that the
potential financial consequences for sellers found to be in violation
of their market-based rate tariffs, as revised, would violate the filed
rate doctrine and the refund limitations set forth in Section 206(b) of
FPA.\28\
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\28\ Section 206(b) requires that any refunds made in a Section
206 proceeding initiated by the Commission on its own motion, be
based on a refund effective date no earlier than 60 days after the
publication by the Commission of notice of its intent to initiate
such a proceeding, or, in the case of a complaint, no earlier than
60 days after the complaint was filed. Section 206(b) also limits
the refund effective period to 5 months after the expiration of the
such 60-day period.
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46. For the reasons discussed below, we reject these challenges to
the Commission's authority. We have initiated this proceeding under
Section 206, for the purpose of examining whether sellers' market-based
rate tariffs are just and reasonable, or whether, conversely, they
should be revised as proposed herein. Should we determine that sellers'
currently effective tariffs are unjust and unreasonable or may lead to
unjust and unreasonable rates without the inclusion of the market
behavior rules we propose, we will require that these tariffs be
revised to include the rules prospectively, as Section 206
requires.\29\ Thus, these tariff revisions, if approved, would not
violate the filed rate doctrine.\30\
47. Nor would the refund limitations of Section 206(b) of the FPA
bar the Commission from enforcing the tariff revisions proposed herein.
Rather, any remedies stemming from a violation of our proposed tariff
provisions would be based on the tariff conditions themselves, as
approved herein. It is well settled that the Commission may take
actions and impose remedies when tariffs are violated. These actions,
moreover, would be fully consistent with the oversight responsibilities
implicit in our market-based rates program.
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\29\ The Commission would intend to make the behavioral rules
effective no earlier than the date of issuance of an order revising
market-based rates tariffs to include new behavioral rules.
\30\ Commenters also assert that the filed rate doctrine would
be violated in this case because the behavioral standard, as
proposed in the November 20 Order, failed to provide adequate notice
regarding the conduct it would prohibit. However, we will not
address these allegations here, given the significant revisions to
the market behavior rules we propose to adopt here. In fact, the
``filed rate,'' in this case, would include a set of specific
behavioral standards voluntarily accepted by the seller, the meaning
and intent of which will be fully aired in this proceeding. In
addition, the filed rate would make explicit that any violation of
our market behavior rules would potentially result in financial
consequences, as discussed herein. Under these circumstances, our
market behavior rules would provide the necessary predictability
required by the filed rate doctrine.
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48. Sellers' authorizations, in this regard, rely upon the
existence of competitive markets. As illustrated by the Western Markets
Report, it is possible for actions to be taken by sellers that can
affect whether the prices charged in such markets are at competitive
levels. Conditioning market-based rate authority to require sellers to
comply with market behavior rules will help ensure that sellers do not
engage in anti-competitive behavior and that just and reasonable rates
will be achieved. By imposing actionable behavioral rules conditioned
upon the risk of material remedial action, the Commission can further
the goal of competition while protecting consumers and other market
participants who do not engage in anti-competitive behavior.
49. Thus, while we are undertaking a Section 206 investigation to
determine whether market-based rate tariffs must be revised to include
the proposed market behavior rules to be just and reasonable, the
potential remedies resulting from violations of such rules will flow
from our conditioning such tariffs to provide, as a component of the
tariff, a clear right for the Commission to enforce its standards and
for affected parties to be compensated for violations.\31\ Such actions
would be in the nature of a proceeding to determine whether there has
been a tariff violation, not a complaint that rates, terms or
conditions were unjust and unreasonable under Section 206.
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\31\ We imposed a similar obligation, pursuant to our
conditioning authority, in the California Refund Proceeding. See San
Diego Gas & Electric Company v. Sellers of Energy and Ancillary
Services, et al., 97 FERC ] 61,121, 61,370 (2000), order on reh'g,
San Diego Gas & Electric Company v. Sellers of Energy and Ancillary
Services, et al., 97 FERC ] 61,275 (2001), appeal pending, Public
Utilities Commission of the State of California, et al. v. FERC,
Nos. 01-71051, et al. (9th Cir. June 29, 2001 and later).
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50. The Commission has ample authority to condition market-based
rate tariffs in this fashion.\32\ Here, these conditions are both
necessary and appropriate to ensure that rates charged by sellers in
the wholesale market will be based on, and influenced by, competitive
factors. We do not intend for these tariff provisions to supersede or
replace in any way any party or the Commission's rights under Section
206 to file a compliant asserting that any rates, term or condition or
service are unjust and unreasonable and requires revision as we are
proposing with market-based tariffs herein.
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\32\ In fact, nothing in the Regulatory Fairness Act (RFA)
(modifying FPA Section 206) or its legislative history suggests that
Congress intended to address or limit the Commission's authority to
condition market-based rate authorizations. Congress passed the RFA,
which established the 15-month refund effective period, to give the
Commission authority to order rate reductions for the period before
the conclusion, but after the start, of Section 206 proceedings. See
San Diego Gas and Electric Co. v. Sellers of Ancillary Services, et
al., 97 FERC at 62,220.
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51. Finally, we reject commenters' assertion that the initiation of
a rulemaking proceeding would be required to implement the tariff
provisions proposed in this proceeding. As we noted above, the
Commission is making its proposed revisions to sellers' market-based
rate authorizations in this proceeding, because these proposals would
embody tariff revisions applicable to individual sellers, not rule
changes. As we also noted, however, we are taking this action in the
context of an investigation with comment procedures designed to
implement full
[[Page 40931]]
public input. The Commission, moreover, is not limited to notice and
comment rulemaking in developing policy. Agencies generally are
permitted considerable discretion to choose whether to proceed by
rulemaking or by adjudication. Our decision to act in this proceeding
pursuant to Section 206 is clearly within our authority.
Comment Procedures
52. We will provide interested entities an opportunity to file
comments and reply comments regarding the proposed market behavior
rules set forth in the Attachment to this order. Initial comments will
be due 30 days from the date this order is published in the Federal
Register, and reply comments will be due 30 days from the date that
initial comments are filed.
The Commission Orders:
(A) The tariff provision proposed by the Commission in the November
20 Order is hereby modified and revised, as set forth in the Attachment
to this order, and as discussed herein;
(B) Interested entities may file comments and reply comments
regarding the market behavior rules set forth in the Attachment to this
order. Initial comments will be due 30 days from the date this order is
published in the Federal Register, and reply comments will be due 30
days from the date that initial comments are filed;
(C) Requests for rehearing of the November 20 Order are hereby
dismissed, as discussed in the body of this order;
(D) The Secretary shall promptly publish this order in the Federal
Register.
By the Commission.
Commissioner Massey concurring in part with a separate statement
attached.
Commissioner Brownell concurring with a separate statement
attached.
Magalie R. Salas,
Secretary.
Attachment--Market Behavior Rules
As a condition of market-based rate authority, [Company Name]
(hereafter, Seller) will comply with the following Market Behavior
Rules:
1. Unit Operation: Seller will operate and schedule generating
facilities, undertake maintenance, declare outages, and commit or
otherwise bid supply in a manner that complies with the rules and
regulations of the applicable power market.
2. Market Manipulation: Actions or transactions without a
legitimate business purpose which manipulate or attempt to
manipulate market prices, market conditions, or market rules for
electric energy and/or energy products, or result in market prices
for electric energy and/or electric energy products which do not
reflect the legitimate forces of supply and demand, are prohibited.
Prohibited actions and transactions include, but are not limited to:
A. pre-arranged offsetting trades of the same product among the
same parties, which trades involve no economic risk and no net
change in beneficial ownership (sometimes called ``wash trades'');
B. transactions predicated on submitting false information to
transmission providers or other entities responsible for operation
of the transmission grid (such as inaccurate load or generation
data; scheduling non-firm service or products sold as firm; or
conducting ``paper trades'' where an entity falsely designates
resources and fails to have those resources available and feasibly
functioning);
C. transactions in which an entity first creates artificial
congestion and then ``relieves'' such artificial congestion;
D. collusion with another party for the purpose of creating
market prices at levels differing from those set by market forces;
and
E. bidding the output of or misrepresenting the operational
capabilities of generation facilities in a manner which raises
market prices by withholding available supply from the market.
3. Communications: Seller will provide complete, accurate, and
factual information, and not submit false or misleading information,
or omit material information, in any communication with the
Commission, market monitors, regional transmission organizations,
independent system operators, or similar entities.
4. Reporting: To the extent Seller engages in reporting of
transactions to publishers of electricity or natural gas price
indices, Seller shall provide complete, accurate and factual
information to any such publisher. Seller shall notify the
Commission of whether it engages in such reporting for all sales. In
addition, the seller shall adhere to such other standards and
requirements for price reporting as the Commission may order.
5. Record Retention: Seller will retain all data and information
necessary for the reconstruction of the electric energy or electric
energy products prices it charges or of the prices it reports for
use in published price indices for a period of three years.
6. Related Tariffs: Seller shall not violate or collude with
another party in actions that violate Seller's code of conduct or
Order No. 889 standards of conduct.
Any violation of these Market Behavior Rules will constitute a
tariff violation. Seller will be subject to disgorgement of unjust
profits associated with the tariff violation, from the date on which
the tariff violation occurred. Seller may also be subject to
suspension or revocation of its authority to sell at market-based
rates or other appropriate non-monetary remedies.
Massey, Commissioner, concurring in part:
I wholeheartedly support conditions to all market-based tariffs
that declare manipulation off limits. Such outrageous behavior has
cast a pall over the promise of energy markets and has brought some
companies to dire financial straits. These tariff conditions should
deter bad behavior in the future. If they fail to do so, then at
least the Commission will have industry wide legal tools to provide
appropriate remedies. I commend Chairman Wood's strong leadership in
developing this proposal.
I am writing separately to express my concern with one aspect of
today's proposal. I would not limit the monetary penalty for tariff
violations to disgorgement of unjust profits. Market manipulation
can raise the market prices paid by all market participants and
collected by all sellers. The Federal Power Act requires that all
rates and charges be just and reasonable. Where the market has been
manipulated so as to affect the market price, that price is not just
and reasonable and is therefore unlawful. Simply requiring that bad
actors disgorge their individual profits does not make the market
whole because all sellers received the unlawful price caused by the
manipulation. The narrow remedy of profit disgorgement is not an
adequate remedy for the adverse effect of the bad behavior on the
market price, and may not be an adequate deterrent to future
behavior. The appropriate remedy may be that the manipulating seller
makes the market whole.\1\ Unfortunately, today's order appears to
take this remedy off of the table. I would prefer to tailor the
remedy to the circumstances of each case. I encourage comments on
this issue.
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\1\ The Commission has accepted the make the market whole remedy
as part of a settlement for withholding generation from the
California PX market. See 102 FERC ] 61,108 (2003).
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For these reasons, I concur in part with today's order.
William L. Massey,
Commissioner.
Brownell, Commissioner, concurring:
1. Today we issue an order proposing to place conditions on
sellers of power that have been granted market based rate authority.
This proposal, coming 18 months after the Commission first launched
the idea of conditioning sellers' market-based rate authorities,
builds on industry events of the last few years. I have spoken about
the need for the ``10 commandments'' and am encouraged that we are
taking this step. Importantly, the proposal attempts to balance
three goals:
[sbull] effective remedies on behalf of customers in the event
anti-competitive behavior or other market abuses occur;
[sbull] clearly delineated ``rules of the road'' to market-based
rate sellers while, at the same time, not impairing the Commission's
ability to provide remedies for market abuses whose precise form and
nature cannot be envisioned today; and,
[sbull] reasonable bounds within which conditions on market
conduct will be implemented so as not to create unlimited regulatory
uncertainty for individual market participants or harm to the
marketplace in general.
2. I appreciate the need to balance these goals but have a
fundamental concern that we've allowed markets to form without a
full appreciation of what constitutes a market let alone the market
dynamics that foster a truly competitive market. For example, what
defines a competitive market and what constitutes scarcity pricing?
These questions
[[Page 40932]]
remain largely unanswered. 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. Finally, I am concerned about
the applicability of behavioral rules to only one market segment--
sellers. This troubles me--equitable rules should apply to all
industry segments. I encourage and look forward to meaningful
comments from all market segments. If we've learned nothing else,
we've learned that rules are critical.
Nora Mead Brownell,
Commissioner.
[FR Doc. 03-17421 Filed 7-8-03; 8:45 am]
BILLING CODE 6717-01-P