[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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \27\ See Western Markets Reports at ES-17.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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