[Federal Register Volume 68, Number 226 (Monday, November 24, 2003)]
[Notices]
[Pages 65902-65925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29299]


-----------------------------------------------------------------------

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 Amending Market-Based 
Rate Tariffs and Authorizations

Issued November 17, 2003.
    1. In an order dated June 26, 2003, 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 on 
sellers' compliance with six proposed Market Behavior Rules.\2\ The 
need for these Market Behavior Rules, we stated, was informed by the 
types of behavior that had been observed in the Western markets during 
2000 and 2001; by Commission Staff's Final Report concerning these 
markets (Western Markets Report);\3\ by our experience in other 
markets, including the organized spot markets in the East; and by the 
comments filed in response to our initial proposal in this 
proceeding.\4\
---------------------------------------------------------------------------

    \1\ 16 U.S.C. 824e (2000).
    \2\ See Investigation of Terms and Conditions of Public Utility 
Market-Based Rate Authorizations, 103 FERC ] 61,349 (2003) (June 26 
Order). These Market Behavior Rules address: (i) Unit operations; 
(ii) market manipulation; (iii) communications; (iv) reporting; (v) 
record retention; and (vi) related tariff matters.
    \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).
    \4\ In an order issued in this proceeding on November 20, 2001, 
we proposed to condition all new and existing market-based rate 
tariffs and authorizations to include a broad prohibition against 
``anticompetitive behavior'' and the ``exercise of market power.'' 
See Investigation of Terms and Conditions of Public Utility Market-
Based Rate Authorizations, 97 FERC ] 61,220 (2001) (Initial Order). 
Numerous responsive pleadings were filed in which it was asserted, 
among other things, that the Commission's proposed tariff provision 
was vague and over-broad, and that without greater specificity and 
guidance, our proposed tariff provision would create uncertainty in 
the marketplace. In the June 26 Order, we noted that our revised 
proposal was designed to identify more precisely and comprehensively 
than we had in our Initial Order the transactions and practices that 
would be prohibited under sellers' market-based rate tariffs and 
authorizations. See June 26 Order, 103 FERC ] 61,349 at P6.
---------------------------------------------------------------------------

    2. In the June 26 Order, we also stated that in formulating our 
proposed Market Behavior Rules, we were required to strike a careful 
balance among a number of competing interests. We noted, for example, 
that while market participants must be given an effective remedy in the 
event anticompetitive behavior or other market abuses occur, sellers 
should be provided ``rules of the road'' that are clearly-delineated. 
We noted that while regulatory certainty was important for individual 
market participants and the marketplace in general, the Commission must 
not be impaired in its ability to provide remedies for market abuses 
whose precise form and nature cannot be envisioned today. We sought 
comments on whether our proposed rules achieved the appropriate balance 
among these competing interests.\5\
---------------------------------------------------------------------------

    \5\ June 26 Order, 103 FERC ] 61,349 at P7.
---------------------------------------------------------------------------

    3.The vast majority of the comments we received in response 
supported the Commission's overall objectives in this proceeding, i.e., 
the need to establish clear guidelines applicable to market-based rate 
sellers' conduct in the wholesale markets. In addition, we received a 
number of constructive suggestions for fine-tuning the specific 
language embodied in our proposed rules. Based on these comments and 
based on our further consideration of the issues discussed below, we 
find that sellers' existing tariffs and authorizations, without 
clearly-delineated rules of the road to govern market participant 
conduct, are unjust and unreasonable. Without such behavioral 
prohibitions, the Commission will not be able to ensure that rates are 
the product of competitive forces and thus will remain within a zone of 
reasonableness. We further find that our Market Behavior Rules, as 
modified in Appendix A to this order, are just and reasonable and will 
help ensure that rates are the product of competitive forces and thus 
remain just and reasonable.

Background

    4. In the June 26 Order, we noted that as part of our ongoing 
responsibility to provide regulatory safeguards to ensure that 
customers are protected from market abuses, we were required to balance 
the following 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. We also noted that 
a stable marketplace with clearly defined rules would benefit both 
customers and market participants and would create an environment that 
will attract much-needed capital.\6\
---------------------------------------------------------------------------

    \6\ June 26 Order, 103 FERC ] 61,349 at P5.
---------------------------------------------------------------------------

    5. Based on these objectives, we proposed six specific Market 
Behavior Rules to govern sellers' conduct in the wholesale market:
    [sbull] Unit Operation: We proposed that sellers be required to 
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;
    [sbull] Market Manipulation: We proposed to prohibit all forms of 
market manipulation;
    [sbull] Communications: We proposed to require that sellers 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 (RTOs), independent system operators (ISOs), 
or similar entities;
    [sbull] Reporting: We proposed to apply this same standard with 
respect to reports made by sellers to publishers of electricity or 
natural gas price indices;
    [sbull] Record Retention: We proposed to require sellers to retain 
for a period of three years all data and information

[[Page 65903]]

necessary for the reconstruction of the prices they charge, and the 
prices they report for use in published price indices;
    [sbull] Related Tariffs: Finally, we proposed to clarify that 
sellers would not be permitted to violate or collude with another party 
in actions that violate seller's code of conduct or Order No. 889 
standards of conduct.
    6. We also stated that any seller found to have engaged in the 
behavior prohibited by our rules would be subject to a disgorgement 
remedy and any other appropriate non-monetary remedies such as 
revocation of seller's market-based rate authority. We sought comments 
from interested entities concerning a number of issues, including the 
specific language embodied in the rules themselves, the overall balance 
of interests reflected in these rules, and the remedies and procedures 
that would be available to market participants with respect to their 
enforcement.\7\
---------------------------------------------------------------------------

    \7\ In a companion issuance, we also proposed 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. See Notice of Proposed Rulemaking, Docket 
No. RM03-10-000, Amendments to Blanket Sales Certificates, 103 FERC 
] 61,350 (2003). A Final Rule in that proceeding is being issued 
contemporaneously with this order.
---------------------------------------------------------------------------

Notice and Responsive Pleadings

    7. The June 26 Order was published in the Federal Register.\8\ 
Interested entities were invited to file comments within 30 days of 
this date, with reply comments permitted within 30 days of the comment 
submission date. In response, numerous comments and reply comments were 
received from entities representing Federal and State agencies, 
consumer advocates, trade organizations, and all segments of the 
industry. These entities are listed in Appendix C to this order.
---------------------------------------------------------------------------

    \8\ 68 FR 40924 (2003).
---------------------------------------------------------------------------

    8. Comments generally supportive of the Commission's proposed rules 
were submitted by a broad majority of the entities who filed comments. 
Specifically, commenters generally concurred that establishing a clear 
set of market behavior standards governing sellers' conduct in the 
wholesale markets is necessary. There were disagreements voiced over 
the means to meet these objectives. For example, some argued that our 
proposed rules were a necessary but not a sufficient step forward in 
addressing the concerns outlined in the June 26 Order. These commenters 
submitted that in addition to our proposed rules, we should also 
consider a number of market design changes to bolster the overall 
competitiveness of the wholesale markets. Others (most notably sellers 
or entities representing their interests) asserted that our proposed 
rules would, if implemented, impose a heavy-handed, open-ended burden 
on sellers that would, without fine-tuning and clarification, chill 
investment in the industry. A number of revisions were proposed 
addressing these issues.
    9. On July 28, 2003, Southern Company Services, Inc. (Southern) 
filed a request for rehearing of the June 26 Order concerning the 
Commission's asserted statutory authority to adopt its proposed rules.

Discussion

Procedural Matters

    10. We will grant intervention status to each of the entities 
listed in Appendix C to this order. In addition, we will dismiss 
Southern's request for rehearing. As we held in the June 26 Order and 
reiterate here, rehearing may not be sought in this case until such 
time as the Commission issues a final order, i.e., within 30 days of 
the issuance of this order.\9\ However, we will treat Southern's 
rehearing request as a comment, the substance of which is addressed in 
section N, below.
---------------------------------------------------------------------------

    \9\ See Rule 713 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.713 (2003).
---------------------------------------------------------------------------

Analysis

    11. The task before us in this proceeding is to determine how and 
to what extent market-based rate seller conduct in the wholesale 
markets should be monitored by the Commission and, when necessary, how 
and to what extent this conduct should be remedied. To this end, we 
concur with the consensus view conveyed in the comments we have 
received in response to our proposed rules, namely, that sellers, while 
accountable for their actions, need and deserve clearly-delineated 
rules governing their conduct so that both sellers, buyers, and other 
interested entities will know what is and what is not acceptable market 
behavior. We find market-based rate tariffs and authorizations that do 
not include such standards are unjust and unreasonable.
    12. Our behavioral rules are designed to provide market 
participants adequate opportunity to detect, and the Commission to 
remedy, market abuses. Our behavioral rules are also clearly defined so 
that they do not create uncertainty, disrupt competitive commodity 
markets or simply prove ineffective. However, since competive markets 
are dynamic, it is important that we periodically evaluate the impact 
these rules have on the energy markets. We direct our office of Market 
Oversight and Investigation to evaluate the effectiveness and 
consequences of these behavioral rules on an annual basis and include 
this analysis in the State of the Markets Report.
A. Market Behavior Rule 1 (Unit Operation)
1. Commission Proposal
    13. In the June 26 Order, we noted that the integrity of an 
organized market and other markets as well require sellers to comply 
with the rules and regulations of the applicable power market. In 
Market Behavior Rule 1, therefore, we proposed 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 these rules and regulations. We stated that while market 
participants may become subject to additional requirements through 
tariff service agreements or other market participation agreements, a 
specific requirement in each seller's market-based rate tariff 
addressing unit operation issues would be necessary in order to give 
the Commission and interested parties direct remedial authority for 
violations that may not exist without such a condition.
2. Comments
    14.Commenters argue that Market Behavior Rule 1, unless it is 
revised, could be relied upon by market operators to impose operating 
and maintenance standards that would require generators to violate 
permit restrictions or operate in an unsafe manner.\10\ EPSA, et al. 
request that the rule be modified by adding that the unit operation 
requirement contemplated by the rule be ``consistent with the 
operational, legal and economic constraints on such generating 
facilities.''\11\ The New York Independent System Operator, Inc. (New 
York ISO) characterizes this issue as a reliability concern, and 
proposes that the rule require sellers to inform the

[[Page 65904]]

system operator if they are unable to follow the dispatch instructions 
they receive. The New York ISO also proposes that Market Behavior Rule 
1 be modified to require sellers to use their ``best efforts to comply 
with the operating instructions of the applicable power system 
operator.''
---------------------------------------------------------------------------

    \10\ Comments of Electric Power Supply Association, Colorado 
Independent Energy Association, Independent Energy Producers of 
California, Independent Power Producers of New York, Inc. and the 
Western Power Trading Forum (EPSA, et al.) at 2. See also Comments 
of Exelon Corporation (Exelon) at 6; Comments of Reliant Energy 
Power Generation, Inc. and Reliant Energy Services, Inc. (Reliant) 
(``Generators should not be penalized for failure to operate a plant 
in a physically impossible manner or in a way that is inconsistent 
with economic and environmental restrictions'').
    \11\ See also Comments of Reliant at 4; Comments of Edison 
Electric Institute (EEI) at 8.
---------------------------------------------------------------------------

    15. Commenters also assert that the ``rules and regulations'' to 
which the proposed rule refers should be limited to ``Commission-
approved'' rules and regulations.\12\ FirstEnergy asserts that absent 
this limitation, the rules of the applicable power market, as 
referenced by the proposed rule, may be unknowable and uncertain and 
thus, among other things, lack the procedural safeguards triggered by a 
Section 205 filing. Dynegy explains that ISOs, RTOs and transmission 
providers occasionally adopt rules, protocols, or guidelines (or 
interpretations of tariff provisions) without vetting them through the 
stakeholder process and without Commission authorization.
---------------------------------------------------------------------------

    \12\ See e.g., Comments of EEI at 8; Comments of FirstEnergy 
Service Company (FirstEnergy) at 6; Comments of Duke Energy 
Corporation (Duke) at 36; Comments of Dynegy Power Marketing, Inc., 
et al. (Dynegy) at 5; Comments of Edison Mission Energy at 5-6; 
Comments of Pinnacle West Companies (Pinnacle) at 5.
---------------------------------------------------------------------------

    16. Pacific Gas and Electric Company (PG&E) submits that the term 
``applicable power market'' also requires clarification, where there is 
more than one market and more than one set of rules which may apply. In 
addition, commenters take varying positions on the issue of whether the 
Commission's proposed prohibitions should apply to bilateral and 
forward markets.\13\ APPA and TAPS argue that they should, while EPSA, 
et al., EEI, Southern, and others assert that Market Behavior Rule 1 is 
inapplicable as it relates to these markets.\14\ Southern, for example, 
asserts that the market abuse concerns of the type contemplated by the 
proposed rule do not arise in the context of arm's-length negotiations. 
On this same basis, EPSA, et al. request clarification that Market 
Behavior Rule 1 (and indeed each of the Commission's proposed rules) 
will not be a basis for modifying rates otherwise agreed to by such 
parties.
---------------------------------------------------------------------------

    \13\ Commenters make similar arguments as they relate to 
proposed Market Behavior Rule 2, discussed below.
    \14\ See e.g., Comments of Exelon at 5; Reply Comments of 
Central Maine, et al. at 3.
---------------------------------------------------------------------------

    17. Merrill Lynch Capital Services, Inc. and Morgan Stanley Capital 
Group Inc. (Merrrill Lynch, et al.) request clarification that Market 
Behavior Rule 1 will not apply to marketers that do not own generation. 
Merrill Lynch, et al. also argue that scheduling services should not, 
by itself, be considered sufficient to constitute ``control'' of 
generation. Finally, the Colorado Office of Consumer Counsel \15\ 
(Colorado Consumer Counsel, et al.) interprets Market Behavior Rule 1 
as a prohibition against capacity withholding and seeks clarification 
regarding the application of such a rule to hydroelectric generation in 
those parts of the country where hydro power is used primarily for peak 
shaving.
---------------------------------------------------------------------------

    \15\ Joined by the New Mexico Attorney General, the Rhode Island 
Attorney General, the Utah Committee of Consumer Service, the Public 
Utility Law Project of New York, Inc., the National Consumer Law 
Center, and Public Citizen, Inc.
---------------------------------------------------------------------------

3. Commission Ruling
    18. We will approve Market Behavior Rule 1, subject to two 
revisions, as requested. First, we will revise the rule to clarify that 
the ``rules and regulations'' to which the rule refers apply only to 
``Commission-approved'' rules and regulations. Second, we will revise 
the rule to clarify that the operation of this rule will not impose a 
must-offer requirement on sellers (although sellers may have such an 
obligation independent of this rule). As revised, Market Behavior Rule 
1 will require market-based rates sellers to:

    Operate and schedule generating facilities, undertake 
maintenance, declare outages, and commit or otherwise bid supply in 
a manner that complies with the Commission-approved rules and 
regulations of the applicable power market. Compliance with this 
Market Behavior Rule 1 does not require Seller to bid or supply 
electric energy or other electricity products unless such 
requirement is a part of a separate Commission-approved tariff or 
requirement applicable to Seller.

    19. As we noted in the June 26 Order, Market Behavior Rule 1 will 
aid the Commission in ensuring that the rates, terms and conditions 
charged by market-based rate sellers remain just and reasonable by 
tying sellers' conduct with respect to their unit operations to the 
rules and regulations of the power markets in which they do business. 
Our rule will thus give the Commission direct remedial authority for 
violations that may not exist in certain cases absent such a rule.
    20. Commenters assert and we agree, however, that the rules and 
regulations to which this rule refers should be limited to 
``Commission-approved'' rules and regulations of the applicable power 
market. We agree that it would not be appropriate to require that a 
market-based rate seller be made subject to potential sanction for 
rules or regulations (e.g., technical guidelines set forth in 
protocols) that have not been filed with the Commission. We also 
clarify that Market Behavior Rule 1, while requiring compliance with 
any Commission-approved rule or regulation of the applicable power 
market, will not otherwise apply to any bilateral power sales 
arrangement or other transactions to which the seller may be a party.
    21. We will also revise Market Behavior Rule 1 to make clear that 
no ``must offer'' requirement will be imposed under this rule. As 
revised, the rule makes clear that ``[c]ompliance with this Market 
Behavior Rule 1 does not require Seller to bid or supply electric 
energy or other electricity products unless such requirement is a part 
of a separate Commission-approved tariff or requirement applicable to 
Seller.'' Unless the seller is subject to a must-offer requirement 
pursuant to the applicability of a Commission-approved tariff, or other 
specific Commission-approved obligation, then, the seller will not be 
subject to such a requirement under our rule.\16\ We also clarify that 
our rule is not intended to supersede market-specific rules such as 
those for outage scheduling/reporting and bidding that we have approved 
in our acceptance of ISO/RTO tariffs. In sum, we clarify that this rule 
is not intended to serve as an independent basis to impose any new 
obligations on sellers, or to further regulate bilateral markets.\17\
---------------------------------------------------------------------------

    \16\ To make this same point, as discussed in Section G, below, 
we are also rejecting our proposed Market Behavior Rule 2(e). That 
proposed rule, which addressed market manipulation in a specific 
context (i.e., with respect to ``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'') was incorrectly interpreted by 
commenters as a must-offer requirement.
    \17\ Additional issues relating to RTO/ISO coordination matters 
are discussed in Section O, below.
---------------------------------------------------------------------------

    22. We will reject commenters' proposed clarification that our rule 
apply only to market-based rate sellers who own physical generation 
assets. Sellers, whether they do or do not own generation, participate 
in markets, bid supply, and, in many cases, control generation 
resources through contract rights. We also clarify that to the degree 
physical withholding or economic withholding issues are the subject of 
an applicable power market's rules and regulations, sellers' compliance 
with such rules and regulations will satisfy the seller's obligations. 
Thus, unless concepts of physical or economic withholding are a 
component of a broader manipulative behavior, as addressed in Market 
Behavior Rule 2, discussed below, actions taken in accord with the 
Commission-approved

[[Page 65905]]

rules of an applicable power market will not be considered actionable 
physical or economic withholding.
    23. Finally, commenters raise concerns that Market Behavior Rule 1 
could require unit operation in an unsafe manner or in a way that could 
violate environmental permit restrictions. However, we are not aware of 
any Commission-approved rule or regulation (and commenters cite to no 
rule or regulation) which would require sellers to operate their units 
in an unsafe manner or in violation of any environmental permit 
restrictions. Issues of this nature should be raised and addressed in 
the applicable power markets when and to the extent they may arise.
B. Market Behavior Rule 2 (Market Manipulation)
1. Commission Proposal
    24. In the June 26 Order, we stated that our reliance on 
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. We stated 
that 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. Accordingly, 
we proposed to prohibit activities that adversely affect competitive 
outcomes, by stating that ``[a]ctions or transactions without a 
legitimate business purpose which manipulate or attempt to manipulate 
market prices for electric energy and/or electric energy products which 
do not reflect the legitimate forces of supply and demand, are 
prohibited.'' \18\
---------------------------------------------------------------------------

    \18\ June 26 Order, 103 FERC ] 61,349 at P22.
---------------------------------------------------------------------------

2. Comments
    25. The Electricity Consumers Resource Council \19\ (ELCON, et al.) 
support Market Behavior Rule 2, as proposed. ELCON, et al. assert that 
the Commission's proposed anti-manipulation prohibition is necessary 
due to the absence of and/or weakness of such provisions in the markets 
operated by the Cal ISO, PJM, ISO New England, Inc., the New York ISO 
and the Midwest Independent System Operator, Inc. (Midwest ISO). ELCON, 
et al. characterize the anti-gaming provisions currently in effect in 
these markets as vague and conflicting, while in other regions of the 
country there are no standards at all. ELCON, et al. conclude that the 
Commission's proposal to apply a single anti-gaming prohibition 
applicable to all markets is appropriate and urgently needed.
---------------------------------------------------------------------------

    \19\ Joined by the American Iron and Steel Institute, the 
American Chemistry Counsel, the American Forest & Paper Association, 
the Association of Business Advocating Tariff Equity, California 
Large Energy Consumers Association, Connecticut Industrial Energy 
Consumers, Industrial Energy Consumers of Pennsylvania, Southeast 
Electricity Consumers Association, and Multiple Intervenors.
---------------------------------------------------------------------------

    26. Other commenters take issue with the market manipulation 
prohibition set forth in proposed Market Behavior Rule 2. First, 
commenters assert that a market manipulation prohibition should not be 
applied to bilateral markets. Mirant and TransAlta, for example, argue 
that there is no economic rationale for applying market manipulation 
rules outside the short-term spot markets for power, given the 
difficulty of exercising market power in forward markets directly or 
leveraging market power from short-term markets into the forward 
markets. APPA and TAPS take the opposite position, noting market power 
and manipulation risks arise not only in the spot markets, but in the 
bilateral markets as well.
    27. Commenters also challenge the sufficiency of the term 
``legitimate business purpose'' in distinguishing between prohibited 
and non-prohibited conduct and question whether and to what extent the 
Commission can fairly (and with adequate notice to sellers) identify 
such motives. InterGen North America, L.P. (InterGen) argues, 
therefore, that the term ``legitimate business purpose'' is fatally 
vague and that there are no recognized principles or accepted rules or 
standards in the industry that would assist market participants in 
understanding what is and what is not ``legitimate.'' InterGen notes, 
in this regard, that Webster's Disctionary defines the word 
``legitimate'' as conforming to recognized principles or accepted rules 
and standards.\20\ Dynegy Power Marketing, Inc. (Dynegy) asserts that 
in the organized markets in the East, any bid with respect to the 
marginal unit could be accused of attempting to manipulate prices, even 
if the market is covered by mitigation procedures that limit the unit's 
bidding parameters.
---------------------------------------------------------------------------

    \20\ See also Comments of EEI at 10 (asserting that the term 
``legitimate business purpose'' is vague and would, if adopted, 
create market uncertainty); Reply Comments of Mirant and TransAlta 
at 16.
---------------------------------------------------------------------------

    28. For others, the term ``legitimate business purpose'' is 
insufficient because it will allow sellers who should be sanctioned to 
justify their bad conduct. The National Association of State Utility 
Consumer Advocates (NASUCA) points out that this term, if approved, 
will invite market participants to try to excuse actions that are 
manipulative but that were undertaken to promote some imaginable 
business purpose.
    29. Other commenters focus their concerns on the term ``legitimate 
forces of supply and demand.'' EPSA, et al. suggest that there is 
little consensus as to what price might result from the unfettered 
interplay among these market forces because there is little consensus 
as to how to value scarcity, how supply and demand interact to set 
prices, when to allow reserves and/or demand response to set the market 
clearing prices, what the proper components of marginal cost are, and 
when mitigation is appropriate. EPSA, et al. assert that without a 
clearer consensus on the proper approach to price formation, the 
proposed term will result in a great deal of controversy and expensive 
litigation to address issues that would be better resolved in other 
forums. In addition, EPSA, et al. submit that any attempt to 
reconstruct the legitimate forces of supply and demand in a complex 
market in which the interaction of the parties affects the outcome is 
virtually impossible.
    30. Numerous commenters also argue that as a means of limiting the 
proposed rule and better defining it, an intent standard must be 
adopted (a recommendation also made with respect to certain other 
Market Behavior Rules, as discussed below).\21\ EME argues that without 
intent to manipulate the proposed rule, it would be unfair to punish 
market participants for actions that are economically justifiable and 
within the bounds of these rules are properly undertaken to maximize 
returns in a competitive market. Southern adds that to address these 
concerns, Market Behavior Rule 2 should be modified to prohibit sellers 
from ``knowingly'' engaging in the conduct prohibited by the rule 
``with the intent'' to manipulate market prices, with a ``showing that 
the seller actually succeeded in its efforts to manipulate the 
market.''\22\
---------------------------------------------------------------------------

    \21\ See e.g., Comments of EEI at 10; Comments of EPSA, et al. 
at 8-12; Comments of Exelon at 6; Comments of Southern at 12; 
Comments of Edison Mission Energy (EME) at 6; Comments of Pinnacle 
West at 6; and Comments of Reliant at 6.
    \22\ Other commenters propose similar language incorporating 
this element of intent. See e.g., Comments of EPSA, et al. 
(prohibiting actions or transactions without a legitimate purpose 
``and which are intended to'' manipulate or attempt to manipulate 
market prices); Comments of Reliant at 6 (prohibiting actions or 
transactions ``undertaken'' without a legitimate business purpose 
``and intentionally to'' manipulate market prices).
---------------------------------------------------------------------------

    31. Reliant also argues that the term ``electric energy products,'' 
as used in the proposed rule, is undefined and

[[Page 65906]]

otherwise unnecessary. Reliant notes the proposed rule already 
prohibits manipulation of market prices and that this prohibition 
covers prices associated with any jurisdictional product, whether 
energy, ancillary services, transmission, or any other.
    32. The New York State Public Service Commission (New York 
Commission) requests that the Commission clarify that sellers are bound 
by the actions or transactions of their affiliates, as they relate to 
this rule. The New York Commission states that absent this 
clarification, sellers would be permitted to sidestep this rule by way 
of affiliate gaming practices. The New York Commission concludes that 
if a seller's affiliate violates a Market Behavior Rule in a way that 
improperly raises market prices and the seller enters into long-term 
contracts that benefit from that price, the seller's contract should be 
governed by this rule just as if the contracts had been signed by the 
affiliate.
    33. Commenters also express concerns regarding the general impact 
of the proposed rule on the marketplace as a whole. EPSA, et al. claim 
that without greater specificity and clarity, the proposed rule will 
lead to excessive litigation. EEI speculates that sellers engaging in 
proscribed transactions will rely on the ambiguity in the proposed rule 
to defend their bad conduct. East Texas Cooperatives and First Energy 
suggest that the over-breadth of the proposed rule will prohibit or at 
least chill legitimate business behavior. The New York ISO submits that 
with the uncertainty engendered by the proposed rule, higher market 
prices may be necessary to induce construction of new generation in New 
York and in other regions.
    34. Finally, the Federal Trade Commission (FTC) argues that 
structurally competitive markets that foster ease of entry are critical 
to efficient pricing, output, and investment, and are more likely to 
protect consumers than would the proposed rule. The FTC also suggests 
that because there may be conflicts between antitrust law and the 
meaning of the terms used by the Commission in the proposed rule (e.g., 
the term ``without a legitimate business purpose''), the Commission 
should limit and better focus its rule such that it would only prohibit 
sellers from engaging in conduct that violates the antitrust laws.
3. Commission Ruling
    35. We will adopt the prohibition against market manipulation, as 
set forth in Market Behavior Rule 2, as revised. As revised, the rule 
provides:

    Actions or transactions that are without a legitimate business 
purpose and that are intended to or foreseeably could manipulate 
market prices, market conditions, or market rules for electric 
energy or electricity products are prohibited. Actions or 
transactions undertaken by Seller that are explicitly contemplated 
in Commission-approved rules and regulations of an applicable power 
market (such as virtual supply or load bidding) or taken at the 
direction of an ISO or RTO are not in violation of this Market 
Behavior Rule.

    36. Our rule, as revised, balances the need to provide sellers 
clearly-defined rules of the road 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. This 
objective is satisfied, here, by our reliance on a prohibition that is 
broad enough in its reach and yet clear enough in its focus to capture 
manipulative conduct in all its forms. Our rule, in essence, is 
designed to prohibit market-based rate sellers from taking actions 
which interfere with the prices that would otherwise be set by 
competitive forces, or from manipulating market conditions or market 
rules.\23\ This standard, which recognizes that manipulative actions 
engaged in by sellers are not undertaken for a legitimate business 
purpose, has been applied by the Commission in the past.\24\ For the 
reasons discussed herein, we apply it now to all market-based rate 
sellers.
---------------------------------------------------------------------------

    \23\ An example of sellers' ability to manipulate market 
conditions is discussed in Section C, below, relating to wash 
trades. An example of sellers' ability to manipulate market rules is 
discussed in Section D (submission of false information) and Section 
E (creation of artificial congestion). An example of seller's 
ability to manipulate market prices is discussed in Section F 
(collusive acts).
    \24\ See Enron Power Marketing, Inc., 103 FERC ] 61,343 (2003) 
(Enron) (revoking Enron's blanket marketing certificate 
authorization based on Enron's participation in wash trades having 
``no legitimate business purpose'').
---------------------------------------------------------------------------

    37. In doing so, we clarify that transactions with economic 
substance, in which a seller offers or provides service to a willing 
buyer and where value is exchanged for value, are not prohibited by our 
rule. While commenters question the usefulness of the term ``legitimate 
business purpose,'' in this context, we note that our reliance on this 
measure will ensure that sellers acting in a pro-competitive manner 
will have the opportunity to show that their actions were not designed 
to distort prices or otherwise manipulate the market. Behaviors and 
transactions with economic substance will thus be recognized as 
reflecting a legitimate business purpose consistent with just and 
reasonable rates.
    38. However, an action or transaction which is anticompetitive 
(even though it may be undertaken to maximize seller's profits), could 
not have a legitimate business purpose attributed to it under our rule. 
If, for example, a seller is shown to have caused, or attempts to 
cause, an artificial shortage by physically withholding sufficient and 
otherwise available power from the market for the purpose of raising 
the sales price obtainable by other units participating in the market--
the seller may be found to have engaged in market manipulation, as 
prescribed by Market Behavior Rule 2, i.e., under these circumstances, 
there can be no legitimate business purpose attributable to such 
behavior.\25\
---------------------------------------------------------------------------

    \25\ The available supply, in this instance, would have been 
withheld from the market without a legitimate business purpose with 
the objective of distorting the price of the remaining supply. 
Conversely, if the power was withheld due to a forced or planned 
outage, environmental restrictions, labor disruption, or similar 
business purpose, the resulting transaction would be reflective of a 
competitively derived price and would not be found to be 
manipulative. In this regard, we reject NASUCA's concern, i.e., that 
sellers can fabricate legitimate business purposes where there are 
none. In fact, the Commission is well equipped, on a case-by-case 
basis, to determine whether the motives ascribed to transactions by 
sellers are legitimate or not legitimate.
---------------------------------------------------------------------------

    39. Our prohibition against market manipulation is not the only 
tool we intend to rely upon to ensure competitive markets.\26\ It is, 
however, a necessary tool, because it reflects the reality that we 
oversee a dynamic and evolving market where addressing yesterday's 
concerns may not address tomorrow's. As we apply Market Behavior Rule 
2, moreover, we will be mindful of the fact that we are not only taking 
steps to assure just and reasonable rates for a specific transaction 
but are also providing guidance to sellers in general. As such, in 
determining the appropriate remedy for violations of this rule, we will 
take into account factors such as how self evident the violation is and 
whether such violation is part of a pattern of manipulative behavior.
---------------------------------------------------------------------------

    \26\ See infra Section L.
---------------------------------------------------------------------------

    40. As recommended by commenters, we will strike from our 
prohibition the proposed term that would have characterized, as 
manipulative behavior, an act resulting in ``market prices which do not 
reflect the legitimate forces of supply and demand.'' While we do not 
believe that our use of this term was inappropriate or unjustified (as 
we intended it), many commenters appear to have misunderstood its 
purpose, suggesting that other causes (e.g., the

[[Page 65907]]

lack of elasticity of demand in an organized market) may explain a 
given dysfunction in the interplay between supply and demand. To avoid 
confusion on this point, then, and because our objectives with respect 
to this rule can be satisfied under the surviving clause, discussed 
above, we have eliminated this term from our rule. We clarify, then, 
that our rule is not meant to say that we will identify prices that 
properly reflect supply and demand and then take action against sellers 
whose prices (however they may be established) differ. Rather, our rule 
is designed to prohibit market-based rate sellers from taking actions 
without a legitimate business purpose which intend to or foreseeably 
could interfere with the prices that would be set by competitive 
forces.\27\
---------------------------------------------------------------------------

    \27\ The rule, then, covers actions that are intended to 
manipulate prices regardless of whether these actions actually 
accomplish their purpose. We note, however, that in most such cases, 
there will be no unjust profits to disgorge.
---------------------------------------------------------------------------

    41. We will reject commenters' argument that Market Behavior Rule 2 
should identify and prohibit only expressly-defined acts of 
manipulation. For all the reasons discussed above, it is essential and 
appropriate that we have a prohibition designed to prohibit all forms 
of manipulative conduct. In approving such a prohibition, moreover, we 
take the necessary safeguards, both procedural and substantive. Thus, 
in the event the Commission receives a complaint about a particular 
behavior or identifies such behavior on its own, we will inquire into 
all of the surrounding facts and circumstances to understand the 
purpose for which the behavior was undertaken and the intended or 
foreseeable outcome of the behavior.
    42. As a threshold matter, the Commission will evaluate if the 
facts presented appear to warrant further inquiry into whether the 
transaction appears to be of a questionable purpose. For example, 
actions or transactions undertaken at the direction of an ISO or an RTO 
are not, by definition, market manipulation in violation of our rule. 
In determining whether an activity is in violation of our rule, we will 
evaluate whether the activity was designed to lead to (or could 
foreseeably lead to) a distorted price not reflective of a competitive 
market.\28\ If, thereafter, the market-based rate seller can establish 
that the behavior at issue was undertaken to provide service to a buyer 
with rates, terms, and conditions disciplined by the competitive forces 
of the market, we would find the transaction to have a legitimate 
business purpose and its rates to reflect a just and reasonable 
competitive level.
---------------------------------------------------------------------------

    \28\ When deciding how best to allocate our enforcement 
resources, we intend to focus our efforts primarily on those actions 
or transactions that have, in fact, caused distorted market prices.
---------------------------------------------------------------------------

    43. Our approach to the enforcement of our rules, then, will be 
based on a consideration of the facts and circumstances of the conduct 
at issue to determine its purpose and intended or foreseeable result. 
We recognize that manipulation of energy markets does not happen by 
accident. However, we also recognize that intent often must be inferred 
from the facts and circumstances presented. Therefore, a violation of 
Market Behavior Rule 2 must involve conduct which is intended to, or 
could foreseeably result in, distorted prices.
    44. While we believe that this approach to identifying and 
remedying market manipulation is necessary, we also believe it is fair. 
We believe, for example, that sellers can recognize the difference 
between actions and strategies that are in furtherance of legitimate 
profit opportunities, or which serve important market functions, and 
those that result in prices that would not have been bid or paid in the 
absence of manipulation. We expect our enforcement and complaint 
procedures, as approved herein, will allow us to timely examine and 
fairly determine, on a case-by-case basis, when, and if, a strategy 
employed by a seller lacks a legitimate business purpose.
    45. Moreover, while our rules will apply to all jurisdictional 
markets, we note these rules will 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'' tests 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 
adopted herein 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.
C. Market Behavior Rule 2(a) (Prohibition Against Wash Trades)
1. Commission Proposal
    46. In addition to the prohibition against market manipulation set 
forth in proposed Market Behavior Rule 2, we also proposed to prohibit 
wash trades as a specific transaction that would be prohibited under 
our proposed rule, i.e., ``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.''
2. Comments
    47. The New York ISO suggests that as an alternative to this 
express prohibition, the Commission should rely on the ISO (or RTO) 
market monitoring unit to craft and implement rules specifically 
tailored to address improper conduct if and as it arises.\29\ The New 
York ISO also states that even if this express prohibition is adopted, 
the relevant aspects of the proposed rule should be incorporated into 
the reporting requirement embodied in Market Behavior Rule 4 (discussed 
below).
---------------------------------------------------------------------------

    \29\ As discussed below, the New York ISO makes the same 
suggestion as it relates to Market Behavior Rules 2(b) and 2(c).
---------------------------------------------------------------------------

    48. NASUCA asserts that the proposed definition of ``wash trade'' 
is too narrow, allowing sellers to evade regulation by slightly 
altering their transactions as they relate to price or quantity. The 
California Electricity Oversight Board (Cal Oversight Board) agrees, 
noting that by contrast, the Commodity Exchange Act defines wash trades 
as transactions producing ``a virtual financial nullity because the 
resulting net financial position is near or equal to zero.'' \30\ The 
Cal Oversight Board further asserts that if the Commission's wash trade 
prohibition is limited to the ``same parties,'' as proposed, the 
Commission would be unable to sanction transactions entered into 
between independent or affiliated third parties.
---------------------------------------------------------------------------

    \30\ Comments of the Cal Oversight Board at 10-11, citing 7 
U.S.C. 6c (2000) (emphasis added).
---------------------------------------------------------------------------

    49. Northeast Utilities argues that the proposed rule is too broad, 
prohibiting sellers from engaging in legitimate ``sleeve'' transactions 
and other legitimate transactions. EEI also asserts that the proposed 
rule could be applied to legitimate transactions in an unfair and 
unjustified way. EEI states, for example, that market participants 
sometimes engage in product swaps between different locations to avoid 
the need to use physical transmission and that these transactions are 
both useful and legitimate.\31\ To exempt such transactions from the 
prohibitions contemplated by Market Behavior Rule 2(a), therefore, EEI 
suggests that the qualifying language ``at the same location'' be added 
after the phrase

[[Page 65908]]

``pre-arranged, simultaneous, offsetting trades of the same service or 
product among the same parties.'' In addition, Duke Energy requests 
clarification that ``bookout'' transactions, in which companies with 
offsetting delivery obligations resulting from heavy trading activity 
agree not to deliver to one another the offsetting amounts of energy, 
not be regarded as a prohibited wash trade.\32\
---------------------------------------------------------------------------

    \31\ See also Comments of Dynegy at 8.
    \32\ See also Comments of Ontario Power Generation Inc. at 4.
---------------------------------------------------------------------------

    50. The New York ISO also identifies a transaction which it claims 
should not fall within the Market Behavior Rule 2(a) prohibition. The 
New York ISO states that when a market participant mistakenly buys 
instead of sells, or accidentally buys more energy or capacity than it 
needs, it may be required to close out of this erroneous position as 
quickly as possible. The New York ISO states that to do so, the market 
participant may wish to enter into an offsetting transaction, possibly 
with the same party or on the same trading platform. Such a 
transaction, the New York ISO contends, is legitimate and should not be 
prohibited.
    51. To clarify what would and what would not constitute a 
prohibited wash trade, Merrill Lynch, et al. propose that the rule 
specify what they claim are the three necessary elements of a ``wash 
trade:'' (i) A deliberately pre-arranged ``pair'' of trades; (ii) made 
at the same time, for the identical price, and at the same delivery 
point; (iii) between the same legal entities. Reliant proposes that 
Market Behavior Rule 2(a) be modified to encompass ``trades of the same 
product among the same parties, which trades are pre-arranged to be 
offsetting and involve no economic risk and no net change in beneficial 
ownership.'' Finally, for the same reason as noted above, commenters 
propose that an intent standard be adopted as it relates to Marker 
Behavior Rule 2(a).\33\
---------------------------------------------------------------------------

    \33\ See e.g., Comments of EPSA, et al. at Att. B, p. 3; 
Comments of EEI at 13; Comments of Pinnacle West at 7; Merrill 
Lynch, et al. at 8; Comments of Duke Energy at 36; Reply Comments of 
ANP, et al. at 3.
---------------------------------------------------------------------------

3. Commission Ruling
    52. We will adopt Market Behavior Rule 2(a), as proposed, to 
address, as a prohibited action or transaction:

    Pre-arranged offsetting trades of the same product among the 
same parties, which involve no economic risk and no net change in 
beneficial ownership (sometimes called ``wash trades'').

    53. As described in the Western Markets Report, market participants 
engaged in wash trading during the period 2000-01 and, as a result, 
distorted market liquidity as well as other indicators of market 
performance.\34\ As we have noted before and reiterate here, such 
activity should be considered a serious violation of the authority to 
sell power at market-based rates. Market Behavior Rule 2(a), therefore, 
expressly prohibits this activity by identifying the two key elements 
of a wash trade, i.e., transactions which are (i) prearranged to cancel 
each other out; and (ii) involve no economic risk.
---------------------------------------------------------------------------

    \34\ Western Markets Report at VI-1.
---------------------------------------------------------------------------

    54. EEI requests clarification that an exchange of power undertaken 
to avoid the procurement of a transmission service would not be 
considered a wash trade under our rule. We will grant EEI's request for 
clarification. As we understand the issue raised by EEI, the subject 
transactions would either be at different prices, transfer beneficial 
ownership, or both. As such, the exchange could not be characterized as 
a wash trade as we define it.
    55. Commenters identify additional transactions which would not 
meet our definition of a wash trade and therefore would not be 
prohibited under Market Behavior Rule 2(a). The New York ISO's 
identification of trades engaged in to correct a prior error, for 
example, would not constitute a prohibited wash trade under our rule, 
because trades such as these would not be ``prearranged'' to cancel 
each other out. In addition, each of the transactions described by the 
New York ISO would involve economic risk because the entity attempting 
to correct its mistake would be at risk for any price change which 
could occur over the time interval between the two trades. In fact, the 
purpose of the off-setting trade, in this instance, would be to address 
the economic risk imposed by the first trade.
    56. Other commenters concerns are also misplaced. We do not agree, 
for example, that a legitimate ``sleeve'' or ``bookout'' transaction 
could be characterized as a prohibited wash trade under our definition. 
Specifically, a sleeve is not an off-setting trade but rather a 
mechanism to accomplish a power sale among parties that have not 
established a credit relationship (involving in the transaction chain a 
third party seller that possesses the required creditworthiness).\35\ 
Similarly, a ``bookout'' is not a pre-arranged trade but rather a 
subsequent arrangement to financially close out a trade that was not 
prearranged and was undertaken (and, in fact, closed out) with economic 
risk.
---------------------------------------------------------------------------

    \35\ The two resulting sales (which are only offsetting to the 
``sleeving'' seller) are each with economic risk, with a change in 
beneficial ownership and, usually, at slightly different prices to 
reflect the use of the ``sleeving'' sellers' credit.
---------------------------------------------------------------------------

    57. In addition, while we agree with EEI, that it may be easier to 
undertake a wash trade that occurs at the same location, it may also be 
possible to engage in wash trades that involve more than one location. 
As such, we decline to revise our proposed rule as EEI requests.
    58. Commenters also argue that Market Behavior Rule 2(a) should be 
revised to include an intent standard, suggesting in effect that a wash 
trade could be executed without intent (or without an understanding as 
to its consequence) and should be excused, in this instance. We 
disagree. Wash trades, by their very nature, are manipulative and 
purposely so. By definition, parties to a wash trade intend to create 
prearranged off-setting trades with no economic risk. Thus, we know of 
no legitimate business purpose attributable to such behavior and no 
commenter has suggested one. Accordingly, wash trades, under our rule, 
will constitute a per se violation of Market Behavior Rule 2.
D. Market Behavior Rule 2(b) (Prohibition Against Transactions 
Predicated on Submission of False Information)
1. Commission Proposal
    59. In addition to the prohibition against market manipulation set 
forth in proposed Market Behavior Rule 2, we also proposed, as a 
specific action or transaction that would be prohibited, ``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).''
2. Comments
    60. Commenters raise three principal concerns regarding the 
proposed rule: (i) Its failure to include an intent standard; (ii) its 
apparent prohibition against virtual trading practices already 
permitted in organized markets; and (iii) its reference to a practice, 
i.e., to ``paper trades,'' for which, it is claimed, there is no common 
definition in the industry.
    61. First, commenters assert that an intent standard should be 
adopted in order to protect sellers from the imposition of sanctions 
relating to inadvertent or honest errors that were

[[Page 65909]]

not intended to manipulate market prices.\36\ To address this issue, 
EPSA, et al. recommend that Market Behavior Rule 2(b) be revised to 
prohibit actions or transactions predicated on ``knowingly'' submitting 
false information to transmission providers or other entities 
responsible for operation of the transmission grid ``with intent to 
manipulate the market.''\37\
---------------------------------------------------------------------------

    \36\ See Comments of EPSA, et al. at Attachment B, p.3; Comments 
of EEI at 14; Comments of AES at 26-27; Comments of FirstEnergy at 
9; Comments of Reliant at 10.
    \37\ EEI proposes a slight variation in this intent standard to 
prohibit actions or transactions ``predicated on intentionally 
submitting false information to transmission providers including 
ISOs and RTOs (such as scheduling non-firm service or products sold 
as firm; or conducting `paper trades' where an entity falsely 
designates resources and also fails to have those resources 
available and feasibly functioning).'' See Comments of EEI at 14. 
See also Comments of Reliant at 10 (``transactions predicated on 
submitting information known to be false'').
---------------------------------------------------------------------------

    62. Related to this same concern, Dynegy notes that due to 
forecasting errors, load forecasts and generation data are rarely 100 
percent accurate. Dynegy further notes that sellers often face 
unknowable circumstances relating to the timing and duration of derates 
or outages. Given these and related contingencies, Dynegy seeks 
clarification that Market Behavior Rule 2(b) is not intended to 
supersede or otherwise nullify existing practices and/or market rules 
which allow for variation between forecasted and actual outcomes. 
Similarly, AES seeks clarification that the proposed prohibition does 
not apply to situations where submitted load data or generation data 
was incorrect due to the occurrence of a legitimate and verifiable 
contingency, or situations that occur in the normal course of business 
and are separately governed by terms and conditions of tariffs already 
on file with the Commission.
    63. EEI also raises concerns regarding the interplay between the 
proposed rule and the existing practice known as virtual trading.\38\ 
EEI proposes that the following language be incorporated into the 
proposed rule: ``This prohibition [i.e., the prohibition set forth in 
Market Behavior Rule 2(b)] does not apply to transactions such as 
virtual trading that are an intentional part of an RTO or ISO market 
design.'' \39\ Finally, commenters assert that the term ``paper trade'' 
be deleted from the rule. Duke Energy claims, in this regard, that 
there is no common meaning in the industry for this term and thus it 
could refer to any number of transactions, many of which may be 
legitimate.
---------------------------------------------------------------------------

    \38\ A virtual trade can be distinguished from a physical trade 
that is actually scheduled to the extent that it involves no actual 
purchase (physical acquisition) or sale (physical disposition) of 
electricity. It is a purely financial transaction designed to 
capture an arbitrage opportunity. See, e.g., PJM Interconnection, 
L.L.C., 104 FERC ] 61,39 (2003).
    \39\ The interplay between the Market Behavior Rules and virtual 
trading is also raised by commenters in connection with Market 
Behavior Rule 2(c), discussed below.
---------------------------------------------------------------------------

3. Commission Ruling
    64. As discussed below, we will adopt Market Behavior Rule 2(b), 
subject to two revisions. As requested, we will adopt an intent 
standard applicable to our prohibition against the submission of false 
information to transmission providers or to other entities responsible 
for operation of the transmission grid, i.e., to be actionable under 
this rule, the seller's submittal must be knowingly false. Second, we 
will strike the example of ``paper trades'' from our illustrative, non-
exclusive list of submissions subject to our rule. As revised, Market 
Behavior Rule 2(b) will prohibit:

    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; or scheduling non-firm service or products sold as firm), 
unless Seller exercised due diligence to prevent such occurrences.

    65. Commenters generally agree, as do we, that a Market Behavior 
Rule addressing market manipulation appropriately includes within its 
prohibitions the submission of false information to transmission 
providers or other entities responsible for operation of the 
transmission grid. As requested, however, we are approving this rule 
subject to the clarification that inadvertent or honest errors will not 
constitute a prohibited act under Market Behavior Rule 2. Rather, to be 
actionable under this rule, it must be shown that a seller has 
knowingly submitted false information.
    66. This due diligence standard, however, will not be measured by 
the Commission with respect to the individual who actually tenders the 
data or who may otherwise be responsible for its submission. Rather, it 
will apply to the seller alone.\40\ In this regard, we expect the 
seller to have in place processes that will assure the sufficiency and 
accuracy of the submitted information, regardless of who is actually 
responsible for submitting the information. Where a seller does not 
have such processes in place, it can be no defense to this rule that 
the submission of data was made by a particular individual who did not 
personally know it to be false or incomplete.
---------------------------------------------------------------------------

    \40\ We make the same clarification, below, as it relates to 
Market Behavior Rules 2(d) and 3.
---------------------------------------------------------------------------

    67. Dynegy requests clarification that Market Behavior Rule 2(b) is 
not intended to supersede existing market rules which allow for 
variation between forecasted and actual demand or generation 
availability. We will grant Dynegy's request. We recognize that where 
required, both buyers and sellers submit information to transmission 
providers or other entities responsible for operation of the 
transmission grid based on forecasts. We understand that these 
forecasts are not and cannot be entirely accurate. Market Behavior Rule 
2(b), as approved herein, fully accommodates this reality by addressing 
the knowing submission of false information. Submitting information 
based on good faith estimates that turn out to be incorrect, then, 
would not be a case of knowingly submitting false information.
    68. Commenters also express concern that Market Behavior Rule 2(b) 
could be read to prohibit Commission-approved activities such as 
virtual bidding. While we do not believe that virtual bidding is 
premised on the knowing submission of false information, we explained 
in the June 26 Order,\41\ and reiterate here, that virtual bidding and 
other Commission-approved activities will not be considered actions 
taken in violation of our Market Behavior Rules. To underscore this 
point expressly (and as discussed above), we have revised the 
prohibition set forth in Market Behavior Rule 2 to provide that 
``[a]ctions or transactions undertaken by Seller which are explicitly 
contemplated in Commission-approved rules and regulations of an 
applicable power market (such as virtual supply or load bidding) are 
not in violation of the Market Behavior Rule 2.''
---------------------------------------------------------------------------

    \41\ June 26 Order, 103 FERC at n.18.
---------------------------------------------------------------------------

    69. Finally, based on commenters' objections, we have omitted the 
example of ``paper trade'' from our non-exclusive, illustrative list of 
submittals subject to Market Behavior Rule 2(b). We agree with Duke 
that because the term ``paper trade'' has no common meaning in the 
industry, at this time, using such an example to clarify the scope and 
reach of Market Behavior Rule 2(b) would not be beneficial.

[[Page 65910]]

E. Market Behavior Rule 2(c) (Prohibition Against Transactions Relating 
to the Creation of Artificial Congestion Followed by the ``Relief'' of 
Such Artificial Congestion)
1. Commission Proposal
    70. In addition to the prohibition against market manipulation set 
forth in proposed Market Behavior Rule 2, we also proposed, as a 
specific action or transaction that would be prohibited, ``transactions 
in which an entity first creates artificial congestion and then 
`relieves' such artificial congestion.''
2. Comments
    71. Colorado Consumer Counsel, et al. argue that, in addition to 
the prohibition set forth in the proposed rule, the Commission should 
also address how all gradations of congestion will be managed in a 
wholesale market context and how market power, during periods of 
congestion, will be constrained.
    72. Reliant asserts that the Commission's apparent focus in Market 
Behavior Rule 2(c) is on market designs like those in California that 
do not use locational marginal pricing (LMP) as a tool to manage 
congestion. Reliant states that, if so, the Commission should clarify 
that its rule does not apply in LMP markets. EEI also questions the 
need and scope of the rule, noting that any transaction that would 
create ``artificial congestion'' would necessarily involve the 
submission of false information, as encompassed within the prohibition 
set forth in Market Behavior Rule 2(b). EEI and Pinnacle West also 
argue that the prohibition set forth in the rule should not apply to 
transactions that are consistent with an RTO's or an ISO's rules.
    73. Reliant and EEI request that the Commission define what it 
means by ``artificial congestion'' because, in theory, this term could 
be construed to apply to (and thus be a sanction against) virtual 
transactions. Pinnacle West also requests clarification regarding the 
meaning of this term in this context.\42\
---------------------------------------------------------------------------

    \42\ See also Comments of the New York ISO at 12-13.
---------------------------------------------------------------------------

    74. The New York ISO also claims that Market Behavior Rule 2(c) 
requires clarification with respect to the day-ahead and real-time 
markets it operates. Specifically, the New York ISO claims that the 
proposed rule could be interpreted to prohibit changes in day-ahead 
schedules in response to changes in market conditions between the day-
ahead and real-time markets, i.e., to prohibit legitimate arbitrage 
between forward and real-time markets. Such a prohibition, it is 
argued, would be harmful to these markets because it would restrict 
market participants from responding in a competitive manner to the 
forces of supply and demand. The New York ISO explains that, in 
practice, congestion that may exist in the forward market may not exist 
in the real-time market, where market participants are permitted to 
respond competitively to these changed conditions. The New York ISO 
concludes that Market Behavior Rule 2(c) should be read to permit such 
responses in the real-time market.
    75. Commenters also assert that Market Behavior Rule 2(c) should be 
modified to incorporate an intent standard.\43\ EPSA, et al. recommend 
that the prohibition apply to transactions in which an entity ``intends 
to'' first create artificial congestion and then relieve such 
artificial congestion.\44\
---------------------------------------------------------------------------

    \43\ See Comments of EPSA, et al. at Attachment B, pp. 3-4; 
Comments of Reliant at 10-11.
    \44\ See also Comments of Reliant at 10 (transactions in which 
an entity ``intends first to create'' artificial congestion and then 
``to purport to relieve'' such artificial congestion); Comments of 
EEI at 15 (``intentionally engaging in transactions or scheduling 
resources that qualify for a congestion relief payment with the 
intent of profiting for relieving that congestion and canceling 
later is prohibited. This prohibition does not apply to transactions 
consistent with markets'').
---------------------------------------------------------------------------

3. Commission Ruling
    76. We will adopt Market Behavior Rule 2(c), subject to the 
inclusion of an intent standard, as requested by commenters. As 
revised, Market Behavior Rule 2(c) will address, as a prohibited 
transaction:

    Transactions in which an entity creates artificial congestion 
and then purports to relieve such artificial congestion (unless 
Seller exercised due diligence to prevent such an occurrence).

    77. Commenters generally agree, as do we, that a Market Behavior 
Rule addressing market manipulation should include as an express 
prohibition transactions predicated on the creation and subsequent 
``relief'' of artificial congestion. Experience has shown that in 
certain markets (including, in particular, markets that have not 
adopted an LMP market design) activities of this nature have been 
undertaken for the purpose of generating revenue without the occurrence 
of any corresponding economically substantive transaction.\45\ Market 
Behavior Rule 2(c) makes clear that market manipulation of this sort, 
to the extent it can occur, has no legitimate business purpose and is 
therefore prohibited.
---------------------------------------------------------------------------

    \45\ See Western Markets Report at VI at 26-30.
---------------------------------------------------------------------------

    78. We agree with commenters, however, that Market Behavior Rule 
2(c) should be revised to include an intent standard, i.e., that the 
prohibition set forth in this rule should be predicated on a seller 
having knowingly committed the prohibited conduct. As we held, above, 
in addressing the use of this intent standard in the context of Market 
Behavior Rule 2(b), however, this due diligence exception will be 
applied only to the entity subject to this rule, i.e., to the seller 
itself, not the individual acting on behalf of the seller who may have 
engaged in or otherwise authorized the prohibited conduct.\46\
---------------------------------------------------------------------------

    \46\ We make this same clarification, below, as it relates to 
Market Behavior Rule 3.
---------------------------------------------------------------------------

    Moreover, we will find that the seller has knowingly violated this 
rule where the prohibited conduct is found to have occurred in the 
absence of adequate internal procedures designed to prohibit its 
occurrence.
    79. Commenters also request clarification regarding the scope and 
definition of the term artificial congestion, as it will be interpreted 
by the Commission in the context of our rule. We will grant these 
requests and hereby clarify that artificial congestion, under our rule, 
will be understood to include all forms of congestion that may result 
from scheduling power flows in an uneconomic manner for the purpose of 
creating congestion (real or perceived).
    80. Finally, the New York ISO seeks clarification that the 
prohibition set forth in Market Behavior Rule 2(c) is not intended to 
be applied in those cases where a market participant may be 
legitimately responding to changing circumstances relative to the day-
ahead and real time markets. The New York ISO points out that from 
time-to-time, there may be a level of congestion in the day-ahead 
markets that is not present in real-time markets because market 
participants can respond to changing conditions. The New York ISO 
requests clarification that such real time responses to congestion that 
were anticipated in the day-ahead markets will not be prohibited under 
our rule. We will grant the requested clarification. The market 
responses addressed by the New York ISO reflect appropriate behavior 
which is reactive to the price signals emanating from the LMP 
congestion management system. Market conduct of this sort will not be 
characterized as a prohibited act under our rule.

[[Page 65911]]

F. Market Behavior Rule 2(d) (Prohibition Against Certain Collusive 
Acts)
1. Commission Proposal
    81. In addition to the prohibition against market manipulation set 
forth in proposed Market Behavior Rule 2, we proposed, as a specific 
action or transaction that would be prohibited, ``collusion with 
another party for the purpose of creating market prices at levels 
differing from those set by market forces.''
2. Comments
    82. Commenters generally support a market behavior rule directed 
towards non-competitive collusive acts or transactions, but argue that 
Market Behavior Rule 2(d) should include language (and should be 
interpreted) consistent with federal antitrust laws and thus not read 
to create new or different norms of permissible behavior.\47\ The New 
York ISO agrees, noting that the antitrust laws include a significant 
volume of precedents dealing with the appropriate meaning and scope of 
such terms as ``collusion'' and ``unlawful constraints on 
competition.''
---------------------------------------------------------------------------

    \47\ See Comments of the FTC at 13; Comments of EPSA, et al. at 
Attachment B, p. 4; Comments of EMI at 7; Comments of EEI at 15; 
Comments of Duke Energy at 37.
---------------------------------------------------------------------------

    83. The New York ISO also points out that Market Behavior Rule 
2(d), in its proposed form, varies with federal antitrust laws in a way 
that it should not. Specifically, the New York ISO asserts that the 
term ``for the purpose of creating market prices,'' as used in the 
proposed rule, suggests a reliance on an intent standard contrary to 
the accepted antitrust approach to collusion. In addition, the New York 
ISO argues that the proposed rule's focus on prices to the exclusion of 
non-price considerations is also inconsistent with federal antitrust 
law. Finally, the New York ISO suggests that the term ``market 
forces,'' as used in the proposed rule, departs from the antitrust term 
``competition'' and the focus of the antitrust laws on the 
``unreasonable restraint of competition.''
    84. The FTC also addresses these issues. The FTC points out that 
some seller conduct could violate both the antitrust laws and Market 
Behavior Rule 2, while other conduct could violate the Commission's 
rule (because it may be unjust and unreasonable) but not the antitrust 
laws. The FTC submits that to avoid potential conflicts in policing 
anti-competitive behavior, the Commission should reaffirm its general 
rule that sellers with market-based rate authority are prohibited from 
engaging in conduct that would violate the antitrust laws.
3. Commission Ruling
    85. We will adopt Market Behavior Rule 2(d), as revised, to 
prohibit Sellers from engaging in:

    Collusion with another party for the purpose of manipulating 
market prices, market conditions, or market rules for electric 
energy or electricity products.

    86. To avoid possible confusion regarding the interpretation and 
scope of the term proposed in the June 26 Order (concerning ``market 
prices [set] at levels differing from those set by market forces), we 
are replacing this term with language consistent our prohibition 
(``manipulating market prices, market conditions, or market rules for 
electric energy or electricity products''). Thus, we are prohibiting 
market manipulation undertaken by one seller acting alone and we are 
prohibiting market manipulation undertaken collectively.
    87. As noted above, commenters, while disagreeing over the scope of 
our rule, generally agree that a specific market manipulation 
prohibition addressing collusive acts is both appropriate and 
necessary. EEI, for example, states that it agrees with the underlying 
concept embodied in the rule, while Duke concludes that the 
Commission's rule legitimately targets collusive activity. EPSA, 
moreover, as part of its code of ethics and sound trading practices, 
has adopted a similar standard.\48\
---------------------------------------------------------------------------

    \48\ The EPSA standard prohibits parties from colluding with 
other market participants to affect the price or supply of power, 
allocate territories, customers or products, or otherwise unlawfully 
restrain competition.
---------------------------------------------------------------------------

    88. EEI, however, suggests that our prohibition should simply 
incorporate by reference existing federal antitrust law and its 
jurisprudence, while EPSA, et al. (reaching the same conclusion) points 
out that the Commission's proposed prohibition is too vague and 
overbroad because, among other things, there is no widespread consensus 
in the industry on the meaning of the term ``creating market prices at 
levels differing from those set by market forces.''
    89. We disagree with these assertions. While commenters are correct 
in their observation that the prohibition set forth in Market Behavior 
Rule 2(d), as applied, may be similar in certain respects to the 
prohibitions set forth in federal antitrust law, specifically to the 
prohibitions against unreasonable restraints of trade as set forth in 
the Sherman Anti-Trust Act,\49\ our authority as it relates to Market 
Behavior Rule 2(d) derives not from federal antitrust law, but rather 
from the FPA itself and its requirement that all rates and charges 
made, demanded, or received by any public utility subject to our 
jurisdiction and all rules and regulations affecting or pertaining to 
such rates and charges be just and reasonable. Our approach includes 
elements of anti-trust law but is not limited to such. For example, it 
also encompasses ``partnerships'' whose existence do not implicate 
anti-trust concerns.\50\
---------------------------------------------------------------------------

    \49\ See 15 U.S.C. 1 (2000).
    \50\ See Enron Power Marketing, Inc., et al., 103 FERC ] 61,346 
(2003) (Enron Partnerships Order) (requiring Enron and other 
entities with whom it had partnerships or other arrangements to show 
cause why they should not be found to have jointly engaged in 
manipulation schemes).
---------------------------------------------------------------------------

    90. Thus, we need not address, here, whether or to what extent 
federal antitrust law may be broader in scope, in certain instances, or 
more narrow in scope, in other cases. Federal antitrust law, rather, 
will apply to sellers in the judicial proceedings or other authorized 
settings in which it is found to apply. Our rule, on the other hand, 
will be governed by the unique facts and circumstances at play in the 
wholesale electric industry and will be interpreted by the Commission 
consistent with our statutory duties relating to these issues.\51\
---------------------------------------------------------------------------

    \51\ See e.g., Pennsylvania Water & Power Co. v. FPC, 193 F.2d 
230, 236 (DC Cir. 1951) (``A rate is not necessarily illegal because 
it is the result of a conspiracy in restraint of trade in violation 
of the Anti-Trust Act. What rates are legal is determined by the 
regulatory statute.'' [cit. omit.]).
---------------------------------------------------------------------------

    91. We also disagree that the Commission's standard is vague and 
overbroad and thus will not give sellers adequate notice of the conduct 
it requires or prohibits. While we address commenters' due process 
challenges in greater detail in Section N, below, we note here, with 
respect to Market Behavior Rule 2(d) in particular, that our rule 
merely expands upon the prohibition against market manipulation set 
forth in Market Behavior Rule 2. As discussed above, moreover, this 
prohibition is limited to actions or transactions that do not have a 
legitimate business purpose. As such, a seller cannot be found to have 
violated the prohibition set forth in Market Behavior Rule 2(d) where 
the conduct at issue (as known to the seller itself, in the first 
instance) has a legitimate business purpose. This limitation, we 
believe, puts sellers on adequate notice regarding the scope of our 
rule.
    92. Finally, we do not agree that the industry lacks an 
understanding regarding the meaning of the terms referred to in our 
rule. These terms, rather, have more than a mere

[[Page 65912]]

hypothetical or theoretical existence, as our recent experience 
relating to collusion in the Western markets aptly demonstrates.\52\
---------------------------------------------------------------------------

    \52\ See Enron Partnerships Order, 103 FERC at P46.
---------------------------------------------------------------------------

G. Market Behavior Rule 2(e) (Prohibition Against Certain Bidding 
Behavior).
1. Commission Proposal
    93. In addition to the prohibition against market manipulation, as 
set forth in proposed Market Behavior Rule 2, we also proposed, as a 
specific action or transaction that would be prohibited, ``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.''
2. Comments
    94. Commenters challenge Market Behavior Rule 2(e) on a number of 
grounds. As a legal matter, EEI and others assert that the proposed 
rule is vague and overbroad, thus failing to provide market 
participants with sufficient notice of the conduct it would require or 
prohibit.\53\ The New York ISO adds that the proposed rule fails to 
make any distinction between competitive and anti-competitive behavior 
or set a threshold that would permit market participants to have 
reasonable flexibility to adjust their bidding behavior in conformance 
with legitimate market forces. AES asserts that the proposed rule is 
vulnerable to misinterpretation and would require substantial oversight 
on the part of regulators.
---------------------------------------------------------------------------

    \53\ See Comments of EEI at 17; Comments of Southern at 14; 
Comments of InterGen at 15; Comments of Reliant at 11.
---------------------------------------------------------------------------

    95. Commenters also argue that the rule, if implemented, should 
adopt an intent standard, among other revisions. Reliant argues that 
inadvertent misrepresentations should not be considered violations of 
the rule and should not subject a seller to the same penalties that 
would attach to intentional violations. FirstEnergy adds that a seller 
should not be penalized for the types of action prohibited by the rule 
absent a showing that the actions at issue were intended to raise 
market prices above competitive levels.
    96. Commenters also address whether and to what extent the proposed 
rule should define and more squarely address the concepts of physical 
withholding and economic withholding on an industry-wide basis.\54\ 
Reliant asserts that its proposed definition of physical withholding 
would include an intent requirement and, with respect to subsection 
(b), would note that there may be legitimate reasons for not complying 
with a must-offer requirement.\55\ EPSA, et al. add that the 
Commission's rule against physical withholding should include safe 
harbor language that would not require sellers to run their units in 
certain specified circumstances (e.g., when doing so would risk 
jeopardizing public health and safety or damaging the seller's 
facilities, in order to comply with facility licensing, environmental 
or other legal requirements; or when doing so would be uneconomic under 
the given circumstances).
---------------------------------------------------------------------------

    \54\ Reliant proposes that the rule be revised to adopt the 
following standard relating to physical withholding: Entities may 
not physically withhold the output of an Electric Facility 
(Generating unit or Transmission Facility) by (a) intentionally 
falsely declaring that an Electric Facility has been forced out of 
service or otherwise become unavailable, or (b) intentionally 
failing to comply with any applicable must-offer conditions of a 
participating generator agreement.
    \55\ See also Comments of EEI at 16-17 (noting that generating 
capacity may be withheld from the market for reasons not associated 
with anti-competitive activity).
---------------------------------------------------------------------------

    97. Commenters also raise a number of concerns regarding the 
definition and scope of the term economic withholding, as it might be 
applied by the Commission under its proposed Market Behavior Rule 2(e) 
standard. The New York ISO asserts that any prohibition on withholding 
supply from the market should not be triggered by the inclusion of 
legitimate opportunity costs in a unit's bid. Reliant, on the other 
hand, asserts that defining what would and what would not constitute 
withholding under the proposed rule is virtually undoable.
    98. Finally, EEI asserts that because Market Behavior Rule 1 and 
Market Behavior Rule 2(b) require sellers to operate their generation 
units consistent with RTO and ISO rules and prohibit the submission of 
false information, Market Behavior Rule 2(e) is redundant and 
unnecessary. The New York ISO claims that the prohibitions contemplated 
by the rule could be implemented by existing market mitigation measures 
approved by the Commission.
3. Commission Ruling
    99. We agree with commenters that Market Behavior Rule 2(e) is 
redundant and unnecessary and therefore will not adopt it. For the 
reasons discussed below, we find that Market Behavior Rule 1 
sufficiently addresses the concerns we intended to address in proposing 
the express prohibition embodied in Market Behavior Rule 2(e).
    100. Several commenters appear to have misread the intent of our 
proposed rule. They suggest that, if implemented, the proposed rule 
would have imposed a must-offer condition in markets in which such a 
requirement is not currently in effect. However, we did not intend to 
create this or any other new substantive obligation applicable to 
sellers, i.e., obligations other than those which already apply to 
sellers in the markets in which they operate. Our intent, rather, was 
simply to provide clarity regarding a specific form of market 
manipulation that would, as proposed, be expressly prohibited under 
Market Behavior Rule 2.
    101. Because our proposed rule related to ``bidding'' into 
organized markets and to misrepresentations concerning the 
``operational capabilities of generation facilities,'' commenters are 
correct that the requirements addressed by our proposed rule were 
necessarily tied to the existing requirements of the applicable power 
markets in which sellers operate and thus were already addressed by the 
unit operation requirements addressed in Market Behavior Rule 1. Given 
this overlap, i.e., this redundancy in our proposed rules, we agree 
with those commenters who assert that Market Behavior Rule 2(e), as 
proposed, is unnecessary and should be rejected.
    102. In reaching this conclusion, however, we are not finding that 
physical withholding,\56\ or economic withholding,\57\ cannot be a 
component of an activity that constitutes market manipulation, as 
prescribed by Market Behavior Rule 2.\58\ Nonetheless, we clarify here 
that seller's compliance with Market Behavior Rule 1, i.e., with the 
Commission-approved bidding and outage reporting rules in organized 
markets, should be sufficient to meet a sellers' obligations concerning 
bidding and reporting requirements with respect to a generating 
facility, absent seller's participation in manipulative conduct.
---------------------------------------------------------------------------

    \56\ The term ``physical withholding'' means not offering 
available supply in order to raise the market clearing price. Such a 
strategy is only profitable for a firm that benefits from the higher 
price in the market.
    \57\ The term ``economic withholding'' means bidding available 
supply at a sufficiently high price in excess of the supplier's 
marginal costs and opportunity costs so that it is not called on to 
run and where, as a result, the market clearing price is raised. 
Such a strategy is only profitable for a firm that benefits from the 
higher price in the market.
    \58\ To the extent this behavior violated any Commission-
approved bidding rules in the applicable power market, moreover, it 
could also be found to be a violation of Market Behavior Rule 1.

---------------------------------------------------------------------------

[[Page 65913]]

 H. Market Behavior Rule 3 (Communications)
1. Commission Proposal
    103. In the June 26 Order, we proposed that sellers be required to 
``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, [RTOs, ISOs], or 
similar entities.'' We sought 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 sought comment on whether this remedial 
authority would serve as a useful and appropriate tool in ensuring just 
and reasonable rates.
2. Comments
    104. Commenters argue that the proposed rule should only prohibit 
violations knowingly committed.\59\ Reliant points out that accidental 
violations, including mistakes made when responding to a request for 
data, or a reasonable but erroneous understanding of the type or scope 
of information requested, should not constitute a violation of the 
rule. EEI adds that unintentional errors and omissions occur in the 
ordinary course of business. Similarly, EPSA, et al. submit that market 
participants should retain the right to challenge requests for 
information and to exercise their judgment in determining the adequacy 
of a response, subject to subsequent direction from the Commission.
---------------------------------------------------------------------------

    \59\ See Comments of EPSA, et al. at Attachment B, p.6; Comments 
of EEI at 18-19; Comments of Duke Energy at 38; Comments of Exelon 
at 13; Comment of Reliant at 18; Comments of MidAmerican Energy at 
5.
---------------------------------------------------------------------------

    105. Commenters also favor limitation of the proposed rule to 
``Commission-approved entities'' and thus the deletion of the proposed 
term ``or similar entities.''\60\ Commenters argue that the application 
of the rule to entities other than jurisdictional entities would create 
unnecessary confusion and uncertainty. Undue market uncertainty is also 
alleged with respect to the potential scope of the proposed rule. 
Dynegy, for example, argues that the term ``material information'' 
creates an overly high and ambiguous standard that is not required to 
protect sophisticated commercial entities.\61\ Similarly, Reliant 
submits that the word ``complete'' effectively requires sellers to 
become mind-readers in to order to avoid running afoul of the 
Commission's rule.\62\ Amerada Hess asserts that it should be left to 
the RTOs, ISOs, and the market monitors to specify what does and what 
does not fall within the scope of the rule. Finally, commenters argue 
that the rule should be modified to require that any entity receiving 
data pursuant to the rule have appropriate data confidentiality 
protocols in place in order to ensure the confidentiality of the data 
it receives.\63\
---------------------------------------------------------------------------

    \60\ See Comments of EPSA, et al. at Attachment B, p. 6; 
Comments of EEI at 18-19; Comments of Reliant at 18. But see 
Comments of the California Commission at 6 (proposing that the term 
``state regulatory authorities'' be added to the list of entities to 
whom accurate information must be be provided).
    \61\ See also Comments of EPSA, et al. at Attachment B, p. 6 
(noting that the word ``material'' is not currently defined).
    \62\ See also Comments of Central Vermont, et al. at 17.
    \63\ See Comments of Reliant at 18; Comments of EME at 8; 
Comments of Pinnacle West at 9.
---------------------------------------------------------------------------

3. Commission Ruling
    106. We will adopt Market Behavior Rule 3, as revised. As revised, 
Market Behavior Rule 3 will require a market-based rate seller to:

    Provide accurate and factual information and not submit false or 
misleading information, or omit material information in any 
communication with the Commission, Commission-approved market 
monitors, Commission-approved regional transmission organizations, 
Commission-approved independent system operators or jurisdictional 
transmission providers, unless Seller exercised due diligence to 
prevent such occurrences.

    107. In adopting this rule, we are emphasizing the need for market-
based rate sellers to act honestly and in good faith when interacting 
with the Commission or organizations and entities tasked by the 
Commission with the responsibility of carrying out non-discriminatory 
transmission access and wholesale electric market administration. The 
integrity of the processes established by the Commission for open 
competitive markets rely on the openness and honesty of market 
participant communications.
    108. We have modified the proposed rule, however, to make clear 
that it will only apply to communications with the Commission and 
entities subject to its jurisdiction. We believe that such 
clarification is appropriate to assure sellers that the information 
sought or provided hereunder will be directly related to the wholesale 
transactions for which they have received market-based rate authority.
    109. In addition, we clarify that this rule will not be a basis for 
a jurisdictional entity requesting or receiving information covered by 
this rule to compel the provision of such information or to fail to 
provide requested confidential treatment. The ability to compel the 
provision of information requested and determinations with respect to 
requests for confidential treatment will depend on the Commission-
approved rules and regulations of the institution requesting or 
receiving the information.
    110. We have also revised the rule to assure that inadvertent 
submission of inaccurate or incomplete information will not be 
sanctioned. As revised, the rule prohibits the knowing submission of 
false or misleading data.\64\ In this regard, we intend the ``due 
diligence'' exception to apply to the entity, not the individual, 
submitting the data. As such, we expect the seller submitting the 
information to have in place processes that assure the accuracy of the 
submitted information. The submission of false or incomplete 
information on behalf of a seller by an individual that did not 
personally know it to be false or incomplete in the absence of a 
process to insure data accuracy and sufficiency will not excuse the 
seller's conduct under this rule.
---------------------------------------------------------------------------

    \64\ As noted above, we make the same clarification as it 
relates to Market Behavior Rules 2(b) and 2(c).
---------------------------------------------------------------------------

 I. Market Behavior Rule 4 (Reporting)
1. Commission Proposal
    111. In the June 26 Order, we applied the prohibition against false 
reporting, as set forth in proposed Market Behavior Rule 3, to the 
reporting of price data to publishers of electricity or natural gas 
price indices. We proposed that to the extent sellers engage in 
reporting of transactions to publishers of electricity or natural gas 
price indices, sellers will be required to provide complete, accurate 
and factual information to any such publisher. We further proposed that 
sellers would be required to notify the Commission of whether they 
engage in such reporting for all sales and that in addition, sellers 
would be required to adhere to such other standards and requirements 
for price reporting as the Commission may order.
    112. We noted that Staff, in the Western Markets Report, supported 
the inclusion of such a requirement in sellers' market-based rate 
tariffs and authorizations.\65\ We sought comment

[[Page 65914]]

on whether our rule, 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. Finally, we noted that in Docket No. AD03-7-000, we 
were considering certain price formation issues, including a 
requirement covering the reporting of price data by jurisdictional 
entities.\66\ Accordingly, we proposed to condition our rule by stating 
that ``seller shall adhere to such other standards and requirements for 
price reporting as the Commission may order.''
---------------------------------------------------------------------------

    \65\ See June 26 Order, 103 FERC ] 61,349 at P28, citing Western 
Markets Report at ES-17. We also noted that 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.''
    \66\ Id. at P31.
---------------------------------------------------------------------------

2. Comments
    113. Issues raised by commenters with respect to the proposed rule 
generally mirror the concerns discussed above relating to Market 
Behavior Rule 3. These concerns include, principally, (i) the absence 
of an intent standard;\67\ (ii) the need for confidentiality when 
reporting transactions to publishers;\68\ and (iii) the importance of 
clarifying the scope of the information to be reported.\69\
---------------------------------------------------------------------------

    \67\ See Comments of EPSA, et al. at Attachment B, pp. 6-7; 
Comments of EEI at 20; Comments of MidAmerican Energy at 5; Reliant 
at 20; Comments of National Energy Marketers Association at 13; 
Comment of PG&E at 11; Comments of EME at 10.
    \68\ See e.g., Comments of EME at 10.
    \69\ See Comments of Central Vermont, et al. at 18; Comments of 
the FTC at 17-18; Comments of OPG at 5.
---------------------------------------------------------------------------

    114. With respect to scope, Platts submits that if the Commission 
does require sellers to state whether they report ``all sales'' to 
publishers, the Commission should further specify the information it 
expects to be provided. Platts argues that sellers should be required 
in their notification to state whether they are reporting their prices 
for electricity transactions, gas transactions or both, and to state to 
which publications they are reporting prices. Platts adds that sellers 
should be required to state that the information they provide to 
publishers includes all of the company's trading at all North American 
trading points, not merely a complete set of data for those points at 
which a seller chooses to report data.
    115. The Intercontinental Exchange, Inc. (Intercontinental) argues 
that since there are only a small number of index publishers relative 
to the hundreds of sellers, the Commission should compel index 
publishers to reveal the number of sellers reporting transaction-level 
data and the number of transactions reported for each index at each hub 
on a daily (for day-ahead indices) and monthly (for month-ahead 
indices) basis. Finally, NASUCA and TDU Systems argue that Market 
Behavior Rule 4 should require mandatory reporting in order to restore 
liquidity and confidence to electricity and natural gas markets. NASUCA 
submits that this requirement should apply to all purchases as well as 
sales.
3. Commission Ruling
    116. We will adopt Market Behavior Rule 4, as revised. As revised, 
Market Behavior Rule 4 will require that a market-based rate seller 
comply with the following:

    To the extent Seller engages in reporting of transactions to 
publishers of electricity or natural gas indices, Seller shall 
provide accurate and factual information, and not knowingly submit 
false or misleading information or omit material information to any 
such publisher, by reporting its transactions in a manner consistent 
with the procedures set forth in the Policy Statement issued by the 
Commission in Docket No. PL03-3 and any clarifications thereto. 
Seller shall notify the Commission within 15 days of the effective 
date of this tariff provision of whether it engages in such 
reporting of its transactions and update the Commission within 15 
days of any subsequent change to its transaction reporting status. 
In addition, Seller shall adhere to such other standards and 
requirements for price reporting as the Commission may order.

    117. In the June 26 Order, we referred to our on-going proceeding 
investigating price index formation in Docket No. AD03-7-000. As 
commenters note, since our proposal regarding these rules was issued, 
we have issued a Policy Statement addressing standards we believe 
appropriate for the formation of price indices that will be robust and 
accurate in the context of a voluntary reporting regime.\70\ Included 
in the Policy Statement is an allowance for a ``safe harbor,'' pursuant 
to which reporting errors would not be subject to Commission sanction 
(e.g., as seller's conduct may relate to Market Behavior Rule 4).
---------------------------------------------------------------------------

    \70\ See Price Discovery in Natural Gas and Electric Markets, 
104 FERC ] 61,121 (2003).
---------------------------------------------------------------------------

    118. In our rule, as revised herein, we explicitly adopt the 
standards set forth in the Policy Statement for transaction reporting. 
Further, we also adopt the ``safe harbor'' set forth therein as a 
component of our enforcement policy with respect to this rule. In 
addition, we make clear that all sellers will be required to inform the 
Commission of their ``reporting status'' within 15 days of the 
effective date of this revision to their tariff and within 15 days of 
any subsequent change in reporting status.
    119. Finally, several commenters suggest that we require mandatory 
reporting, while other commenters contend that we have created 
requirements that will have a chilling effect on reporting. We believe 
that we have struck an appropriate balance in our rule. For the moment, 
we are attempting to work within the framework of voluntary reporting. 
We are awaiting Staff's review of the comprehensiveness of reporting in 
the wake of our Policy Statement. At this time, we are not mandating 
reporting. We have engaged in a comprehensive investigation of 
transaction reporting and related issues and believe the practices set 
forth in our Policy Statement represent the necessary minimum for those 
entities that choose to report. Accordingly, we will not require 
reporting, here, but will set forth practical standards for entities 
that do report.
J. Market Behavior Rule 5 (Record Retention)
1. Commission Proposal
    120. In the June 26 Order, we noted that in the Western Markets 
Report, Staff recommended 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.\71\ Based on Staff's recommendation, 
we proposed and sought comment on the record retention guidelines set 
forth in Market Behavior Rule 5. Specifically, we sought comment on 
whether this Market Behavior Rule, as proposed, would ensure that 
companies adopt suitable retention policies permitting the Commission 
and interested entities to better monitor these transactions and 
practices.
---------------------------------------------------------------------------

    \71\ 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.''
---------------------------------------------------------------------------

2. Comments
    121. Commenters generally agree that a data retention requirement 
of some kind should be imposed on market-based rate sellers, but 
disagree over the number of years over which this requirement should 
apply. Some argue that the data retention period should be reduced from 
the proposed three-year period to a two-year or even one-year 
requirement,\72\ others request that it be

[[Page 65915]]

increased to a six-year or even seven-year requirement,\73\ and others 
recommend that it be approved, as proposed.\74\
---------------------------------------------------------------------------

    \72\ See Comments of Central Vermont, et al. at 18-19 (two 
years); Comments of Merrill Lynch, et al. at 9 (two years); Comments 
of FirstEnergy at 21 (two years) Comments of EPSA, et al. at 
Attachment B, p. 7 (one year).
    \73\ See Comments of NASUCA at 23 (six years); Comments of East 
Texas Cooperatives at 10 (seven years).
    \74\ See Comments of Reliant at 21.
---------------------------------------------------------------------------

    122. Commenters also raise concerns regarding the scope and 
specificity of the proposed requirement. EEI, Dynegy and MidAmerican, 
for example, argue that the language in the rule is too vague, while 
Exelon submits that the proposed rule would arguably require a seller 
to retain virtually every piece of paper it generates. These and other 
commenters conclude that without a more narrow, clearly articulated 
requirement, the proposed rule could be burdensome and costly.\75\ 
Reliant requests clarification that the data retention requirement not 
extend to economic analyses associated with the development of prices 
and bids that underlie the prices charged by a seller (e.g., fuel cost, 
variable operation and maintenance expenses, or opportunity costs). In 
addition, Reliant argues that the products specified in Market Behavior 
Rule 5 be limited to jurisdictional products for which sellers have 
express authority to sell at market-based rates.
---------------------------------------------------------------------------

    \75\ See e.g., Comments of Duke Energy at 39-40.
---------------------------------------------------------------------------

3. Commission Ruling
    123. We will adopt Market Behavior Rule 5, as revised. As revised, 
Market Behavior Rule 5 will require a market-based rate seller to:

    Retain for a period of three years, all data and information 
upon which it billed the prices it charged for the electric energy 
or electric energy products it sold pursuant to this tariff or the 
prices it reported for use in price indices.

    124. In revising this rule, we clarify that we are not seeking 
retention of ``cost-of service'' or analytical data related to all 
sales, as some commenters perceived from our use of the word 
``reconstruction'' in our original proposal. Rather, we are requiring 
that sellers retain the complete set of contractual and related 
documentation upon which they billed their customers for their sales. 
The sales contemplated are sales made pursuant to the seller's market-
based rate tariff. The Commission is indifferent as to whether this 
material is retained in paper form or in an electronic medium as long 
as the data can be made accessible in a reasonable fashion if its 
review is required by the Commission or its Staff.
    125. In addition, commenters suggest that the length of the 
retention period may be burdensome. On balance, however, requiring 
sellers to retain records for the period proposed, i.e., for three 
years, will not constitute an undue burden on sellers, particularly 
given the fact that sellers can satisfy this requirement either by 
retaining their records in a hard copy form or electronically. To 
permit a shorter retention period may not allow sufficient time for the 
investigations into possible violations.
 K. Market Behavior Rule 6 (Related Tariff Matters)
1. Commission Proposal
    126. In the June 26 Order, we noted that in the Western Markets 
Report, Staff had found that sellers had failed to abide by their 
market-based rate codes of conduct \76\ and their Order No. 889 
standards of conduct.\77\ We noted that these tariff provisions, among 
other things, required the functional separation of transmission and 
wholesale merchant personnel. We sought comment on whether Market 
Behavior Rule 6, as proposed, was 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.
---------------------------------------------------------------------------

    \76\ The Commission requires a market-based rate code of conduct 
when a power marketer is affiliated with a public utility with a 
franchised service area and captive customers. See Carolina Power & 
Light Company, 97 FERC ] 61,063 (2001).
    \77\ See Open Access Same-time Information System and Standards 
of Conduct, Order No. 889, FERC Stats. & Regs. ] 31,135 (1996), 
order on reh'g, Order No. 889-A, FERC Stats. & Regs ] 31,049 (1997), 
reh'g denied, Order No. 889-B, 81 FERC ] 61,253 (1997).
---------------------------------------------------------------------------

2. Comments
    127. Notwithstanding the discussion which accompanied our proposed 
rule, commenters suggest that the language set forth in Market Behavior 
Rule 6, as proposed, could be construed to apply to codes of conduct 
other than sellers' market-based rate codes of conduct. Accordingly, 
commenters seek clarification that the codes of conduct to which Market 
Behavior Rule 6 refers are the codes of conduct contained in sellers' 
market-based rate schedules. EEI also challenges the proposed rule as 
being too heavy-handed, permitting the Commission, in theory, to revoke 
a seller's market-based rate authority for any code of conduct or 
standards of conduct violation, no matter how small or insignificant 
the infraction (e.g., failing to correctly post a job description).\78\
---------------------------------------------------------------------------

    \78\ See also Comments of EME at 11 (asserting that the proposed 
rule is vague and ill-defined).
---------------------------------------------------------------------------

3. Commission Ruling
    128. We will adopt Market Behavior Rule 6, as revised. As revised, 
Market Behavior Rule 6 will require that a market-based rate seller:

    Not violate or collude with another party in actions that 
violate Seller's market-based rate code of conduct or Order No. 889 
standards of conduct, as they may be revised from time to time.

    129. Market Behavior Rule 6 is designed to emphasize our commitment 
to make certain that entities adhere to our electric power sales code 
of conduct and Order No. 889 standards of conduct. In response to 
commenter concerns, we have revised this rule to add clarity. In 
revising this rule, we clarify that this rule applies to a seller's 
electric power sales code of conduct contained in a Seller's market-
based rate tariff or rate schedule as well as seller's Order No. 889 
standards of conduct. We intend that any violation of this provision 
will subject the seller and its affiliates to disgorgement of unjust 
profits, as applicable, or other remedies as the Commission may find 
appropriate.
    130. We further clarify that, in adopting this rule, it is not the 
Commission's intention to order disgorgement of unjust profits or other 
remedies for inadvertent errors (such as incorrectly posting a job 
description). However, the Commission is concerned with all violations 
and, in particular, those violations which involve affiliate sales and 
preferential treatment, including access to transmission information or 
service.
 L. Additional Rules and Alternative Options
1. Commission Proposal
    131. In the June 26 Order, we noted that the prohibitions set forth 
in our proposed Market Behavior Rules represented only one of the tools 
available to the Commission to ensure just and reasonable rates and 
that in undertaking our enforcement decisions, we would focus on the 
best outcome for assuring just and reasonable rates in our 
jurisdictional markets. We stated that in some instances, significant 
remedial action may be warranted, while in other instances, we may use 
a specific set of facts and circumstances to clarify our requirements 
for acceptable public utility activities. We noted that in formulating 
our proposed rules, we were required to balance a number of competing 
interests. We sought comments from interested entities on whether our 
proposed rules struck the appropriate balance.

[[Page 65916]]

2. Comments
    132. A number of commenters assert, in effect, that the 
Commission's proposed Market Behavior Rules fail to strike the 
necessary balance of interests, given the Commission's asserted failure 
to address various additional issues.
    133. El Paso Electric Company (El Paso), for example, states that 
June 26 Order failed to examine or otherwise provide any understanding 
on a number of important threshold questions underlying the 
Commission's stated objectives in this proceeding. Specifically, El 
Paso asserts that the Commission is attempting to articulate Market 
Behavior Rules without a full understanding of what constitutes a 
market, what dynamics foster a competitive market, and what kinds of 
behavior are beneficial or harmful.
    134. The FTC points out that structurally competitive markets are 
generally the best remedy against anticompetitive behavior and that, as 
such, the Commission should give high priority to achieving 
structurally competitive markets while it pursues interim measures, if 
any, to address Market Behavior Rule violations. Similarly, EPSA, et 
al. submits that the solution for most of the alleged and actual 
inappropriate market behavior is well-functioning markets with clear 
and efficient rules that foster efficient investment and competitive 
behavior.\79\
---------------------------------------------------------------------------

    \79\ See also Comments of East Texas Cooperative at 4-6 (stating 
that the lack of competitive markets remains a fundamental concern); 
Comments of ANP, et al. at 14 (the Commission should continue to 
rely on preventive measures tailored to specific markets, rather 
than adopting blanket rules that, by their own design, cannot stop 
anticompetitive behavior); Reply Comments of TDU Systems at 3 
(noting that the Commission must address not only the behavior of 
market participants but the structure of the markets themselves).
---------------------------------------------------------------------------

    135. In addition, commenters assert that the Market Behavior Rules 
should apply to all market participants, including transmission owners 
and load serving entities (LSEs). AE Supply argues that buyers who 
manipulate markets to depress prices should be subject to complaints by 
sellers to recover appropriate surcharges. EEI notes that this could be 
accomplished by including the Market Behavior Rules in the tariffs 
administered by all RTOs, ISOs, and the Western Systems Power Pool.
    136. APPA, TAPS, and TDU Systems propose that the Commission 
broaden the scope of its undertaking in this proceeding by addressing 
structural market issues. APPA and TAPS propose as additional rules, a 
requirement imposing long-term sales obligations for the benefit of 
LSEs, a requirement for capacity auctions to de-concentrate generation, 
and additional rules providing for greater access to transmission and 
the relief of existing transmission constraints. TDU Systems recommends 
that the Commission take action on its proposed supply reassessment 
screen to provide an up-front measure of a seller's potential market 
power.
3. Commission Ruling
    137. We share the views of those commenters who assert that the 
Commission's proposed Market Behavior Rules, taken alone, will not be 
adequate to ensure that the rates, terms and conditions offered by 
market-based rate sellers will be just and reasonable. We also agree 
with EPSA, et al. and others that a well functioning market may be the 
best single, long-term remedy against the abuse of market power. In 
fact, the Commission is pursuing these efforts in other concurrent 
proceedings.\80\
---------------------------------------------------------------------------

    \80\ See e.g., Midwest Independent Transmission System Operator, 
Inc., 105 FERC ] 61,145 (2003); California Independent System 
Operator Corporation, 105 FERC ] 61,140 (2003).
---------------------------------------------------------------------------

    138. As we have recognized in the past, however, even in a 
structurally competitive market, individual sellers may have the 
ability to exercise market power. Individual sellers may have the 
ability to engage in market manipulation or other deceptive practices. 
Thus, it is appropriate that the Commission delineate well-defined 
rules of the road applicable to market-based rate sellers. Where these 
rules are violated, it is appropriate that the Commission provide a 
remedy for such conduct. It is important that such conduct be deterred 
to the extent possible.
 M. Available Remedies and Complaint Procedures
1. Commission Proposal
    139. In the June 26 Order, we indicated that in complaint 
proceedings brought before the Commission to enforce our proposed 
Market Behavior Rules, the principal remedy available to complainants 
for any Market Behavior Ruleviolation shown to have occurred (in 
addition to the potential revocation of the seller's market-based rate 
authority) would be the disgorgement of the seller's unjust profits 
attributable to the specific violation at issue.\81\
---------------------------------------------------------------------------

    \81\ June 26 Order, 103 FERC ] 61,349 at P38.
---------------------------------------------------------------------------

    140. In addition, we proposed 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 disgorgement 
relief be made no later than 60 days after the end of the calendar 
quarter in which the violation is alleged to have occurred. We proposed 
that if a market participant can show that it did not know and should 
not have known of the behavior which forms the basis for its complaint 
within the period prescribed in our proposal, then the 60-day period 
would be deemed to run from the time when the market participant knew 
or should have known of the behavior. Finally, we proposed that these 
time limitations not apply to enforcement actions undertaken by the 
Commission.
2. Comments
    141. EEI rejects the remedial approach set forth by the Commission 
in the June 26 Order. EEI asserts that to avoid regulatory uncertainty, 
the Commission should only pursue remedies on a prospective basis after 
the Commission identifies new market problems and/or the need for new 
market rules.
    142. Numerous comments (both pro and con) were received regarding 
the specific financial remedy proposed by the Commission, i.e., a 
disgorgement remedy. On the one hand, commenters challenge the 
Commission's authority to impose any remedies at all in this context 
based on various legal challenges (discussed below), the 
impracticalities involved in attempting to calculate such a remedy, 
and/or the commercial undesirability of doing so.\82\ Other commenters 
stake out a position on the opposite end of the spectrum, suggesting 
that a financial remedy limited to the disgorgement of unjust profits 
is entirely inadequate, unfair, and will not provide a sufficient 
deterrent against sellers who violate the Commission's rules.\83\ The 
middle ground position between these two polar views, i.e., a 
disgorgement remedy that would not require the seller to make the 
market whole (as proposed by the Commission in the June 26 Order), is 
supported by EPSA, et al. and others.
---------------------------------------------------------------------------

    \82\ See Comments of EEI at 22-26; Comments of TransCanada at 4; 
Comments of Southern at 18 (noting that it may prove difficult, if 
not impossible, to calculate unjust profits in the context of 
market-based rates); Reply Comments of Mirant and TransAlta at 11 
(noting that disgorgement liability could completely chill bulk 
power markets and severely limit capital market access for bulk 
power market participants); Reply Comments of Cinergy Services, Inc. 
(Cinergy) at 1-4 (arguing that a make-whole remedy would be 
unreasonable, unnecessary, impractical, and unauthorized by the 
FPA).
    \83\ See Comments of TDU Systems at 10; Nucor Steel, et al. at 
7; SMUD at 6-7; PG&E at 3; Comments of Cal ISO at 5; Comments of 
NASUCA at 31; Comments of Cal Oversight Board at 5-6; Reply Comments 
of Central Maine, et al. at 8-9.

---------------------------------------------------------------------------

[[Page 65917]]

    143. Commenters also stake out a number of different positions 
regarding the Commission's proposed 60-day complaint limitation rule. 
EPSA, et al. and others submit that this complaint limitation proposal 
is both necessary and appropriate, as it relates to market participant 
complaints because, among other things, it will promote transactional 
certainty.\84\ Others, including TDU Systems and East Texas 
Cooperatives, submit that this time limitation requirement will 
significantly undermine the Commission's overall objectives in this 
proceeding. Similarly, Central Maine, et al. argue for an extended 
period in which to file complaints, given (it contends) the complexity 
of an LMP-based market (and the time it requires to analyze market 
outcomes), the practicalities associated with billing cycles and 
correction periods, and the administrative burden associated with 
determinations of when a particular party knew or should have known of 
a rule violation. NECPUC submits that, at a minimum, the 60-day rule 
should be modified by providing all market participants 180 days to 
file a complaint from the date they know, or should know, of the 
violation at issue.\85\
---------------------------------------------------------------------------

    \84\ See also Reply Comments of EEI at 12-13; Reply Comments of 
Cinergy at 4-6.
    \85\ See also Comments of SMUD at 5-6 (pointing out that a 
market participant that uncovers a violation on the last day of the 
calendar quarter has only one third the amount of time to prepare a 
complaint as a market participant who happens to find evidence of a 
violation on the first day of the calendar quarter); Reply Comments 
of TDU Systems at 5.
---------------------------------------------------------------------------

    144. Commenters also address the Commission's statement in the June 
26 Order that it would not be bound by the 60-day complaint limitation 
requirement applicable to market participant complaints. On the one 
hand, the Louisiana Commission asserts that this 60-day complaint 
exemption is appropriate and that it should also apply to state 
regulators. On the other hand, EPSA, et al. and EEI warn that such an 
allowance would constitute an open-ended risk that the Commission might 
question any seller's transaction at any time (even in response to a 
hotline complaint made by a market participant otherwise precluded from 
filing a complaint) and would have a chilling effect on the market.\86\
---------------------------------------------------------------------------

    \86\ See also Reply Comments of Mirant and TransAlta at 8.
---------------------------------------------------------------------------

    145. Commenters seek a number of clarifications regarding the 
Commission's role in enforcing its Market Behavior Rules. EPSA, et al. 
seek clarification that while the Commission might reexamine 
transactions and provide guidance at any time, it will nonetheless be 
bound by the time limitation imposed herein with respect to any 
remedies it might impose. Central Vermont, et al. also seek a 
limitation on the Commission's authority in this area, proposing that 
there be a time limit of six months following the date on which the 
violation is alleged to have occurred for the Commission to initiate an 
investigation and order disgorgement of unjust profits. The California 
Commission seeks clarification that a Commission Staff investigation 
initiated in response to an alleged tariff violation will be open to 
the public, noting that complaint proceedings initiated by other 
parties will necessarily be open to the public. Mirant and TransAlta 
also assert that the triggering event for bringing a complaint or 
initiating an investigation is unclear in the Commission's proposal. 
These entities propose that the triggering event be the time that the 
transaction at issue is entered into, absent fraud or the willful 
withholding of material information. Finally, Nucor Steel, et al. 
propose that revocation of a seller's market-based rate authority be 
made mandatory if it is determined that the seller is in violation of 
any Market Behavior Rule.
3. Commission Ruling
    146. We will adopt the remedies and complaint procedures outlined 
in the June 26 Order, as revised (see Appendix B). Specifically, we 
will adopt the remedies and complaint procedures as they relate to 
market participant complaints, subject to the modification that the 
complaint limitation period will be 90-days, not 60-days, as proposed. 
Thus, a complaint must be brought within 90 days from the end of the 
calendar quarter in which the violation has been alleged to have 
occurred, unless a complainant can show that it did not know or should 
not have known of the behavior which forms the basis for its complaint 
within this time period.
    147. Upon consideration of the comments received concerning our 60-
day proposal, in the Commission's view the 60-day time period may be 
insufficient time for parties to discover and act upon violations of 
these rules. Accordingly, the Commission will modify its original 
proposal to allow 90 days from the end of the quarter from which a 
violation occurred for a party to bring a complaint based on these 
rules. A 90-day time period provides a reasonable balance between 
encouraging due diligence in protecting one's rights, discouraging 
stale claims, and encouraging finality in transactions. Furthermore, 
the Commission clarifies that its exception regarding the time period 
applicable to the filing of a complaint, where the complainant could 
not have known of the alleged violation, incorporates a reasonableness 
standard, i.e., the 90-day time period to file a complaint does not 
begin to run until a reasonable person exercising due diligence should 
have known of the alleged wrongful conduct. Rather than being 
impermississibly vague, this safeguard ensures a sufficient time-period 
for complainants to discover hidden wrongful conduct and submit a 
claim.
    148. We will also place a time limitation on Commission enforcement 
action for potential violations of these Market Behavior Rules. The 
Commission, unlike the market participants who may be buyers or 
otherwise directly affected by a transaction, may not be aware of 
actions or transactions that potentially may violate our rules. Thus, 
the Commission will act within 90 days from the date it knew of an 
alleged violation of its Market Behavior Rules or knew of the 
potentially manipulative character of an action or transaction. 
Commission action in this context means a Commission order or the 
initiation of a preliminary investigation by Commission Staff pursuant 
to 18 CFR part 1b. If the Commission does not act within this time 
period, the seller will not be exposed to potential liability regarding 
the subject transaction. Knowledge on the part of the Commission will 
take the form of a call to our Hotline alleging inappropriate behavior 
or communication with our enforcement Staff.
    149. We will not adopt commenters' additional proposed revisions 
and arguments. First, we reject EEI's argument that the disgorgement 
remedy proposed in the June 26 Order is inappropriate, because, EEI 
asserts, it will retroactively or retrospectively declare actions to be 
market abuses when such actions were not envisioned when the rules were 
promulgated. In fact, EEI's premise is mistaken. Our Market Behavior 
Rules establish clear advance guidelines to govern market participant 
conduct. Moreover, in approving these Market Behavior Rules and 
requiring sellers to be fully accountable for any unjust gains 
attributable to their violation, we do not foreclose our reliance on 
existing procedures or other remedial tools, as may be necessary, 
including generic rule changes or the approval of new market rules 
applicable to specific

[[Page 65918]]

markets.\87\ As always, we will consider the full range of options 
available to the Commission to promote competition and to ensure that 
rates remain just and reasonable.
---------------------------------------------------------------------------

    \87\ Moreover, if Congress grants the Commission additional 
remedial power, including the authority to levy civil penalties, the 
Commission will, in addition to the remedies set forth herein, 
implement such authority and utilize it when appropriate for 
violations of these Market Behavior Rules.
---------------------------------------------------------------------------

    150. We also reject commenters' assertions that a disgorgement 
remedy may be difficult to calculate in a particular case, or may 
operate as a chill on the market in other circumstances. The concerns 
raised by commenters, in this regard, are speculative at best. 
Moreover, any such concerns can be fairly evaluated by the Commission 
on a case-by-case basis, with a full opportunity for input from all 
interested parties. Thus, we need not reject a disgorgement remedy in 
all cases simply because it may be inappropriate to apply (and need not 
be imposed) in a specific case. For the reasons discussed below (see 
Section H, ``Legal Authority'') we will also reject the assertion that 
the Commission is precluded from applying a disgorgement remedy under 
section 206 of the FPA or on due process grounds.
    151. We also reject commenters' assertions that, in enforcing our 
Market Behavior Rules, the Commission should consider a make-the-
market-whole remedy. In fact, the remedies outlined by the Commission 
in the June 26 Order, including the possible revocation of Sellers' 
market-based rate authority, will provide a sufficient inducement for 
sellers to comply with our rules. Our primary focus, in this regard, is 
on encouraging appropriate market behavior and deterring inappropriate 
market behavior.
    152. Finally, we will reject the proposal made by Mirant and 
TransAlta that the triggering event applicable to market participant 
complaints be the date on which the transaction was entered into, 
absent fraud or willful withholding of material information on the part 
of the seller. We will not limit market participant complaints in this 
way. First, the Commission's Market Behavior Rules address both actions 
and transactions and thus cannot be limited to dates applicable to 
transactions alone. For example, the declaration of an outage, as 
addressed by Market Behavior Rule 1, could be an action that does not 
necessarily involve a transaction.\88\ Second, the June 26 Order was 
clear that the 60-day requirement would be triggered by the occurrence 
of the violation, which (in the case of a transaction) could come well 
after the transaction date. Finally, the extension of this 60-day 
period, we said, would be based on whether the complainant knew or 
should have known of the behavior which forms the basis for its 
complaint, not fraud or any other conduct that the complainant would be 
required to attribute to the seller as a pre-condition to its right to 
seek relief.
---------------------------------------------------------------------------

    \88\ In this regard, while we held in the June 26 Order that our 
disgorgement remedy, in the context of a market-participant 
complaint, could only be sought on ``transaction-specific basis,'' 
we clarify here that this requirement, as it relates to actions, 
need only refer to specific actions.
---------------------------------------------------------------------------

N. Legal Authority
1. Commission's Findings in the June 26 Order
    153. In the June 26 Order, we concluded that section 206 of the FPA 
would not bar the Commission from either approving or enforcing our 
proposed Market Behavior Rules.\89\ We noted that we had 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. We stated that 
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 proposed herein, 
we would require that these tariffs be revised to include the rules 
prospectively, as section 206 requires.
---------------------------------------------------------------------------

    \89\ See June 26 Order, 103 FERC ] 61,349 at P46. Our discussion 
of this issue, we noted, was prompted by the comments we received in 
response to the more broadly-stated tariff condition proposed in our 
Initial Order issued in this proceeding. See Initial Order, 97 FERC 
at 61,976 and note 4, supra.
---------------------------------------------------------------------------

    154. We also found that the refund limitations of section 206(b) 
would not bar the Commission from enforcing our proposed Market 
Behavior Rules. We found that any remedies stemming from a violation of 
our proposed tariff provisions would be based on the tariff conditions 
themselves, as approved herein, and that we were fully authorized to 
take actions and impose remedies when tariffs are violated.
2. Comments
    155. A number of commenters continue to challenge the Commission's 
authority to promulgate and/or enforce its proposed Market Behavior 
Rules, given the asserted limitations of Section 206 of the FPA.\90\
---------------------------------------------------------------------------

    \90\ See e.g., Comments of EEI at 27; Comments of ANP. Inc., et 
al. at 6-10; Comments of Central Vermont, et al. at 3; Comments of 
Cinergy at 21; Comments of Duke Energy at 14; Comments of FPL 
Energy, LLC at 9; Comments of Mirant and TransAlta at 6; Comments of 
TransCanada at 6.
---------------------------------------------------------------------------

    156. In addition, commenters also challenge one or more of the 
Commission's proposed Market Behavior Rules on due process grounds.\91\ 
Southern, for example, argues that fundamental concepts of due process 
require that standards of conduct be sufficiently clear and unambiguous 
so as to provide a reasonable guide by which to identify prohibited 
conduct.\92\ Southern further asserts that basic principles of 
administrative law require agencies to provide regulated entities with 
adequate notice of the conduct expected of them.\93\ Southern adds that 
an agency fails to provide fair notice if the regulations and other 
policy statements issued by the agency are so unclear that regulated 
entities are unable to identify with ascertainable certainty the 
standards with which the agency expects parties to conform.\94\
---------------------------------------------------------------------------

    \91\ See Comments of EEI at 23; Comments of Southern at 13; 
Comments of ANP Inc., et al. at 1012; Comments of BPA at 5; Comments 
of BP Energy Company at 4-5; Comments of Cinergy at 23; Comments of 
Duke Energy at 8; Comments of InterGen at 9; Comments of Mirant and 
TransAlta at 18; Comments of TransCanada at 5.
    \92\ See Comments of Southern at 13, citing Gates & Fox, Co. v. 
OSHRC, 790 F.2d 154, 155 (DC Cir. 1986).
    \93\ Id., citing Satellite Broadcasting Company, Inc. v. FCC, 
824 F.2d 1, 3 (DC Cir. 1987); McElroy Electronics Corporation v. 
FCC, 990 F.2d 1351, 1358 (DC Cir. 1993).
    \94\ Id., citing Trinity Broadcasting of Florida, Inc. v. FCC, 
211 F.3d 618, 628 (DC Cir. 2000).
---------------------------------------------------------------------------

    157. AE Supply points to two Commission cases in which the 
Commission required the proposed tariff provisions at issue to impose a 
more clear and specific obligation and suggests that applying this same 
degree of specificity here, the Commission's proposed rules do not pass 
muster. AE Supply states that in California Power Exchange,\95\ the 
Commission held that a tariff provision addressing the improper use of 
market power could only prohibit specific actions or specific outcomes 
and required the utility to provide actual examples of the specific 
actions that would be prohibited. AE Supply further notes that in New 
York Independent System Operator, Inc.,\96\ the Commission rejected a 
proposed market power mitigation remedy, in part, because the New York 
ISO had not described with enough specificity the types of conduct that 
would trigger the imposition of the proposed measures and because the 
New York ISO had not established specific thresholds or bright line 
tests that would trigger the

[[Page 65919]]

conclusion that market power had been exercised.
---------------------------------------------------------------------------

    \95\ 88 FERC ] 61,112 at 61,265 (1999).
    \96\ 89 FERC ] 61,196 at 61,605 (1999).
---------------------------------------------------------------------------

3. Commission Ruling
    158. For the reasons discussed below, we find that: (i) the 
Commission is not barred by section 206 of the FPA from approving 
Market Behavior Rules applicable to market-based rate sellers, or 
allowing as a remedy the disgorgement of unjust profits and other 
remedies, as discussed herein; and (ii) these Market Behavior Rules are 
not unduly vague or overbroad.
    159. First, we reject the suggestion that the potential financial 
consequences for sellers found to be in violation of the Commission's 
Market Behavior Rules would violate the refund limitations set forth in 
section 206(b) of the FPA.\97\ As we noted in the June 26 Order, we 
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. We stated that should we determine that sellers' currently 
effective tariffs are unjust and unreasonable or may lead to unjust and 
unreasonable rates without the inclusion of Market Behavior Rules, we 
would require that these tariffs be revised, but only on a prospective 
basis, as section 206 requires.
---------------------------------------------------------------------------

    \97\ 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 five months after the expiration of 
such 60-day period.
---------------------------------------------------------------------------

    160. Our Market Behavior Rules will operate as conditions to the 
grant of market-based rate authority and the Commission, in such a 
case, has broad authority to impose conditions that will help ensure 
that rates are within a zone of reasonableness. We held in the June 26 
Order and reiterate here that the approval of Market Behavior Rules, 
under these circumstances, and any future remedies imposed for their 
violation, would neither violate the filed rate doctrine nor the refund 
limitations of section 206(b).\98\
---------------------------------------------------------------------------

    \98\ 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).
---------------------------------------------------------------------------

    161. Further, the Commission has the authority to impose the 
appropriate remedy where it finds that violations of its Market 
Behavior Rules have occurred.\99\ In particular, we reject the argument 
that a violation of an existing condition of service may not be 
remedied by the Commission from the time the violation occurred. In 
fact, the courts have held that the Commission has this authority in 
the fully analogous context presented by the Natural Gas Act 
(NGA).\100\ The courts have also held that the Commission has a great 
deal of discretion when imposing remedies devised to arrive at maximum 
reinforcement of Congressional objectives.\101\ In devising its remedy, 
the Commission is required to exercise its discretion to arrive at an 
appropriate remedy,\102\ and to explore all equitable considerations 
and practical consequences of its action pursuant to its statutory 
delegation.\103\
---------------------------------------------------------------------------

    \99\ See e.g., Coastal Oil Corp, v. FERC, 782 F.2d 1249 (DC Cir. 
1986).
    \100\ See Consolidated Gas Transmission Corp., et al., 771 F.2d 
1536 (DC Cir. 1985) (holding that the Commission has the authority 
under section 16 of the NGA to order retroactive refunds to enforce 
conditions in certificates).
    \101\ The courts have held that ``the breadth of agency 
discretion is, if anything, at its zenith when the action assailed 
relates * * * to the fashioning of policies, remedies and 
sanctions.'' Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 
109 (DC Cir. 1984), quoting Niagara Mohawk Power Corp. v. FPC, 379 
F.2d 153, 159 (DC Cir. 1967).
    \102\ Gulf Oil Corp. v. FPC, 536 F.2d 588 (3rd Cir. 1977), cert 
denied, 434 U.S. 1062 (1978), reh'g denied, 435 U.S. 981 (1978).
    \103\ Continental Oil Co. v. FPC, 378 F.2d 510 (5th Cir. 1967) 
and FPC v. Tennessee Gas Transmission Co., 371 U.S. 145 (1962).
---------------------------------------------------------------------------

    162. In addition, this order is based upon the Commission's finding 
after hearing that existing tariffs are unjust and unreasonable under 
section 206 of the FPA. In a proceeding brought pursuant to these 
rules, the issue would be whether the entity has violated its tariff. 
Therefore, in a remedial proceeding brought pursuant to these rules, 
unlike an FPA section 206 investigation initiated by the Commission, 
the regulated entity has notice of the conditions required for service 
at the time of the implementation of the service conditions and the 
Commission may, at its discretion, fashion an appropriate remedy.
    163. In addition, we find that our Market Behavior Rules, including 
specifically the prohibitions set forth in Market Behavior Rule 2 
(relating to market manipulation), are not unduly vague on their 
face.\104\ While constitutional due process requirements mandate that 
the Commission's rules and regulations be sufficiently specific to give 
regulated parties adequate notice of the conduct they require or 
prohibit,\105\ this standard is satisfied ``[i]f, by reviewing [our 
rules] and other public statements issued by the agency, a regulated 
party acting in good faith would be able to identify, with 
ascertainable certainty, the standards with which the agency expects 
parties to conform.''\106\ Our Market Behavior Rules will satisfy this 
due process requirement ``so long as they are sufficiently specific 
that a reasonably prudent person, familiar with the conditions the 
regulations are meant to address and the objectives the regulations are 
meant to achieve, would have fair warning of what the regulations 
require.'' \107\
---------------------------------------------------------------------------

    \104\ We note that due process challenges regarding the 
application of our rules to a particular case are not presented in 
this proceeding. Thus, commenters' arguments are limited to a facial 
challenge to our rules, i.e., an assertion that one or more of our 
rules is vague in all its possible applications.
    \105\ See Freeman United Coal Mining Company v. Federal Mine 
Safety and Health Review Commission, 108 F.3d 358, 362 ((DC Cir. 
1997) (Freeman).
    \106\ See General Electric Co. v. EPA, 53 F.3d 1324, 1329-30 (DC 
Cir. 1995) (holding that the agency's interpretation of its rules 
was ``so far from a reasonable person's understanding of the 
regulations that [the regulations] could not have fairly informed GE 
of the agency's perspective.'').
    \107\ See Freeman, 108 F.3d at 362. See also Faultless Division, 
Bliss & Laughlin Industries, Inc. v. Secretary of Labor, 674 F.2d 
1177, 1185 (7th Cir. 1982) (``[T]he regulations will pass 
constitutional muster even though they are not drafted with the 
utmost precision; all that due process requires is a fair and 
reasonable warning.'').
---------------------------------------------------------------------------

    164. As applied by the courts, this due process standard has been 
held to allow for flexibility in the wording of an agency's rules and 
for a reasonable breadth in their construction.\108\ The courts have 
recognized, in this regard, that specific regulations cannot begin to 
cover all of the infinite variety of cases to which they may apply and 
that ``[b]y requiring regulations to be too specific, [courts] would be 
opening up large loopholes allowing conduct which should be regulated 
to escape regulation.'' \109\
---------------------------------------------------------------------------

    \108\ See Grayned v. City of Rockford, 408 U.S. 104, 110 (1971) 
(holding that an anti-noise ordinance was not vague where the words 
of the ordinance ``are marked by flexibility and reasonable breadth, 
rather than meticulous specificity.'').
    \109\ See Ray Evers Welding Co. v. OSHRC, 625 F.2d 726, 730 (6th 
Cir. 1980).
---------------------------------------------------------------------------

    165. The Supreme Court has further noted that the degree of 
vagueness tolerated by the Constitution, as well as the relative 
importance of fair notice and fair enforcement, depend in part on the 
nature of the rules at issue.\110\ In Hoffman, for example, the Court 
held that in the case of economic regulation (as opposed to criminal 
sanctions), the vagueness test must be applied in a less

[[Page 65920]]

strict manner because, among other things, ``the regulated enterprise 
may have the ability to clarify the meaning of the regulation by its 
own inquiry, or by resort to an administrative process.'' \111\
---------------------------------------------------------------------------

    \110\ See Village of Hoffman Estates, et al. v. The Flipside, 
Hoffman Estates, Inc., 455 U.S. 489, 498 (1981) (Hoffman).
    \111\ Id. See also Texas Eastern Products Pipeline Co. v. OSHRC, 
827 F.2d 46, 50 (7th Cir. 1987) (``Texas Eastern, as a major 
pipeline company, in which trenching and excavation are a part of 
its routine, had ample opportunity to know of the earlier 
interpretation, should have been able to see the sense of the 
regulations on their face, and if still in doubt Texas Eastern 
should have taken the safer position both for its employees and for 
itself.'').
---------------------------------------------------------------------------

    166. Applying these standards here, we find that our Market 
Behavior Rules satisfy the requirement of due process. Market Behavior 
Rule 1, for example, gives sellers ``ascertainable certainty'' that in 
operating and scheduling their generation facilities, undertaking 
maintenance, declaring outages, and committing or otherwise bidding 
supply, they must do so in a manner that ``complies with the 
Commission-approved rules and regulations of the applicable power 
market.'' There can be no reasonable uncertainty, in this regard, as to 
what these broadly-practiced, generally-understood activities encompass 
in the wholesale electric utility industry (i.e., operating facilities, 
scheduling, undertaking maintenance, declaring outages, and bidding 
supplies). Nor can there be any reasonable doubt as to the ``rules and 
regulations'' to which the rule applies.\112\
---------------------------------------------------------------------------

    \112\ In fact, as discussed above, we are adopting the 
clarification that the rules and regulations to which this rule 
refers are limited to ``Commission-approved'' rules and regulations.
---------------------------------------------------------------------------

    167. Similarly, we cannot agree that the prohibitions against 
market manipulation, as set forth in Market Behavior Rule 2, are 
unclear in their requirement. It should be noted, in this regard, that 
our requirement that seller's actions or transactions have a 
``legitimate business purpose'' is intended to give sellers an 
opportunity to explain their actions, while still safeguarding market 
participants against market manipulation for which there can be no 
legitimate business purpose attached. Sellers will not be required to 
guess at the meaning of this term, as applied, then, because the term 
can only have meaning with specific reference to a seller's own 
business practices and motives, i.e., if the seller has a legitimate 
business purpose for its actions or transactions, it cannot be 
sanctioned under this rule.
    168. Moreover, as fully discussed in the June 26 Order and 
reiterated above, there is an important justification underlying our 
prohibition against market manipulation. We must be able to protect 
market participants against abuses whose precise form and nature cannot 
be envisioned today. As we have previously stated, in establishing 
these rules, we have worked to strike a necessary balance. We have 
attempted to set forth with sufficient specificity the class of 
behaviors we intend to prohibit and to do so in a manner that will 
inform market-based rate sellers of the type of activities that are 
consistent with just and reasonable rates. At the same time, we have 
also attempted to maintain our ability to address particular activities 
and situations that cannot be envisioned today. Our Market Behavior 
Rules, we have said, are designed to codify our requirements and 
provide a regulatory vehicle for their enforcement going forward.
    169. The Commission would not be able to fulfill its statutory 
responsibilities, however, if it established rules addressing future 
activities based only on the specificity of the past. While we have 
provided clarity and specificity, where possible, with respect to our 
experience with past market conduct, we must also establish general 
rules to prohibit a class of behavior going forward if we are to 
adequately protect customers to ensure that rates are the product of 
competitive forces (and thus are just and reasonable). Thus, our Market 
Behavior Rules have been designed to meet these twin objectives--to be 
specific in order to inform sellers as to the type of behavior that is 
prohibited today, while containing enough breadth and flexibility to 
address new and unanticipated activities, as they may arise in the 
future.
    170. In sum, we believe our Market Behavior Rules, as modified, 
explained and approved herein, put sellers and all market participants 
on fair notice regarding the conduct we seek to encourage and the 
conduct we seek to prohibit. Stripped to their essentials, these 
guidelines amount to the following: (i) Act consistently within the 
Commission's established rules; (ii) do not manipulate or attempt to 
manipulate power markets; (iii) be honest and forthright with the 
Commission and the institutions it has established to implement open-
access transmission and entities publishing indices for the purpose of 
price transparency; and (iv) retain associated records. Viewed in this 
context, there can be no reasonable uncertainty over the underlying 
objectives embodied in our rules or their requirements going forward.
    171. Nonetheless, we are committed to making our Market Behavior 
Rules as specific as they possibly can be and thus, as discussed above, 
we are adopting a number of the revisions proposed by commenters in 
order to better focus and fine-tune the scope and application of our 
rules.
    172. With respect to Market Behavior Rule 2, we have clarified that 
the rule applies to actions without a legitimate business purpose which 
are undertaken for the purpose of manipulation of wholesale power 
markets or prices and that actions which are explicitly contemplated in 
Commission approved processes such as virtual load or supply bidding 
are not considered manipulation.\113\ We have further explained that 
implementing Market Behavior Rule 2, we will consider all of the 
relevant facts and circumstances surrounding the particular transaction 
in question to determine whether the market-based rates sellers actions 
were without a legitimate business purpose but rather taken to impact 
the competitive market in a manner inconsistent with just and 
reasonable rates. We recognize that our standard is necessarily non-
specific with respect to the particular activities it prohibits but 
believe that our explanation of its meaning and associated enforcement 
philosophy accompanying the rule make clear that we are acting to 
prohibit actions which create or are designed to create artificial 
prices which would not have existed in a competitive market but for the 
manipulative acts. We have provided specific examples of such acts in 
Market Behavior Rule 2(a) through 2(d).\114\ As explained above, we 
expect our administration of this rule will provide a vehicle to 
highlight specific prohibited activities on a case-by-case basis.
---------------------------------------------------------------------------

    \113\ Statutes such as section 10(b) of the Securities and 
Exchange Act of 1937, 15 U.S.C. 78j (2000), prohibit the usage of 
any ``manipulative or deceptive device or contrivance'' in 
connection with the sale of securities. Courts have recognized that 
specific examples of such prohibited activities would emerge over 
time while market participants understood that ``market 
manipulation'' related to certain types of practices.
    \114\ As noted above, we have also deleted proposed Market 
Behavior Rule 2(e).
---------------------------------------------------------------------------

    173. We have also revised the language of Market Behavior Rules 3 
and 4 to assure that inadvertent factual errors in communications will 
not be sanctionable under our rules and, with respect to Market 
Behavior Rule 3, that only the Commission and entities relied upon by 
the Commission to implement open access transmission are the entities 
triggering seller's factual reporting obligations. We have also revised 
Market Behavior Rule 5 to make clear that we are not requiring ``cost-
based'' or other data but rather the data upon which the seller based 
its market-based

[[Page 65921]]

charges to its buyer and upon which it reported its transactions to 
index publishers.
    174. In sum, we have carefully considered our proposal and the 
comments we have received in light of our obligation to assure that 
wholesale power rates are just and reasonable and that sellers subject 
to our regulation are fairly apprised of their obligations as 
participants in a competitive power market subject to Commission 
oversight. We believe the rules we are establishing herein will allow 
us to assure just and reasonable rates and provide an adequate basis 
for sellers to understand our expectations of them.
 O. RTO/ISO Coordination Issues
1. Commission Proposal
    175. In the June 26 Order, we noted that the Market Behavior Rules 
we were proposing would apply to any market-based rate sale, whether in 
the bilateral market or in an organized market, i.e., in the bid-based 
markets administered by RTOs or by an ISO. We stated that these Market 
Behavior Rules were intended to complement any RTO or ISO tariff 
conditions and market rules that may apply to sellers in these 
markets.\115\
---------------------------------------------------------------------------

    \115\ See June 26 Order, 103 FERC ] 61,349 at P8.
---------------------------------------------------------------------------

2. Comments
    176. Commenters disagree over whether and to what extent the 
Commission's Market Behavior Rules should be applied in organized 
markets. Some argue that in these markets, the Market Behavior Rules 
should not apply.\116\ The New York ISO, the New York Commission, and 
ELCON seek clarification, in this regard, that when a generator unit 
operates and bids within the automated mitigation procedure (AMP) 
thresholds established by the New York ISO, such behavior will not be 
treated as a violation of any Market Behavior Rule.
---------------------------------------------------------------------------

    \116\ See Comments of AES at 5; Comments of Exelon at 5.
---------------------------------------------------------------------------

    177. Others assert that the Commission's Market Behavior Rules 
should play a vital role in the organized markets. Central Maine, et 
al., for example, point out that market power problems have continued 
to plague the LMP markets, notwithstanding the oversight and 
intervention of market monitors.
    178. EEI asserts that market participants should not be left with 
conflicting sets of rules and no guidance as to which applies or which 
takes precedence over the other. EEI recommends that where there is an 
inconsistency between the Market Behavior Rules and an RTO or ISO 
tariff provision approved by the Commission, the Market Behavior Rule 
should be treated as subordinate. This is appropriate, EEI argues, 
because the RTO or ISO tariff provision, in this instance, will be the 
product of a regional stakeholder process specifically suited to 
meeting regional energy market needs.
    179. EPSA, et al., on the other hand, argue that while regional 
differences may be appropriate on various discrete matters, many of the 
Market Behavior Rules address generic issues and should be applied 
uniformly across all markets.
3. Commission Finding
    180. In our discussion of Market Behavior Rule 1, above, we 
clarified that absent inclusion in a broader manipulative scheme 
addressed in Market Behavior Rule 2, compliance with the Commission-
approved rules and regulations of an applicable power market, such as 
an ISO/RTO market, will serve as compliance with our behavioral 
rules.\117\ However, in order to provide as much clarity as possible to 
market participants and market monitoring units (MMUs), we will also 
provide guidance concerning how we expect both these Market Behavior 
Rules and ISO/RTO rules to be applied and enforced by the Commission 
and MMUs.
---------------------------------------------------------------------------

    \117\ See supra, Section A.
---------------------------------------------------------------------------

    181. As stated in our order issued in Docket No. RT03-1-000 
(Communications with Commission-Approved Market Monitors), MMUs may be 
viewed as the ``functional equivalent'' of the Commission's staff and, 
for example, are not typically subject to our ex parte rules in 
communicating with the Commission or Commission Staff.\118\ In this 
regard, in ISO/RTO tariffs, we have approved certain limited authority 
to MMUs to enforce tariffs and implement sanctions for a market 
participant's failure to comply with tariff requirements.\119\ In each 
case, the determination of a tariff violation and the sanctions imposed 
may be appealed to the Commission.
---------------------------------------------------------------------------

    \118\ See, Communications with Commission-Approved Market 
Monitors, 102 FERC ] 61,041 (MMU Communications Order), order 
denying reh'g, 103 FERC ] 61,151 (2003).
    \119\ See e.g., New York Independent System Operator, Inc., 96 
FERC ] 61,249 (2001).
---------------------------------------------------------------------------

    182. We believe it is appropriate to authorize MMUs to enforce 
certain ISO/RTO tariff matters if those matters are: (i) Expressly set 
forth in the tariff; (ii) involve objectively-identifiable behavior; 
and (iii) do not subject the seller to sanctions or other consequences 
other than those expressly approved by the Commission and set forth in 
the tariff.\120\ Beyond this defined MMU authority, sellers' behavior 
will be subject to direct Commission enforcement in the first instance, 
regardless of whether the behavior occurs in ISO/RTO administered 
markets or bilateral markets. Market-based rate authority has been 
granted to sellers not only based on a finding of lack, or mitigation, 
of market power, but also with the expectation that such seller will 
not act in an anti-competitive manner. Through our administration of 
these rules, the Commission can assure that anti-competitive behavior 
is not countenanced and that rates remain just and reasonable.
---------------------------------------------------------------------------

    \120\ With respect to such matters, we will rely on the MMUs to 
identify and take action with respect to a specific behavior covered 
in the tariff, subject to later appeal to the Commission. If the MMU 
does not take action in such a case, the seller, absent an appeal to 
the Commission, will not be exposed to subsequent Commission 
enforcement actions regarding behavior found acceptable by the MMU.
---------------------------------------------------------------------------

    183. While MMUs may take actions as authorized by the ISO/RTO 
tariff, the Commission retains its responsibility to oversee tariff 
compliance on the part of any market-based rate seller. For example, a 
repeated pattern of tariff violations across several markets could lead 
the Commission to consider revoking a seller's market-based rate 
authorization. Further, except to the extent that enforcement authority 
has explicitly been authorized for an MMU in an ISO/RTO tariff, these 
behavioral rules will apply and be administered by the Commission.
    184. The roles of the MMUs and the Commission will require the 
Commission staff and the MMUs to continue to forge a close working 
relationship. This process has been underway for some time. Commission 
Staff is coordinating data collection and reporting functions with 
MMUs, including developing appropriate triggers for referring 
compliance issues to the Commission. We expect an MMU to maintain an 
on-going dialogue with our staff so that we are apprised at all times 
of the status of the markets and activities of market participants. If 
an MMU becomes aware of activities of a market participant that appear 
to violate that market participant's market-based rate tariff condition 
or other requirement that has not been assigned to the MMU for 
enforcement in the first instance, the MMU is expected to bring the 
matter to the attention of the Commission staff.\121\
---------------------------------------------------------------------------

    \121\ We have stated that the MMUs ``serve an important 
practical and unique function as the Commission's `eyes and ears' in 
the marketplace, and are charged with reporting back to the 
Commission any problems and anomalies which they encounter so that 
the Commission may take appropriate action under the Federal Power 
Act.'' See MMU Communications Order, 102 FERC at 61,091. In other 
words, the most important function an MMU performs is to provide 
feedback to the Commission in order for the Commission to take 
substantive action in accord with the statute. As we have stated, 
MMUs ``are practically an extension, or a surrogate for, the 
Commission's own monitoring and investigative staff.'' Id.

---------------------------------------------------------------------------

[[Page 65922]]

    185. Therefore, the behavioral rules adopted by the Commission for 
market-based rates sellers will apply to all markets. To the degree 
these rules overlap with a clearly stated tariff provision for which 
the Commission has assigned the first-line enforcement authority with 
associated sanctions to a MMU subject to appeal to the Commission, we 
will defer in the first instance to the MMU, subject to possible 
review. The Commission will exclusively undertake consideration of all 
other asserted violations of these rules. The Commission staff and the 
MMUs will work together to act to comprehensively assure that the 
overall competitiveness of jurisdictional electricity markets is 
maintained.
    186. In addition, as discussed in our consideration of Market 
Behavior Rule 1, absent a situation in which an activity is part of a 
broader manipulative scheme prohibited by Market Behavior Rule 2, a 
compliance with Commission-approved ISO and RTO rules (such as bidding 
consistent with the AMP process in the New York ISO) will be deemed in 
compliance with these market behavior rules.
P. Administrative Findings and Notices
1. Information Collection Statement
    187. As noted above, the Market Behavior Rules approved herein will 
require jurisdictional market-based rate sellers, to the extent they 
engage in reporting of transactions to publishers of electricity or 
natural gas price indices, to provide accurate and factual information 
and not submit false or misleading information or omit material 
information to any such publisher.\122\ In addition, these Market 
Behavior Rules will require market-based rate sellers to retain certain 
records for a minimal period of three years, as required by Market 
Behavior Rule 5.\123\
---------------------------------------------------------------------------

    \122\ See Appendix A at Market Behavior Rule 4.
    \123\ Id. at Market Behavior Rule 5.
---------------------------------------------------------------------------

    188. Given these requirements, the collection of information set 
forth below has been submitted to the Office of Management and Budget 
(OMB) for review under section 3507(d) of the Paperwork Reduction Act 
of 1995.\124\ OMB's regulations require OMB to approve certain 
information collection requirements imposed by agency rule.\125\ The 
Commission identifies the information provided for under this order as 
FERC-516, Electric Rate Schedule Filings.
---------------------------------------------------------------------------

    \124\ 44 U.S.C. 3507(d) (2000).
    \125\ 5 CFR 1320.12 (2003).

----------------------------------------------------------------------------------------------------------------
                                                     Number of       Number of       Hours per     Total annual
                 Data collection                    respondents      responses         total           hours
----------------------------------------------------------------------------------------------------------------
FERC-516
    (Reporting).................................             864               3           1.5 3           3,888
    (Recordkeeping).............................             864               1             5.0           4,320
                                                 -----------------
        Totals..................................  ..............  ..............             6.5           8,208
----------------------------------------------------------------------------------------------------------------

    Total annual hours for Collection (reporting + recordkeeping) = 
8,208.
    189. Information Collection Costs: The Commission seeks comments on 
the cost to comply with these requirements. It has projected the 
average annualized cost of all respondents to be: $252,720 (3,888 @ 
$65.00 per hour, for reporting) + $2,000,160 (4,320 hours @ $31.00 per 
hour + $1,866,240 maintenance/storage/recordkeeping) = $2,252,880.
    190. OMB's regulations require it to approve certain information 
collection requirements imposed by agency rule. The Commission is 
submitting a copy of this order to OMB.
    Title: Electric Rate Schedule Filings.
    Action: Proposed Collection.
    OMB Control No: 1902-0096.
    Respondents: Businesses or other for profit.
    Frequency of Responses: On occasion.
    Necessity of Information: The Market Behavior Rules approved herein 
will revise market-based rate sellers' tariffs and authorizations and 
are intended to ensure that rates and terms of service offered by 
market-based rate sellers remain just and reasonable.
    Internal review: The Commission has reviewed the requirements 
pertaining to Market Behavior Rules 4 and 5 and has determined that 
these tariff conditions are necessary to ensure just and reasonable 
rates. These tariff requirements, moreover, conform to the Commission's 
plan for efficient information collection, communication, and 
management within the electric utility industry. The Commission has 
assured itself, by means of internal review, that there is specific, 
objective support for the burden estimates associated with the 
information/data retention requirements.
    191. Interested persons may obtain information on the information 
requirements by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426 [Attention: 
Michael Miller, Office of the Executive Director, Phone (202)502-8415, 
fax: (202)273-0873, e-mail: [email protected].]
    192. For submitting comments concerning the collection of 
information and the associated burden estimates, please send your 
comments to the contact listed above and to the Office of Management 
and Budget, Office of Information and Regulatory Affairs, Washington, 
DC 20503, [Attention: Desk Officer for the Federal Energy Regulatory 
Commission, phone: (202)395-7856, fax: (202)395-7285.]
2. Environmental Analysis
    193. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\126\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\127\
    The actions proposed to be taken here fall within categorical 
exclusions in the Commission's regulations for rules that are 
clarifying, corrective, or procedural, for information gathering, 
analysis, and dissemination, and for sales, exchange, and 
transportation of natural gas that requires no construction of 
facilities.\128\ Therefore, an environmental assessment

[[Page 65923]]

is unnecessary and has not been prepared in connection with this order.
---------------------------------------------------------------------------

    \126\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs. Preambles 1986-1990 ] 30,783 (1987).
    \127\ 18 CFR 380.4 (2003).
    \128\ Id. at Sec. Sec.  380.4(a)(2)(ii), 380.4(a)(5), and 
380.4(a)(27).
---------------------------------------------------------------------------

3. Regulatory Flexibility Act Certification
    194. The Regulatory Flexibility Act of 1980 (RFA)\129\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small entities. 
The Commission is not required to make such analyses if a rule would 
not have such an effect.\130\
---------------------------------------------------------------------------

    \129\ 5 U.S.C. 601-612 (2000).
    \130\ Id. at section 605(b).
---------------------------------------------------------------------------

    195. The Commission does not believe that the Market Behavior Rules 
approved herein would have such an impact on small entities. Most of 
the sellers required to comply with the proposed regulations would be 
entities who do not meet the RFA's definition of a small entity whether 
or not they are under the Commission's jurisdiction. Therefore, the 
Commission certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.
4. Document Availability
    196. In addition to publishing the full text of this document in 
the Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426.
    197. From FERC's Home page on the Internet, this information is 
available in the eLibrary. The full text of this document is available 
on eLibrary in PDF and Microsoft Word format for viewing, printing, 
and/or downloading. To access this document in eLibrary, type the 
docket number excluding the last three digits of this document in the 
docket number field.
    198. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours by contacting FERC Online Support [email protected]">at[email protected] or toll free at (866)292-3676 or for TTY, 
contact (202)502-8659.
5. Effective Date and Congressional Notification
    199. The Commission has determined that the Market Behavior Rules 
approved in this order do not constitute a ``major rule'' as defined in 
section 351 of the Small Business Regulatory Enforcement Fairness Act 
of 1996. The provisions of 5 U.S.C. 801 regarding Congressional review 
of Final Rules, therefore, do not apply to this order.
Q. Mirant Corp. v. FERC
    200. On September 12, 2003, the Bankruptcy Court for the Northern 
District of Texas issued a ``Temporary Restraining Order Against the 
Federal Energy Regulatory Commission'' (TRO) in In re Mirant Corp. 
(Mirant v. FERC), Adversary Proceeding No. 03-4355, which enjoins the 
Commission ``from taking any action, directly or indirectly, to require 
or coerce the [Mirant] Debtors to abide by the terms of any Wholesale 
Contract [to which a Mirant Debtor is a party] which Debtors are 
substantially performing or which Debtors are not performing pursuant 
to an order of the Court unless FERC shall have provided the Debtors 
with ten (10) days' written notice setting forth in detail the action 
which FERC seeks to take with respect to any Wholesale Contract which 
is the subject of this paragraph.''
    201. Should the TRO be converted into a preliminary injunction, an 
action that the Commission opposes, the Commission will appeal that 
order. Despite the Commission's disagreement with the validity of the 
TRO and its expectation that the TRO (or a preliminary injunction) will 
be vacated on appeal, the Commission must comply with it until vacated. 
The TRO requires ten days' written notice before the Commission takes a 
proscribed action with respect to a covered Mirant Wholesale Contract. 
Accordingly, to the extent that this order requires Mirant to act in a 
manner proscribed by the TRO, the order will provide written notice to 
Mirant of the action that the Commission will take with respect to a 
covered Mirant Wholesale Contract.

The Commission Orders

    (A) The Market Behavior Rules set forth in Appendix A to this order 
are hereby adopted, as discussed in the body of this order, to become 
effective 30 days from the date of issuance of this order.
    (B) In compliance with this order, market-based rate sellers are 
hereby directed to include the Market Behavior Rules, as approved 
herein, at such time as they file any amendment to their market-based 
rates tariff or (if earlier) at such time as they seek continued 
authorization to sell at market-based rates (e.g., in their three-year 
update filings). Notwithstanding this time allowance, as applicable to 
sellers' compliance filings, the effective date for the tariff 
revisions approved herein shall be the effective date, as specified in 
ordering paragraph A, above.
    (C) The Secretary shall promptly publish this order in the Federal 
Register.
    (D) Southern's request for rehearing of the June 26 Order is hereby 
dismissed, as discussed in the body of this order.
    (E) The entities listed in Appendix C to this order shall be 
treated as parties to this proceeding.
    By the Commission. Commissioners Massey and Brownell concurring 
with separate statements attached.

Linda Mitry,
Acting Secretary.

Appendix A--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 Commission-
approved rules and regulations of the applicable power market. 
Compliance with this Market Behavior Rule 1 does not require Seller 
to bid or supply electric energy or other electricity products 
unless such requirement is a part of a separate Commission-approved 
tariff or requirement applicable to Seller.
    2. Market Manipulation: Actions or transactions that are without 
a legitimate business purpose and that are intended to or 
foreseeably could manipulate market prices, market conditions, or 
market rules for electric energy or electricity products are 
prohibited. Actions or transactions undertaken by Seller that are 
explicitly contemplated in Commission-approved rules and regulations 
of an applicable power market (such as virtual supply or load 
bidding) or taken at the direction of an ISO or RTO are not in 
violation of this Market Behavior Rule. Prohibited actions and 
transactions include, but are not limited to:
    a. Pre-arranged offsetting trades of the same product among the 
same parties, which 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; or scheduling non-firm service or products sold as firm), 
unless Seller exercised due diligence to prevent such occurrences;
    c. Transactions in which an entity first creates artificial 
congestion and then purports to relieve such artificial congestion 
(unless Seller exercised due diligence to prevent such an 
occurrence; and
    d. Collusion with another party for the purpose of manipulating 
market prices, market conditions, or market rules for electric 
energy or electricity products.
    3. Communications: Seller will provide accurate and factual 
information and not submit false or misleading information, or omit 
material information, in any communication with the Commission,

[[Page 65924]]

Commission-approved market monitors, Commission-approved regional 
transmission organizations, or Commission-approved independent 
system operators, or jurisdictional transmission providers, unless 
Seller exercised due diligence to prevent such occurrences.
    4. Reporting: To the extent Seller engages in reporting of 
transactions to publishers of electricity or natural gas price 
indices, Seller shall provide accurate and factual information, and 
not knowingly submit false or misleading information or omit 
material information to any such publisher, by reporting its 
transactions in a manner consistent with the procedures set forth in 
the Policy Statement issued by the Commission in Docket No. PL03-3 
and any clarifications thereto. Seller shall notify the Commission 
within 15 days of the effective date of this tariff provision of 
whether it engages in such reporting of its transactions and update 
the Commission within 15 days of any subsequent change to its 
transaction reporting status. In addition, Seller shall adhere to 
such other standards and requirements for price reporting as the 
Commission may order.
    5. Record Retention: Seller shall retain, for a period of three 
years, all data and information upon which it billed the prices it 
charged for the electric energy or electric energy products it sold 
pursuant to this tariff or the prices it reported for use in price 
indices.
    6. Related Tariffs: Seller shall not violate or collude with 
another party in actions that violate Seller's market-based rate 
code of conduct or Order No. 889 standards of conduct, as they may 
be revised from time to time.
    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.

Appendix B--Remedies and Complaint Procedures

    Complaints alleging any violation of the Commission's Market 
Behavior Rules will be subject to the following remedies and 
procedures, in addition to all other remedies and procedures, as may 
be applicable, pursuant to the Commission's Rules of Practice and 
Procedure.
    (1) Any complaint seeking relief for a violation of the 
Commission's Market Behavior Rules shall be made no later than 90 
days after the end of the calendar quarter in which the violation is 
alleged to have occurred.
    (2) If a complainant can show that it did not know and should 
not have known of the behavior which forms the basis for its 
complaint, within the period prescribed by these procedures, then 
the 90-day period will be deemed to run from the time when the 
complainant knew or should have known of the behavior.
    (3) Commission action on a complaint not meeting the filing 
deadlines, as prescribed in these procedures, will be prospective 
only.
    (4) The applicability of the Commission's disgorgement remedy in 
any complaint proceeding alleging a violation of the Commission's 
Market Behavior Rules will be limited by requiring that any such 
violation be shown to have occurred on a transaction-specific basis.
    (5) The Commission will act within 90 days from the date it knew 
of an alleged violation of its Market Behavior Rules or knew of the 
potentially manipulative character of an action or transaction. 
Commission action, in this context, means a Commission order or the 
initiation of a preliminary investigation by Commission Staff 
pursuant to 18 CFR Section 1b. If the Commission does not act within 
this time period, the seller will not be exposed to potential 
liability regarding the subject action or transaction. Knowledge on 
the part of the Commission must take the form of a call to our 
Hotline alleging inappropriate behavior, communication with our 
enforcement Staff.

Appendix C--Entities Filing Comments and/or Reply Comments

AES Eastern Energy, L.P.
Allegheny Energy Supply Company, LLC
Amerada Hess Corporation
American National Power, Inc., PPL Energy Plus, LLC and Sempra 
Energy\*\
American Public Power Association and Transmission Access Study 
Group\*\
Bonneville Power Administration
BP Energy Company
California Electricity Oversight Board
California Independent System Operator Corporation
Public Utilities Commission of the State of California
Canadian Electricity Association
Central Maine Power Company, New York State Electric & Gas 
Corporation and Rochester Gas and Electric Corporation\**\
Central Vermont Public Service Corporation, El Paso Electric 
Company, Southern Indiana Gas & Electric Company & WPS Resources 
Corporation
City of Seattle, Washington
Colorado Office of Consumer Counsel, et al.
Connecticut Department of Public Utility Control
Cinergy Services, Inc.
Duke Energy Corporation
Dynegy Power Marketing, Inc., et al.
East Texas Cooperatives
Eastern Energy, L.P.
Edison Electric Institute
Edison Mission Energy
ELCON, et al.
Electric Power Supply Association, Independent Energy Producers of 
California, Independent Power Producers of New York, Inc. and the 
Western Power Trading Forum\*\
El Paso Electric Company
Entergy Services, Inc.
Exelon Corporation
Federal Trade Commission
FPL Energy, LLC
FirstEnergy Service Company
Intercontinental Exchange, Inc.
Intergen North America, L.P.
Louisiana Public Service Commission
Merrill Lynch Capital Services, Inc. (Morgan Stanley Capital Group, 
Inc.)
MidAmerican Energy Company
Mirant Americas Energy Marketing, L.P. and TransAlta Energy 
Marketing (U.S.), Inc.\*\
Modesto Irrigation District
Montana Consumer Counsel
Montana Public Service Commission
National Association of State Utility Consumer Advocates
National Energy Marketers Association
National Rural Electric Cooperative Association
New England Conference of Public Utility Commissioners
New York Independent System Operator
New York State Public Service Commission
NiSource Inc.
Northeast Utilities Service Company
Ontario Power Generation Inc.
PacificCorp
Pacific Gas and Electric Company
Pinnacle West Companies
PJM Industrial Customer Coalition
PLATTS
Powerex Corp.
PPL Montana, LLC and PPL EnergyPlus, LLC\**\
Reliant Energy Power Generation, Inc. and Reliant Energy Services, 
Inc.
Sacramento Utility District
Southern California Edison Company
Southern Company Services, Inc.
Steel Producers
TECO Energy, Inc.
TransCanada Companies
Transmission Dependent Utility Systems
Tucson Electric Power Company
Williams Energy Marketing & Trading Company

------------

    \*\ Entities Filing Both Comments and Reply Comments.
    \**\Entities Filing Reply Comments Only.

    Massey, Commissioner, concurring in part:
    The tariff conditions that the Commission approves today send a 
clear message to market-based rate sellers: don't lie, don't 
manipulate market conditions, don't violate market rules and don't 
collude with others. For sellers who choose to behave otherwise, the 
Commission now has the tools to sanction such bad behavior and we 
give notice of what some of those sanctions could be. This action 
should help to restore the faith in energy markets that has been 
lost in the last few years.
    There is one aspect of today's order, however, that I would have 
written differently. 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. In such a case, the 
appropriate remedy may be that the manipulating seller makes the 
market whole. I would prefer to not take this or any monetary remedy 
off of the table, but instead to allow the Commission the 
flexibility to tailor the remedy to the circumstances of each case.
    This one concern with today's order should not be interpreted, 
however, as diminishing in any way my enthusiastic support for this 
otherwise excellent order. I commend my colleagues for taking this 
important and much needed step.

[[Page 65925]]

    For these reasons, I concur in part with today's order.

William L. Massey,
Commissioner.

    Brownell, Commissioner, concurring:
    1. We are adopting behavioral rules for market participants in 
the electric and natural gas markets. No one can question the good 
intention behind these behavioral rules. As I have stated before, if 
there are violations of our rules, regulations or policies, we must 
be willing to punish and correct. Concurrently, if there is 
misconduct by market participants that is intended to be 
anticompetitive, we must have the ability to remedy those market 
abuses.
    2. Conversely, when we originally proposed behavioral rules, I 
had a number of concerns. I was concerned that the use of vague 
terms would create uncertainty and, thereby, undermine the good 
intentions of the rules. I feared that subsequent applications of 
the proposed behavior rules to real world actions could result in 
overly proscriptive ``rules of the road'' that will dampen business 
innovation and creative market strategies. The net effect would be 
less competition and the associated higher costs to consumers. I was 
concerned that we may be proposing a model that simply does not fit 
with the larger lessons we have learned in fostering competition 
over the past two decades, particularly in the gas market.
    3. It is difficult to strike the right balance. I have carefully 
weighed the comments and believe the revisions and clarifications to 
the proposed behavioral rules achieve the appropriate balance. We 
clarify that these rules do not impose a ``must offer'' requirement. 
We revise the definition of manipulation to relate to actions that 
are ``intended to or foreseeably could'' manipulate markets. We add 
the exclusion that action taken at the direction of an RTO or ISO 
does not constitute manipulation.
    4. Commenters also challenge the sufficiency of the term 
``legitimate business purpose'' in distinguishing between prohibited 
and non-prohibited behavior. We clarify that transactions with 
economic substance, in which a seller offers or provides a service 
to a buyer where value is exchanged for value, are not prohibited 
behavior. Behavior driven by legitimate profit maximization or that 
serves important market functions is not manipulation. Moreover, I 
think it is important to recognize that scarcity pricing is the 
market response to a supply/demand imbalance that appropriately 
signals the need for infrastructure. For example, the high prices of 
2000-2001 that reflected supply/demand fundamentals resulted in the 
first new power plants being constructed in California in ten years; 
price risk being hedged through the use of long-term contracting; 
and renewed efforts to correct a flawed market design.
    5. We have also adopted measures that require accountability. A 
complaint must be brought to the Commission within 90 days after the 
calendar quarter that the manipulative action was alleged to have 
occurred. The 90-day time limit strikes an appropriate balance 
between providing sufficient opportunity to detect violations and 
the market's need for finality. The Order also places a similar time 
limit on Commission action. As a matter of prosecutorial policy, the 
Commission will only initiate a proceeding or investigation within 
90 days from when we obtained notice of a potential violation 
through either a hotline call; conversations with our enforcement 
staff; or notification from a market monitor.
    6. While these rules are designed to provide adequate 
opportunity to detect, and the Commission to remedy, market abuses 
and are clearly defined so that they do not create uncertainty, 
disrupt competitive commodity markets or prove simply ineffective, 
competitive markets are dynamic. We need to periodically evaluate 
the impact of these behavior rules on the electric and natural gas 
markets. We have directed our Office of Market Oversight and 
Investigation to evaluate the effectiveness and consequences of 
these behavioral rules on an annual basis and include their analysis 
in the State of the Market Report.

Nora Mead Brownell.

[FR Doc. 03-29299 Filed 11-21-03; 8:45 am]
BILLING CODE 6717-01-P