[Federal Register Volume 68, Number 228 (Wednesday, November 26, 2003)]
[Rules and Regulations]
[Pages 66323-66338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29300]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM03-10-000; Order No. 644]


Amendments to Blanket Sales Certificates

November 17, 2003.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
amending its regulations regarding the blanket certificates for 
unbundled gas sales services held by interstate natural gas pipelines 
and the blanket marketing certificates held by persons making sales for 
resale of gas at negotiated rates in interstate commerce to require 
that pipelines and all sellers for resale adhere to a code of conduct 
with respect to gas sales. The purpose of the revisions to the current 
regulatory framework is to ensure the integrity of the gas sales market 
that remains within the Commission's jurisdiction. The rule is another 
part of the Commission's continuing effort to restore confidence in the 
nation's energy markets.

EFFECTIVE DATE: The rule will become effective December 26, 2003.

FOR FURTHER INFORMATION CONTACT: Robert D. McLean, Office of the 
General Counsel, Federal Energy Regulatory Commission, 888 First 
Street, NE., Washington, DC 20426, (202) 502-8156.
    Frank Karabetsos, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202) 502-8133.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Background
    A. Changes in the Natural Gas Industry
    B. Events in Western Energy Markets in 2000
III. Comment Analysis
    A. Application of Code of Conduct to Jurisdictional Sellers
    B. Limited Jurisdiction of Blanket Certificates
    C. Code of Conduct
    1. General Language Prohibiting Manipulation
    2. Wash Trades
    3. Collusion
    4. Reporting to Gas Index Publishers
    5. Three-Year Data and Information Retention Requirement
    6. Prohibition on Reporting Transaction with Affiliates
    D. Remedies
    1. General Issues
    2. 90-Day Time Limit on Complaints
IV. Administrative Finding and Notices
    A. Information Collection Statement
    B. Environmental Analysis
    C. Regulatory Flexibility Act Certification
    D. Document Availability
    E. Effective Date and Congressional Review
Regulatory Text
Appendix--Entities Filing Intervening and Reply Comments

Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
and Nora Mead Brownell.

I. Introduction

    1. The Federal Energy Regulatory Commission (Commission) is 
amending the blanket certificates for unbundled gas sales services held 
by interstate natural gas pipelines and the blanket marketing 
certificates held by persons making sales for resale of gas at 
negotiated rates in interstate commerce to require that pipelines and 
all sellers for resale adhere to a code of conduct with respect to gas 
sales. The purpose of the revisions is to ensure the integrity of the 
gas sales market that remains within the Commission's jurisdiction. 
This rule is another part of the Commission's continuing effort to 
restore confidence in the nation's energy markets. Contemporaneously 
with this rule, the Commission is also issuing a rule to require 
wholesale sellers of electricity at market-based rates to adhere to 
certain behavioral rules when making wholesale sales of electricity. In 
an order dated June 26, 2003,\1\ the Commission, acting under the 
authority of Section 7 of the Natural Gas Act, proposed to revise 
Section 284.288 of its regulations, which is currently reserved, to 
require that pipelines providing unbundled sales service adhere to a 
code of conduct when making gas sales. The Commission also proposed to 
add a new Section 284.403 to Part 284, Subpart L to require persons 
holding blanket marketing certificates under Section 284.402 to adhere 
to a code of conduct when making gas sales.\2\
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    \1\ 1103 FERC ] 61,350 (2003) (June 26 NOPR).
    \2\ Section 284.5 of the Commission's regulations also states 
that ``[t]he Commission may prospectively, by rule or order, impose 
such further terms and conditions as it deems appropriate on 
transactions authorized by this part.''
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    2. The need for this code of conduct, we stated, was informed by 
the types of behavior that occurred in the Western markets during 2000 
and 2001, by Commission Staff's Final Report concerning these 
markets,\3\ and by our experience in other competitive markets. We 
stated that in formulating our proposed code of conduct rules, we were 
required to strike a careful balance among a number of competing 
interests. We noted, for example, that while customers 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 specifically sought comments on whether our 
proposed code of conduct rules had achieved the appropriate balance 
among these competing interests.
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    \3\ Final Report on Price Manipulation in Western Markets: Fact-
Finding Investigation of Potential Manipulation of Electric and 
Natural Gas Prices, Docket No. PA02-2-000 (March 2003) (Final 
Report).
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    3. Here, based on the extensive comments received by the entities 
listed in the Appendix to this order and based on our further 
consideration of the issues presented, we will adopt the code of 
conduct rules proposed in the June 26 NOPR subject to certain 
modifications discussed below. These rules, as revised, are set forth 
below in, 18 CFR Sec. Sec.  284.288 and 284.403.

[[Page 66324]]

    4. Under Sections 284.288 and 284.403 of the new codes of conduct, 
a pipeline providing unbundled natural gas sales service under Section 
284.284, or any person making natural gas sales for resale in 
interstate commerce pursuant to Section 284.402, is prohibited from 
engaging in actions without a legitimate business purpose that 
manipulate or attempt to manipulate market conditions, including wash 
trades and collusion.
    5. New Sections 284.288 and 284.403 also contain various reporting 
obligations. To the extent a pipeline providing service under Section 
284.284, or any person making natural gas sales for resale in 
interstate commerce pursuant to Section 284.402, engages in reporting 
of transactions to publishers of gas price indices, the pipeline or 
blanket marketing certificate holder shall provide complete and 
accurate information to any such publisher. Further, such entities must 
retain all relevant data and information upon which they billed the 
prices they charged for natural gas they sold pursuant to their market 
based sales certificate or the prices they reported for use in price 
indices for three years. Moreover, such entities that engage in 
reporting must do so consistent with the Policy Statement on Natural 
Gas and Electric Price Indices, 104 FERC ] 61,121 (2003) (Policy 
Statement), which provides that a data provider should only report each 
bilateral, arm's-length transaction between non-affiliated companies. 
Violation of the preceding provisions may result in disgorgement of 
unjust profits, suspension or revocation of a pipeline's blanket 
certificate or other appropriate non-monetary remedies. Finally, any 
person filing a complaint for a violation of the preceding provisions 
must do so no later than 90 days after the end of the calendar quarter 
in which the alleged violation occurred unless that person could not 
have known of the alleged violation, in which case the 90-day time 
limit will run from the discovery of the alleged violation.
    6. This code of conduct is designed to provide market participants 
adequate opportunities to detect, and the Commission to remedy, market 
abuses. This code is clearly defined so that it does not create 
uncertainty, disrupt competitive commodity markets or simply prove 
ineffective. However, since competitive markets are dynamic, it is 
important that we periodically evaluate the impact that these 
regulations have on the energy markets. We direct our office of Market 
Oversight and Investigation to evaluate the effectiveness and 
consequences of these regulations on an annual basis and to include 
this analysis in the State of the Markets Report.

II. Background

A. Changes in Natural Gas Industry

    7. A decade ago, as a result of changes in the natural gas 
industry, Congressional legislation and various Commission rulemaking 
proceedings restructuring the gas industry, the Commission issued 
blanket certificates to allow pipelines and other persons selling 
natural gas to make sales for resale of natural gas at market-based or 
negotiated rates. These certificates were granted in two final rules 
issued by the Commission: Order No. 636 \1\ and Order No. 547.\2\
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    \1\ Order No. 636, Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation Under part 
284 of the Commission's Regulations, and Regulation of Natural Gas 
Pipelines After Partial Wellhead Decontrol, FERC. Stats. & Regs. ] 
30,939 (1992), order on reh'g, Order No. 636-A, FERC. Stats. & Regs. 
] 30,950 (1992), order on reh'g, Order No. 636-B, 61 FERC. ] 61,272 
(1992), aff'd in part, rev'd in part, United Distribution Cos. v. 
FERC, 88 F.3d 1105 (DC Cir. 1996), cert. denied, 137 L. Ed. 2d 845, 
117 S. Ct. 1723, 117 S. Ct. 1724 (1997), on remand, Order No. 636-C, 
78 FERC. ] 61,186 (1997), order on reh'g, Order No. 636-D, 83 FERC ] 
61,210 (1998).
    \2\ Regulations Governing Blanket Marketer Sales Certificates, 
FERC Stats. & Regs. ] 30,957 (1992), order on reh'g and 
clarification, 62 FERC ] 61,239 (1993).
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    8. In Order No. 636, the Commission required all pipelines that 
provide open-access transportation to offer their sales services on an 
unbundled basis. To this end, the Commission issued to pipelines 
holding a blanket transportation certificate under subpart G of part 
284 of the Commission's regulations, or performing transportation under 
subpart B, a blanket certificate authorizing firm and interruptible 
sales for resale.\3\ The Commission required that all firm and 
interruptible sales services be provided as unbundled services under 
the blanket sales certificate. The Commission found that this form of 
regulation would enable the pipelines to compete directly with other 
gas sellers on the same terms at prices determined in a competitive 
market. The unbundled sales services were also afforded pregranted 
abandonment authority.
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    \3\ 18 CFR 284.281-287 (2003).
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    9. In Order No. 636, the Commission authorized pipelines to make 
unbundled sales at market-based rates because it concluded that, after 
unbundling, sellers of short-term or long-term firm gas supplies 
(whether they be pipelines or other sellers) would not have market 
power over the sale of natural gas. The Commission's determination was 
also based on Congress' express finding that a competitive market 
exists for gas at the wellhead and in the field. The Commission 
indicated that it was instituting light-handed regulation, relying upon 
market forces at the wellhead or in the field to constrain unbundled 
pipeline sales for resale gas prices within the Natural Gas Act's 
``just and reasonable'' standard. In addition, the requirement that 
pipelines provide open access transportation from the wellhead to the 
market also permitted the Commission to exercise light-handed 
regulation over jurisdictional gas sales. Finally, the Commission 
stated that it would be regulating the pipeline sales in the same 
manner as it had done for sales for resale by marketers.
    10. The Commission also determined that a pipeline as a gas 
merchant would be the functional equivalent of a pipeline's marketing 
affiliate. The Commission concluded that standards of conduct set forth 
by Order No. 497 would apply to the relationship between the pipeline 
transportation function and its merchant function.\4\ Accordingly, the 
regulations issuing pipelines blanket sales certificates included 
standards of conduct and reporting requirements. The purpose of 
imposing the requirements set forth in Order No. 497 was to ensure that 
the pipeline did not favor itself as a merchant over other gas 
suppliers in performing its transportation function.
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    \4\ Inquiry Into Alleged Anticompetitive Practices Related to 
Marketing Affiliates of Interstate Pipelines, Order No. 497, 53 FR 
22139 (June 14, 1988), FERC Statutes and Regulations, Regulation 
Preambles 1986-1990 ] 30,820 (1988), order on rehearing, Order No. 
497-A, 54 FR 52781 (Dec. 22, 1989), FERC Statutes and Regulations, 
Regulation Preambles 1986-1990 ] 30,868 (1989), order extending 
sunset date, Order No. 497-B, 55 FR 53291 (Dec. 28, 1990), FERC 
Statutes and Regulations, Regulation Preambles 1986-1990 ] 30,908 
(1990), order extending sunset date and amending final rule, Order 
No. 497-C, 57 FR 9 (Jan. 2, 1992), FERC Statutes and Regulations ] 
30,934 (1991), reh'g denied, 57 FR 5815, 58 FERC ] 61,139 (1992), 
aff'd in part and remanded in part, Tenneco Gas v. Federal Energy 
Regulatory Commission, 969 F.2d 1187 (DC Cir. 1992), order on 
remand, Order No. 497-D, 57 FR 58978 (Dec. 14, 1992), FERC Statutes 
and Regulations ] 30,958 (1992), order on reh'g and extending sunset 
date, Order No. 497-E, 59 FR 243 (Jan. 4, 1994), FERC Statutes and 
Regulations ] 30,987 (Dec. 23, 1994), order on reh'g, Order No. 497-
F, 59 FR 15336 (Apr. 1, 1994), 66 FERC ] 61,347 (1994).
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    11. In Order No. 547, as part of the industry restructuring begun 
by Order No. 636, the Commission issued blanket certificates to all 
persons who are not interstate pipelines authorizing them to make 
jurisdictional gas sales for resale at negotiated rates with pregranted 
abandonment authority.\5\ The blanket certificates were issued by 
operation of

[[Page 66325]]

the rule itself and there was no requirement for persons to file 
applications seeking such authorization. The Commission determined that 
the competitive gas commodity market would lead all gas suppliers to 
charge rates that are sensitive to the gas sales market and cognizant 
of the variety of options available to gas purchasers. The Commission 
further stated that, in a competitive market, the basis for the rate to 
be negotiated between a willing buyer and seller is a commercial, not a 
regulatory, matter. The requirement that pipelines provide open access 
transportation from the wellhead to the market also permitted the 
Commission to exercise light-handed regulation over jurisdictional gas 
sales. The Commission also determined that marketing certificates 
issued by the final rule are of a limited jurisdiction. The Commission 
held that the holders of marketing certificates are not subject to any 
other regulation under the Natural Gas Act jurisdiction of the 
Commission by virtue of transactions under the certificates.
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    \5\ 18 CFR Sec.  284.401-402 (2003).
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B. Events in Western Energy Markets

    12. In March 2003, in Docket No. PA02-2-000, the Commission Staff 
concluded its Fact Finding Investigation of Potential Manipulation of 
Electric and Gas Prices and issued a Final Report on Price Manipulation 
in Western Markets (Final Report). A key conclusion of the Final Report 
is that markets for natural gas and electricity in California are 
inextricably linked, and that dysfunctions in each fed off one another 
during the California energy crisis. Staff found that spot gas prices 
rose to extraordinary levels, facilitating the unprecedented price 
increase in the electricity market. The Final Report found that 
dysfunctions in the natural gas market appear to stem, at least in 
part, from efforts to manipulate price indices compiled by trade 
publications. The Final Report stated that reporting of false data and 
wash trading are examples of efforts to manipulate published price 
indices.
    13. While the Final Report contained numerous recommendations which 
will not be discussed here, the Staff did recommend that Sections 
284.284 and 284.402 of the Commission's regulations be amended to 
provide explicit guidelines or prohibitions for trading natural gas 
under Commission blanket certificates. The specific recommendations 
include: (1) Conditioning natural gas companies' blanket certificates 
on providing accurate and honest information to entities that publish 
price indices; (2) conditioning blanket certificates on retaining all 
relevant data for three years for reconstruction of price indices; (3) 
establishing rules banning any form of prearranged wash trading; and 
(4) prohibiting the reporting of trades between affiliates to industry 
indices.

III. Comment Analysis

A. Application of Code of Conduct to Jurisdictional Sellers

    14. As an initial matter, the Commission will clarify the extent of 
its jurisdiction over resales of natural gas. As stated above, the 
Commission's NGA jurisdiction to regulate the prices charged by sellers 
of natural gas has been substantially narrowed by the Natural Gas 
Policy Act of 1978 (NGPA) and Congress' subsequent enactment of the 
Natural Gas Wellhead Decontrol Act of 1989. As a result of these 
statutory provisions first sales of natural gas were deregulated. Under 
the NGPA, first sales of natural gas are defined as any sale to an 
interstate or intrastate pipeline, LDC or retail customer, or any sale 
in the chain of transactions prior to a sale to an interstate or 
intrastate pipeline or LDC or retail customer. NGPA Section 2(21)(A) 
sets forth a general rule stating that all sales in the chain from the 
producer to the ultimate consumer are first sales until the gas is 
purchased by an interstate pipeline, intrastate pipeline, or LDC.\4\ 
Once such a sale is executed and the gas is in the possession of a 
pipeline, LDC, or retail customer, the chain is broken, and no 
subsequent sale, whether the sale is by the pipeline, or LDC, or by a 
subsequent purchaser of gas that has passed through the hands of a 
pipeline or LDC, can qualify under the general rule as a first sale on 
natural gas. In addition to the general rule, NGPA Section 2(21)(B) 
expressly excludes from first sale status any sale of natural gas by a 
pipeline, LDC, or their affiliates, except when the pipeline, LDC, or 
affiliate is selling its own production.
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    \4\ NGPA Section 2(21)(A) states: General Rule.--The term 
``first sale'' means any sale of any volume of natural gas--(i) To 
any interstate pipeline or intrastate pipeline; (ii) to any local 
distribution company; (iii) to any person for use by such person; 
(iv) which precedes any sale described in clauses (i),(ii), (iii); 
and (v) which precedes or follows any sale described in clauses (i), 
(ii), (iii), or (iv) and is defined by the Commission as a first 
sale in order to prevent circumvention of any maximum lawful price 
established under this Act.
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    15. Therefore, the Commission's jurisdiction under the NGA includes 
all sales for resale by interstate and intrastate pipelines and LDCs 
and their affiliates, other than their sales of their own production. 
The Commission's jurisdiction also includes a category of sales by 
entities that are not affiliated with any pipeline or LDC. Such 
entities are those making sales for resale of gas that was previously 
purchased and sold by an interstate or intrastate pipeline or LDC or 
retail customer.
    16. Given that the Commission does not have jurisdiction over the 
entire natural gas market, several commenters raise concerns regarding 
the potential adverse effect of imposing the proposed code of conduct 
only on the portion of the natural gas market under the Commission's 
jurisdiction.\5\ Commenters assert that the proposed rules could tilt 
capital markets against those subject to the code of conduct because 
they would be viewed as a riskier proposition than those entities 
selling gas that do not have the same regulatory risk. Commenters argue 
that to impose these regulations on a portion of the market causes an 
uneven playing field and amounts to undue discrimination because those 
under the rules would be: (1) Subject to sanctions such as loss of 
certificate authority and disgorgement of profits; (2) hesitant to 
engage in legitimate transactions due to uncertainty imposed by vague 
and inconsistent standards developed in different proceedings; (3) 
subject to the increased risk of private enforcement actions by gas 
purchasers before the Commission; (4) subject to the shifting of 
investment to non-jurisdictional marketers, and; (5) subject to 
increased recordkeeping costs for jurisdictional entities.
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    \5\ See e.g., AGA, Peoples, NiSource, Nicor, Cinergy, Sempra, 
FPL Group, Reliant, Coral, NJR Companies, EPSA, ProLiance, Duke 
Energy, Questar, Western.
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    17. Commenters argue that the proposed regulations are duplicative 
because other government agencies such as the Federal Trade Commission, 
the Department of Justice, and various state agencies already exercise 
jurisdiction over anticompetitive behavior.\6\ Further, commenters 
argue that in addition to stifling innovation, the proposed regulations 
will erode regulated marketer participation, and thereby reduce the 
efficiency of the markets and deprive the customers of the benefits of 
deregulation. Furthermore, since this code regulates only a small 
portion of the market,\7\ they argue that the rules will be ineffective 
in achieving uniform compliance.
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    \6\ Coral at 5.
    \7\ See NiSource at 9 (stating that the sales for resale by 
interstate pipelines and off-system sales by LDCs constitute a small 
portion of the gas sales transactions in the market, in contrast to 
producers and independent marketers that account for a very 
substantial portion of gas sold, which are not subject ot the 
proposed regulations).
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    18. Finally, commenters maintain that before imposing these 
potentially

[[Page 66326]]

burdensome compliance conditions, the Commission should ascertain 
critical information on its effects, including the percentage of the 
natural gas sellers that would be required to comply with the proposed 
rule or the amount of the gas affected. Commenters argue that 
uncertainty caused by the proposed rules would be particularly damaging 
in light of the current need for additional supplies and the current 
need to regain investor confidence.
    19. However, several commenters support the Commission's action in 
imposing a code of conduct.\8\ These commenters state that if 
jurisdictional gas sellers seek to avoid a requirement that they do 
business honestly by restructuring their business to escape the 
Commission's jurisdiction, Congress might be interested in broadening 
the Commission's jurisdiction to prevent such outcomes. Moreover, they 
assert that the only way that jurisdictional certificate holders could 
be at a competitive disadvantage is if they are competing against 
companies that are engaging in the very illegal acts that the 
Commission's code of conduct is proscribing. Finally, commenters argue 
that the proposed regulations should not harm any market participant 
and should not have a negative impact on natural gas prices, but will 
only require action consistent with a competitive market.
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    \8\ See, e.g., BP, EMIT, CPUC, NASUCA.
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    20. The Commission has reviewed the comments setting forth possible 
problems in placing a code of conduct regulations over the portion of 
the natural gas marketplace within its jurisdiction. In the 
Commission's view, implementing these regulations designed to prevent 
manipulation of market prices and prevent abusive behavior which 
distorts the competitive marketplace for natural gas will not present 
an undue burden for gas sellers under the Commission's jurisdiction or 
disrupt the competitive gas market.
    21. As stated above, the Commission retains jurisdiction of sales 
of domestic gas for resale by pipelines, local distribution companies 
and affiliated entities, if the seller does not produce the gas it 
sells. The fact that the Commission does not regulate the entire 
natural gas market does not compel the Commission to refrain from 
exercising its authority over that portion of the gas market which is 
within its jurisdiction to prevent the manipulation of prices. By its 
action here, the Commission will maintain and protect the competitive 
marketplace within its jurisdiction. On balance, the Commission finds 
that its statutory responsibility to ensure just and reasonable rates 
for the sales over which it does have jurisdiction outweighs concerns 
that a portion of the market will not be subject to these regulations 
and the potential resulting market disruptions.\9\
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    \9\ We note that the Commission also does not have jurisdiction 
over all sales for resale in electric markets. The Commission 
nevertheless exercises its authority to prevent manipulation of the 
market by those sellers over whom it does have jurisdiction.
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    22. This finding is based upon a balancing of factors raised by the 
commenters against the Commission's duty to maintain the competitive 
marketplace for natural gas within its jurisdiction. Although all 
sellers of natural gas will not be under the same set of regulations, 
this does not by itself place an undue burden, or for that matter, a 
competitive disadvantage of any consequence upon the sellers of natural 
gas within the Commission's jurisdiction. This is because the 
regulations to be placed upon jurisdictional natural gas sellers only 
prevent such market participants from distorting the competitiveness of 
the marketplace by engaging in abusive or manipulative acts in the 
marketplace. For instance, commenters argue that the increased 
regulatory risk could shift capital markets against those subject to 
the new regulations. This argument is speculative and it appears to the 
Commission that it is at least equally likely that investors and gas 
buyers would gain confidence in the knowledge that the jurisdictional 
seller of natural gas was required to engage in business practices that 
do not abuse or manipulate the marketplace.

B. Limited Jurisdiction of Blanket Certificates

    23. In its June 26 NOPR, the Commission proposed to delete the last 
sentence of 18 CFR 284.402(a) (2003) from its regulations. That 
sentence reads, ``[a] blanket certificate issued under Subpart L is a 
certificate of limited jurisdiction which will not subject the 
certificate holder to any other regulation under the Natural Gas Act 
jurisdiction of the Commission by virtue of the transactions under the 
certificate.''
    24. Several commenters raise concerns regarding this deletion.\10\ 
Commenters argue that the statement of limited jurisdiction for the 
subject blanket certificates should remain in the regulations in order 
to relieve blanket holders of market sales certificates from any aspect 
of the Commission's jurisdiction which does not apply to market based 
rates such as the filing of tariff rates and various forms. Retaining 
this statement of limited jurisdiction is of particular concern to LDCs 
that are comprehensively regulated at the state level.\11\ Commenters 
argue that the Commission should clarify that blanket certificate 
holders are not subject to any other regulations except as provided in 
Subpart L of Part 284. Finally, commenters argued that the new rules 
and burdens are inappropriate for affiliates of small pipelines, 
particularly where the pipeline is non-major and serves few customers 
and the affiliated seller is selling supplies for the primary purpose 
of balancing its purchases with its manufacturing needs.\12\ These 
commenters argue that the Commission should establish a procedure to 
exempt such affiliates of small pipelines.
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    \10\ See e.g., Peoples, TXU, NiSource, USG, AGA, NGSA, NJR 
Companies, Shell Offshore, BP, Western.
    \11\ See NiSource.
    \12\ See USG.
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    25. The Commission has reviewed the comments and has determined 
that it will not delete the affirmative statement of limited 
jurisdiction from its regulations; rather, in keeping with the points 
raised by the comments it will modify the sentence to read, ``[a] 
blanket certificate issued under Subpart L is a certificate of limited 
jurisdiction which will not subject the certificate holder to any other 
regulation under the Natural Gas Act jurisdiction of the Commission, 
other than that set forth in this Subpart L, by virtue of the 
transactions under this certificate.'' Because the regulations adopted 
by the instant rulemaking will be placed in Subpart L, this action will 
maintain the original intent of the limited market based blanket 
certificate while allowing for the new conditions found necessary by 
the Commission.
    26. Further, the Commission will not grant a generic exception to 
these regulations for small entities. In the Commission's view, 
entities with a small number of customers making few, or low volume, 
transactions should incur only minimal administrative or financial 
burden by virtue of these regulations.

C. Code of Conduct

1. General Language Prohibiting Manipulation
    27. As revised Section 284.288(a) of the Commission's regulations 
provides that:

    A pipeline that provides unbundled natural gas service under 
Sec.  284.284 is prohibited from engaging in actions or transactions 
that are without a legitimate business purpose and that are intended 
to or foreseeably could manipulate market prices,

[[Page 66327]]

market conditions, or market rules for natural gas.\13\

    \13\ Section 284.403(a) of the Commission's regulation provides 
that:
    Any person making natural gas sales for resale in interstate 
commerce pursuant to Sec.  284.402 is prohibited from engaging in 
actions or transactions that are without a legitimate business 
purpose and are intended to or foreseeably could manipulate market 
prices, market conditions, or market rules for natural gas.
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    28. As discussed above, several commenters raise concerns regarding 
the general language prohibiting manipulation.\14\ Commenters contend 
that the regulation contains too many ambiguous terms such as 
``legitimate business purpose,'' ``manipulation,'' and ``legitimate 
forces of supply and demand.'' NJR Companies assert that the proposal 
violates due process requirements, and that parties must receive fair 
notice before being deprived of their property. NJR Companies suggest 
that the Commission replace vague language with straightforward 
requirements.
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    \14\ See e.g., TXU, NGSA, Shell, NJR Companies, NEMA, EMIT, 
Cinergy, Sempra, Reliant, Select, Merrill Lynch and Morgan Stanley, 
Coral, Hess, Peoples, EnCana, Mirant, NASUCA.
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    29. Sempra recommends that the Commission take a cue from the 
jurisprudence of the CFTC and SEC by adopting a standard for 
manipulation that includes ability, intent, and effect as required 
elements of an offence. Reliant, Select, Merrill Lynch and Morgan 
Stanley assert that the Commission should establish four essential 
elements to prove manipulation: (1) The ability to move market prices, 
(2) the specific intent to create an artificial price, (3) the 
existence of an artificial price, and (4) causation of the artificial 
price by the accused.
    30. Coral contends that adoption of the proposed regulation could 
have the effect of deterring blanket certificate holders from 
aggressively or creatively marketing their gas or developing new 
products that may benefit competitive gas markets. NASUCA argues that 
the Commission should clarify what types of manipulative behavior is 
prohibited. It adds that manipulation that results from inadequate 
planning, inept design, incompetent personnel, or poor supervision 
should not be exempted from enforceable action.
    31. Hess believes that the Commission should not adopt this 
measure, asserting that, among other things, it has not sufficiently 
explained how it intends to enforce the standard. EnCana and Mirant 
question the necessity of the rule since the Commission and other 
agencies have already shown an ability to police allegedly manipulative 
behavior.
    32. We find that our rules, including specifically the prohibitions 
set forth relating to market manipulation, are not unduly vague as 
asserted by some commenters. 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,\15\ 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.'' \16\ The Commission's rules will 
be found to 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.'' \17\
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    \15\ See Freeman United Coal Mining Company v. Federal Mine 
Safety and Health Review Commission, 108 F.3d 358, 362 (DC Cir. 
1997) (Freeman).
    \16\ 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.'').
    \17\ 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.'').
---------------------------------------------------------------------------

    33. 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.\18\ 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.'' \19\
---------------------------------------------------------------------------

    \18\ 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.'').
    \19\ See Ray Evers Welding Co. v. OSHRC, 625 F.2d 726, 730 (6th 
Cir. 1980).
---------------------------------------------------------------------------

    34. 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.\20\ 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 less 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.'' \21\
---------------------------------------------------------------------------

    \20\ See Village of Hoffman Estates, et al. v. The Flipside, 
Hoffman Estates, Inc., 455 U.S. 489, 498 (1981) (Hoffman).
    \21\ 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.'').
---------------------------------------------------------------------------

    35. Applying these standards here, we find that our rules satisfy 
the requirement of due process. It cannot be said that the prohibitions 
against market manipulation, as set forth in the rules, are unclear in 
their intent. For example, our requirement that a seller's actions must 
have a ``legitimate business purpose'' is clearly intended to give 
sellers some latitude in determining their business actions, while 
safeguarding market participants against market manipulation for which 
there can be no legitimate business purpose. Sellers will not be 
required to guess at the meaning of the above-referenced term because 
it can only have meaning with specific reference to seller's own 
business practices and motives. In other words, if the seller has a 
legitimate business purpose for its actions, it cannot be sanctioned 
under this rule.
    36. In establishing these rules, we have worked to strike a 
necessary balance. On the one hand, this prohibition allows the 
Commission to protect market participants from market abuses that 
cannot be precisely envisioned at the present time. At the same time, 
we have attempted to set forth with sufficient specificity the class of 
behaviors prohibited in a manner that will inform market-based rate 
sellers of the type of activities that are consistent with just and 
reasonable rates. This provides the Commission the ability to codify 
these requirements and provide a regulatory vehicle for their 
prospective enforcement. Thus, our 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 down the road.

[[Page 66328]]

    37. Nonetheless, we are committed to making our rules as specific 
as possible and thus, we are adopting a number of the revisions 
proposed by commenters in order to clarify the scope and application of 
our rules.
    38. We clarify that we are focusing on behavior undertaken without 
an appropriate commercial underpinning for the purpose of distorting 
prices from those that would otherwise occur in the competitive market. 
However, 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'' has resulted in 
confusion. 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 causes other 
than manipulation 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 that this 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 that are intended to or foreseeably could interfere with the 
prices that would be set by competitive forces.\22\ One such action 
would be a wash trade. As discussed below, wash trades have no economic 
risk or substance, and create a false price for use in indices or in 
the market in general.
---------------------------------------------------------------------------

    \22\ Our rules are designed to cover actions that are intended 
to manipulate prices regardless of whether such actions actually 
resulted in distorted prices. We note, however, that in most such 
cases there will be no unjust profits to disgorge.
---------------------------------------------------------------------------

    39. Commenters have also raised questions regarding how the 
Commission will determine whether this rule has been violated. In 
determining whether an activity is in violation of our rule, we will 
examine all relevant facts and circumstances surrounding the activity 
to evaluate whether there is a legitimate business purpose attributable 
to the behavior. We will evaluate whether the activity was designed to 
lead to (or could foreseeably lead to) a distorted price that is not 
reflective of a competitive market. Our approach will be to consider 
the facts and circumstances of the activity to determine its purpose 
and its intended or foreseeable result. However, the Commission 
recognizes that manipulation of energy markets does not happen by 
accident. We also recognize that intent often must be inferred from the 
facts and circumstances presented. Therefore, a violation of the 
instant rule must involve conduct which is intended to, or would 
foreseeably distort prices.\23\
---------------------------------------------------------------------------

    \23\ 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.
---------------------------------------------------------------------------

    40. Some ambiguity necessarily arises from the fact that we cannot 
expressly identify all behaviors that are precluded by the instant 
rule. However, in the Commission's view, the rule and its 
implementation provide sufficient clarity for market-based rates 
sellers to understand the scope of precluded behaviors. The rule 
clearly prohibits behaviors that are undertaken without a legitimate 
business purpose which are designed to, or foreseeably would, distort 
prices for jurisdictional natural gas sales.
    41. Many commenters have raised concerns with the Commission's 
inclusion of the phrase ``legitimate business purpose.'' The 
Commission's inclusion of the phrase is to assure sellers that 
transactions with economic substance in which a seller offers or 
provides service to a willing buyer where value is exchanged for value 
will not be considered prohibited by our rule. While several commenting 
sellers have raised concerns regarding the inclusion of the phrase 
``legitimate business purpose'' in the rule, we believe that not only 
is the inclusion of the phrase necessary, it acts to ensure that such 
sellers acting in a pro-competitive manner will be able to show that 
their actions were not designed to distort prices or otherwise 
manipulate the market. Behaviors and transactions with economic 
substance in which a seller offers or provides service to a willing 
buyer where value is exchanged for value will be recognized as 
reflecting a legitimate business purpose consistent with just and 
reasonable rates. 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.\24\
---------------------------------------------------------------------------

    \24\ See Enron Power Marketing, Inc., 103 FERC ] 61,343 (2003) 
(revoking Enron's blanket marketing certificate authorization based 
on Enron's participation in wash trades having ``no legitimate 
business purpose'').
---------------------------------------------------------------------------

    42. Prices for transactions undertaken in the competitive 
marketplace where value is exchanged for value should be disciplined by 
market forces. On the other hand, all gas transactions may not be 
constrained by market forces. For example, if a gas merchant bought 
natural gas at a location typically used as an index reference point in 
a manner that drives prices higher (and promptly thereafter sold such 
gas at the market prevailing price at a loss) while also possessing a 
derivative position at a notional quantity significantly in excess of 
its physical gas position, that benefits from the increase in the 
market price of natural gas at this index reference point, these 
physical purchases may be interpreted as a component of a broader 
manipulative scheme and the cash market transactions may be found to be 
without a legitimate business purpose.\25\
---------------------------------------------------------------------------

    \25\ Although the instant example focused upon gas market prices 
manipulated upward in order to benefit the merchant derivative 
position, the transactions implementing any manipulation of the 
natural gas market will not be considered legitimate. For further 
discussion of several manipulative strategies see the Commission 
Staff's Final Report on Price Manipulation in Western Markets, 
Chapter IX, p. IX-9 through IX-24.
---------------------------------------------------------------------------

    43. We recognize that we are establishing a general rule that will 
become more clear and concrete after we have had the opportunity to 
consider actual cases. As with all new requirements of this nature, 
with caselaw comes further clarity. This reflects the fact that we 
oversee a dynamic and evolving market where addressing yesterday's 
concerns may not address tomorrow's. Nevertheless, experience in 
applying this rule should be instructive to both the Commission and 
market-based rates sellers. As we apply the rule, 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 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.
    44. The Commission rejects arguments that it 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 
sum, we believe our rules, as modified, explained and adopted 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

[[Page 66329]]

within the Commission's established rules; (ii) do not manipulate or 
attempt to manipulate natural gas markets; (iii) be honest and 
forthright with the Commission and the institutions it has established 
to implement open-access transportation 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.
    45. Our code of conduct rules would not supercede or replace 
parties' rights under Section 5 of the NGA to file a complaint 
contending that a contract should be revised by the Commission 
(pursuant to either the ``just and reasonable'' or ``public interest'' 
test as required by the contract). Rather, any party seeking contract 
reformation or abrogation based on a violation of one or more of these 
regulations 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 these regulations with respect to 
the formation of such contract, we do not intend to entertain contract 
abrogation complaints predicated on our instant code of conduct rules.
2. Wash Trades
    46. Proposed Section 284.288(a)(1) provides that:

    Prohibited actions and transactions include but are not limited 
to 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'').\26\

    \26\ Proposed Section 284.403(a)(1) applies these same 
prohibited actions and transactions to ``[a]ny person making natural 
gas sales for resale in interstate commerce pursuant to Sec.  
284.402 * * * .''
---------------------------------------------------------------------------

    47. TXU comments that wash trades should be more precisely defined, 
contending that the present definition does not explicitly limit the 
applicable transaction to one involving the same location, price, 
quantity, and term, and can be interpreted to prohibit legitimate 
exchange transactions that occur through displacement or backhauls.
    48. Merrill Lynch and Morgan Stanley request that the Commission 
modify the definition of wash trades to clarify that it applies to 
parties who intended to enter into simultaneous offsetting trades to 
effectuate a wash trade. They request that the Commission further 
clarify its definition by specifying that wash trades must involve: (1) 
A deliberately pre-arranged pair of trades, (2) trades made at the same 
time, at the same price, and at the same delivery points, and (3) 
trades made between the same legal entities. NGSA submits that the 
proposed ban on wash trades should be narrowed to encompass only 
simultaneous offsetting trades that are intended to manipulate market 
prices or rules. It explains that parties may enter into legitimate 
business arrangements that may appear as wash trades, for example, 
trades made to correct a scheduling or nomination error, or to 
liquidate a position at a pricing point based on subsequent changes in 
market conditions. NGSA suggests that the proposed regulation regarding 
wash trades be rewritten as: ``knowingly pre-arranged simultaneous 
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').''
    49. Reliant recommends the definition of wash trades be refined to 
eliminate the possibility that multiple traders within the same company 
who are trading with multiple traders in another company do not stand 
accused of engaging in wash trades by the mere coincidence that their 
trades offset one another. Reliant suggests that the regulation be re-
written as: ``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 (sometimes called `wash 
trades').
    50. The Oversight Board asserts that the definition of wash trade 
is unduly narrow, because it limits wash trades to transactions 
involving the same parties, the same quantity, and no economic risk 
whatsoever. The Oversight Board joins NASCUA in contending the proposed 
definition would permit a party to evade the wash trade prescription by 
engaging in transactions that result in the net financial position near 
to, but not equal to, zero. The Oversight Board contends that the 
Commission should qualify its wash trade definition to ensure that the 
codes of conduct can effectively react to unforeseen, novel attempts to 
circumvent the regulatory process. The Oversight Board requests that 
the Commission clarify that it will define wash trades as those 
necessarily affecting market prices or modify the definition to include 
pre-arranged multi-party transactions.
    51. Commenters such as Select, Duke and NEMA suggest that the 
Commission's definition of a ``wash trade'' is too broad and may 
encompass transactions not intended to be wash trades such as 
``sleeving'' and ``bookout'' transactions. Select explains that 
``sleeving'' is a commonly performed trading practice in which a 
creditworthy party agrees to act as an intermediary in transactions 
between two parties who do not have a credit relationship. Duke 
recommends that legitimate trades may include the so-called ``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. In the same vein, NEMA 
submits that there may be instances where legitimate business purposes 
appear to be wash trades (e.g., when traders ``book out'' or ``test the 
waters''), and that the Commission should not deem such trade to be 
illegal. Sempra request that the wash trade prohibition to only apply 
to trades that affect the market and asks that the Commission clarify 
the definition accordingly.
    52. Other commenters such as Shell Offshore, NEMA, and Coral 
question whether the Commission has provided adequate definitions for 
the terms used in its regulations. For example, Shell Offshore 
questions what the regulations mean by a ``pre-arranged'' trade, and 
how it differs from any other negotiation leading to a trade. It also 
questions how to define an ``offsetting trade,'' and how the value is 
measured. It also asks what constitutes the ``same product'' (i.e., 
does an exchange of gas among the same parties constitute the same 
product, and thus qualify as an illegal wash trade). It also notes that 
there are legitimate transactions that involve ``no economic risk,'' 
such as a transaction providing a guaranteed supply at a guaranteed 
price. NEMA also requests additional clarification of the terms ``wash 
trades'' and ``pre-arranged deals'' and requests that the Commission 
investigate the meanings of the terms ``intentional manipulation'' and 
``wash trades'' as they apply to securities and commodity futures 
trading.
    53. The Commission will adopt Section 284.288(a)(1) as proposed. 
Thus, the regulation will state that:

    Prohibited actions and transactions include but are not limited 
to 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'').\27\
---------------------------------------------------------------------------

    \27\ The Commission also adopts Section 284.403(a)(1) as 
proposed, which will apply the same prohibited actions and 
transactions to ``[a]ny person making natural gas sales for resale 
in interstate commerce pursuant to Sec.  284.402 * * * .''

    54. The Commission disagrees with the comments that its definition 
of wash trades is ill conceived or vague. The

[[Page 66330]]

definition of wash trades states the two key elements that the 
Commission sees as the fundamentally manipulative aspects of wash 
trading: (1) that the transaction or transactions are prearranged to 
cancel each other out; and (2) that they involve no economic risk. As 
such, the prohibition against wash trades is illustrative of the 
Commission's prohibition against the manipulation of market conditions.
    55. Transactions such as ``sleeving'' or ``bookouts'' as described 
by the commenters do not fall with the key elements of the Commission's 
definition and therefore would not be prohibited by the regulation. 
Further, trades made to correct scheduling or nomination errors, or 
trades that do not result from an attempt to manipulate the market 
would not be prohibited by the Commission's regulation. Moreover, 
displacement or backhauls are not wash trades as they are 
transportation services obtained from a pipeline if operationally 
feasible and simply do not meet the definition of wash trades as set 
forth herein. A sleeve is not an off-setting trade but rather a 
mechanism to accomplish a gas sale among parties that have not 
established a credit relationship by including a third party seller 
that has acceptable credit in the transaction chain. 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'' 
seller's credit. A ``bookout'' is not a pre-arranged trade but rather a 
subsequent arrangement to financially close out trades that were not 
prearranged and executed (and, in fact, closed out) with economic risk.
    56. Commenters argue that the Commission should impose an 
``intent'' standard relating to wash trading. The language, as proposed 
and finalized in this order, does include the element of intent. We 
recognize that buyers and sellers trade the same products with the same 
counterparties over the course of a trading day. Entering into a set of 
trades that happen to offset each other is not market manipulation. 
Wash trades are by their nature manipulative. By definition, parties 
must purposefully create prearranged off-setting trades with no 
economic risk to engage in a wash trade. We know of no legitimate 
business purpose to such behavior and no commenter has suggested one. 
Accordingly, as opposed to many other behaviors which would not, 
standing alone, violate Sections 284.288(a) or 284.403(a), wash trades 
will constitute a per se violation.
    57. The Commission finds that its definition of wash trading, as 
explained here, satisfies the requirements that parties will generally 
know what is expected of them and what actions are prohibited. 
Therefore, the Commission will not further define its regulations at 
this point.
3. Collusion
    58. As revised Section 284.288(a)(2) of the Commission's 
regulations provides that prohibited actions and transactions include 
but are not limited to:

collusion with another party for the purpose of manipulating market 
prices, market conditions, or market rules for natural gas.\28\
---------------------------------------------------------------------------

    \28\ Section 284.403(a)(2) of the Commission's regulations 
contains an identical prohibition.

    59. Several commenters argue that the Commission should better 
define the term collusion.\29\ For instance, TXU recommends that the 
Commission and market participants rely on federal and state antitrust 
laws specifically defining collusion in order to ensure certainty 
concerning the conduct that is prescribed. Sempra argues that the 
Commission's prohibition of collusion is unconstitutionally vague, as 
well as unnecessary since such conduct is already proscribed under 
other statutory and regulatory schemes administered by other federal 
agencies with specialized expertise in those areas of law.
---------------------------------------------------------------------------

    \29\ See e.g., Merrill Lynch and Morgan Stanley, Duke, TXU, 
Sempra, NGSA, NEMA, Shell, EnCana, Hess, Mirant.
---------------------------------------------------------------------------

    60. NEMA argues that for conduct to constitute collusion, there 
must be an element of intent to manipulate prices in the marketplace as 
well as an actual impact on commodity prices. Shell asks what standard 
the Commission would rely upon to determine whether or not there was 
collusion to ``create'' prices at levels that differ from those set by 
market forces.
    61. While commenters such as Sempra are correct in their 
observation that the prohibition set forth in Sections 284.288(a)(1) 
and 284.403(a)(1) may be similar, in certain respects, to the 
prohibitions set forth in federal antitrust laws, our authority, as it 
relates to Sections 284.288(a)(1) and 284.403(a)(1), is not derived 
from federal antitrust law. Rather, our authority comes from the NGA 
itself and its requirement that all rates and charges made, demanded, 
or received by any natural gas company selling natural gas subject to 
the jurisdiction of the Commission and all rules and regulations 
affecting or pertaining to such rates and charges be just and 
reasonable.\30\ Although our regulatory approach includes elements of 
anti-trust law, it is not limited to the structure of those laws. For 
example, our regulatory approach encompasses ``partnerships'' whose 
existence does not implicate anti-trust concerns that may, nonetheless, 
undertake manipulative behavior. Therefore, these regulations will be 
interpreted and enforced by the Commission consistent with our own 
policies and precedents. As such, we need not be concerned here 
whether, or to what extent, federal antitrust law may be broader in 
scope or more narrow in scope.\31\ These regulations are expressly 
tailored to our statutory duties and our competitive goals with respect 
to the natural gas market.\32\
---------------------------------------------------------------------------

    \30\ Section 4(a) of the NGA, 15 U.S.C. 717c.
    \31\ Similarly, we need not revise our rule so that violations 
of the antitrust laws are also prohibited by our rule. Federal 
antitrust law will continue to apply where it is found to apply, 
with or without our rule.
    \32\ See Pennsylvania Water & Power Co. v. FPC, 193 F.2d 230, 
236 (D.C. 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.]).
---------------------------------------------------------------------------

    62. To avoid possible confusion regarding the interpretation and 
scope from our originally proposed language which prohibited collusion 
for the purpose of creating market prices differing from those set by 
market forces, we have replaced this term with language consistent with 
our prohibition against manipulation set forth above. Therefore, the 
instant regulation prohibits collusion with another party for the 
purpose of manipulating market prices, market conditions or market 
rules for natural gas. We find such collusive acts to be illustrative 
of our prohibition against the manipulation of market prices and 
clarify that Sections 284.288(a)(2) and 284.403(a)(2) merely expand our 
general manipulation standard set forth in subparagraphs (a) of these 
rules to include acts taken in concert with another party. In other 
words, these regulations prohibit market manipulation undertaken by one 
market participant acting alone and market manipulation undertaken 
collectively by more than one market participant.
4. Reporting to Gas Index Publishers
    63. Proposed Regulation Section 284.288(b) states that:

    To the extent a pipeline that provides unbundled natural gas 
sales service under Sec.  284.284 engages in reporting of 
transactions to publishers of gas price indices, the pipeline shall 
provide complete, accurate and factual information to such 
publisher. The pipeline shall notify the Commission of whether it 
engages in such reporting for all sales. In addition, the pipeline 
shall adhere

[[Page 66331]]

to such other standards and requirements for price reporting as the 
Commission may order.\33\

    \33\ Proposed regulation Section 284.403(b) provides a similar 
requirement stating:
    To the extent that blanket marketing certificate holder engages 
in reporting of transactions to publishers of gas price indices, the 
blanket certificate holder shall provide complete, accurate and 
factual information to any such publisher. The blanket marketing 
certificate holder shall notify the Commission of whether it engages 
in such reporting for all sales. In addition, the blanket marketing 
certificate holder shall adhere to such other standards and 
requirements for price reporting as the Commission may order.
---------------------------------------------------------------------------

    64. Commenters argue that the Commission should not prescribe 
reporting requirements that might prevent innovation of better long-
term solutions to the industry's evolving future needs for price 
information.\34\ Others argue that the proposed penalties may 
discourage market participants from voluntarily reporting price data.
---------------------------------------------------------------------------

    \34\ See e.g., Western.
---------------------------------------------------------------------------

    65. Commenters also argue that the confidential treatment of 
reported data, as required by the Policy Statement, is critical to the 
voluntary reporting process.\35\ Moreover, several commenters recommend 
that the Commission articulate specific reporting requirements, 
consistent with the Policy Statement. Commenters submit that many 
aspects of the reporting process remain unclear. For instance, they 
argue that it is unclear what data must be reported, the format for the 
data, the policy for confirming the accuracy of the data, and to which 
entities the seller must report. BP seeks clarification of this rule, 
contending that it does not mandate reporting, but simply requires that 
any information reported be ``complete.'' Specifically, BP asks the 
Commission to clarify that where an entity voluntarily reports, that 
entity should not be required to report all sales at all locations. 
Coral suggests that general reviews followed by spot checks should be 
all that is required to assure a reasonable level of accuracy in 
reported trade price information.\36\ Other commenters argue that the 
Policy Statement obviates the need for a reporting rule.\37\
---------------------------------------------------------------------------

    \35\ See e.g., PSCNY, NEMA, NGSA, Reliant, TXU.
    \36\ See Coral at 7.
    \37\ See e.g., Mirant, Hess, Coral.
---------------------------------------------------------------------------

    66. Several other commenters assert that the rule does not go far 
enough.\38\ They recommend that the Commission require that all 
entities holding blanket certificates report all of their trades to the 
data collectors. They assert that only reporting occasional bits of 
information could lead to inaccuracies.
---------------------------------------------------------------------------

    \38\ See e.g., EMIT, Platts, NASUCA.
---------------------------------------------------------------------------

    67. Moreover, several commenters request clarification as to 
whether the Commission notification requirement is a one-time or 
ongoing obligation.\39\ BP argues that the Commission should clarify 
that it is only necessary to indicate to the Commission that the entity 
engages in reporting. Merrill Lynch and Morgan Stanley requests that 
the Commission clarify that if new entrants or entities that currently 
do not report to indices subsequently initiate reporting, such entities 
must notify the Commission within 30 days from the first date they 
initiated reports.
---------------------------------------------------------------------------

    \39\ See e.g., AGA, BP (recommending a one-time obligation), 
Peoples.
---------------------------------------------------------------------------

    68. As part of the reporting provisions, numerous parties recommend 
that the Commission incorporate a safe harbor provision into its 
proposal so that an industry participant who, in good faith, provides 
trade data to index developers, will not be subject to penalties for 
inadvertent mistakes in reporting the information. Several commenters 
ask that the safe harbor provisions mirror the one adopted in the 
Commission's Policy Statement.\40\ Commenters submit that incorporation 
of a safe harbor provision will encourage the voluntary reporting of 
information. Commenters also request the Commission to clarify the 
proposed false reporting prohibition so that it only applies to 
information that is known to be false at the time it is reported, as 
opposed to false reports based on inadvertent mistakes or human 
error.\41\ Nicor and NGSA add that the Commission should expressly 
state that the safe harbor protections in the Policy Statement are not 
eliminated or negated by the subject reporting requirements.
---------------------------------------------------------------------------

    \40\ See e.g., Select; see also AGA (recommending that rather 
than incorporating a safe harbor provision into the subject 
proceeding, the Commission should clarify that the safe harbor 
announced in the Policy Statement applies specifically to a blanket 
marketing certificate holder's obligation, to the extent it engages 
in reporting of transactions to publishers of gas price indices, to 
provide complete, accurate, and factual information to any 
publisher).
    \41\ See e.g., Merril Lynch and Morgan Stanley, Select, Mirant.
---------------------------------------------------------------------------

    69. Calpine contends that any safe harbor provision must be adopted 
into the proposed code without the burden on industry participants to 
self-audit and self-correct errors not otherwise discovered in the 
ordinary course of business. Given the volumes of data to be reported, 
Calpine believes it a certainty that inadvertent errors that do no harm 
to the overall integrity of the indices will be made. NEMA urges that 
the safe harbor be extended to index prices published by parties that 
meet the Commission's protocols.
    70. The Commission proposed this regulation to assure that to the 
degree that a market-based rates seller reports its transactions to 
publishers of natural gas price indices, such seller must do so 
honestly and accurately. The Commission also proposed to require 
sellers to inform it if they undertook such reporting. Based upon the 
comments received, we have modified Sections 284.288(b) and 284.403(b) 
to read as follows:

    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 on Natural Gas 
and Electric Price Indices, issued by the Commission in Docket No. 
PL03-3-000 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.

    71. In our June 26 NOPR, we referred to our on-going proceeding 
investigating price index formation. As many commenters have pointed 
out, since our proposal regarding these rules was issued we have also 
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.\42\ Included in the Policy 
Statement is a ``Safe Harbor'' under which reporting errors will not be 
subject to Commission sanction. Here, 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.
---------------------------------------------------------------------------

    \42\ Policy Statement, 104 FERC ] 61,121 (2003).
---------------------------------------------------------------------------

    72. The Commission clarifies that the requirement that entities 
notify the Commission of any change in status with regard to price 
reporting to indices is an ongoing obligation. As such, the entities 
must, upon the implementation of these regulations, inform the 
Commission of whether they report to the index publishers. As shown 
above, the Commission will modify the text of Sections 284.288(b) and 
284.403(b) of its proposed regulations to provide that the blanket 
marketing certificate holder shall, after the initial notification to 
the Commission, inform the Commission of

[[Page 66332]]

its reporting status within 15 days of the effective date of these 
regulations and within 15 days of any subsequent change in reporting 
status.
    73. Finally, some commenters have asked that we require mandatory 
reporting while others contend that we have created requirements that 
will have a chilling effect on reporting. We believe that we have 
struck an appropriate balance in these rules. For the moment, we are 
attempting to work within the framework of voluntary reporting. We are 
awaiting our staff's review of the comprehensiveness of reporting in 
the wake of our Policy Statement. At this time, we are not mandating 
reporting. However, we have engaged in a comprehensive investigation of 
transaction reporting and related issues and believe that 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, but will seek to learn which sellers are reporting and set 
forth standards for those that do.
5. Three-Year Data and Information Retention Requirement
    74. Proposed Section 284.288(c) of the Commission's regulations 
provides that:

    A pipeline that provides unbundled natural gas sales service 
under Sec.  284.284 shall retain all relevant data and information 
necessary for the reconstruction of price indices for three 
years.\43\
---------------------------------------------------------------------------

    \43\ Similarly, proposed Section 284.403(c) provides:
    A blanket marketing certificate holder shall retain all relevant 
data and information necessary for the reconstruction of price 
indices for three years.

    75. Several entities comment on the Commission's proposed three-
year data and information retention requirement.\44\ Other commenters 
request clarification as to what constitutes ``relevant data'', and 
suggest that the Commission specify what types of data and information 
must be retained, and in what format (e.g., paper or electronic).\45\ 
Commenters are concerned that the required documentation will prove too 
burdensome due to both the time and the money required to store and 
retrieve information. NJR Companies argues that the proposal may create 
a new set of business records that could lead to decreased market 
activity, and a slow-down or elimination of certain transactions.
---------------------------------------------------------------------------

    \44\ See e.g., BP, NJR Companies, NEMA, NGSA, EMIT, Western, 
Sempra, Reliant, Coral, Hess, Peoples, Mirant, EnCana, NASUCA, 
ProLiance, Merrill Lynch and Morgan Stanley, PG&E, Duke.
    \45\ See e.g., BP, NJR Companies, NEMA, Coral, Peoples, Mirant, 
EnCana, ProLiance, Merrill Lynch and Morgan Stanley, PG&E.
---------------------------------------------------------------------------

    76. BP asserts that relevant data should be limited to accounting 
data that records the details of each reported transaction, along with 
a record of the data transmitted to the index developer, if applicable. 
BP adds that requiring data maintained in the accounting records would 
be consistent with the Commission's proposed requirement for price 
reporting in its recent Policy Statement, which requires that price, 
volume, buy/sell indicator, delivery/receipt point, transaction date 
and time, term, and any counterparty name be maintained. It argues that 
negotiation materials and other ancillary data should not be required 
to be maintained.
    77. Several commenters argue that the three-year retention period 
is too long, and that the burden may dissuade blanket marketing 
certificate holders from reporting data.\46\ Other commenters argue 
that the three-year retention period is too short, and that with 
current computer technology, a longer retention period should not 
result in additional costs to market participants.\47\ Finally, some 
commenters argue that the three-year record retention period is 
consistent with the commercial practices of many natural gas 
sellers.\48\
---------------------------------------------------------------------------

    \46\ See e.g., ProLiance (requesting a 2-year retention period), 
NEMA (requesting a 1-year retention period), Coral.
    \47\ See e.g., NASUCA (requesting a 6-year retention period).
    \48\ See e.g., Western.
---------------------------------------------------------------------------

    78. Several commenters argue that the record retention requirement 
will only be meaningful if the Commission makes reporting of all trade 
data mandatory.\49\ At the same time, other commenters argue that if an 
entity does not report, then documentation is not necessary to verify 
the accuracy of price indices.\50\ Other commenters submit that only 
relevant data should be retained and not peripheral documents that may 
have been generated in association with a transaction, but which have 
no bearing on the data reported to index publishers.\51\
---------------------------------------------------------------------------

    \49\ See e.g., EMIT.
    \50\ See e.g., Sempra.
    \51\ See e.g., BP, Hess, Mirant, Merrill Lynch and Morgan 
Stanley.
---------------------------------------------------------------------------

    79. This proposed rule requires that sellers maintain relevant 
records regarding their sales for three years. After review of the 
comments received, we revise Section 284.288(c) to read:

    A pipeline that provides unbundled natural gas sales service 
under 284.284 must retain, for a period of three years, all data and 
information upon which it billed the prices it charged for the 
natural gas it sold pursuant to this certificate or the prices it 
reported for use in price indices for a period of three years.\52\
---------------------------------------------------------------------------

    \52\ The Commission will modify Section 284.403(c), applying to 
blanket marketing certificate holders, in a like manner.

    80. In revising the proposed rule, we clarify that we are not 
seeking retention ``cost-of service'' or analytical data related to 
sellers' sales as some commenters perceived from our suggestion that 
entities retain all relevant data ``necessary for the reconstruction of 
price indices'' in our original proposal. Rather, we are requiring that 
sellers retain the complete set of contractual and related 
documentation upon which such entities billed their customers for 
sales. 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. In addition, commenters raise several issues in regard to the 
three-year retention period. On balance, the Commission does not 
believe that requiring sellers to retain records for a three-year 
period constitutes an undue burden given the fact that the Commission 
is prepared to allow the records to be kept in electronic or paper 
form. To permit a shorter retention period may not allow sufficient 
time for the investigations into possible violations.
6. Prohibition on Reporting Transactions With Affiliates
    81. Proposed section 284.288(d) of the Commission's regulations 
provides that:

    A pipeline that provides unbundled natural gas sales 
transactions under Sec.  284.284 is prohibited from reporting any 
natural gas sales transactions between the pipeline and its 
affiliates to industry indices.\53\
---------------------------------------------------------------------------

    \53\ Proposed Section 284.403(d) of the Commission's regulations 
provides that:
    A blanket marketing certificate holder is prohibited from 
reporting any natural gas sales transactions between the blanket 
market certificate holder and its affiliates to industry indices.

    82. Commenters generally agree with this restriction.\54\ NASUCA 
agrees to the prohibition of affiliate transactions from price indices 
calculations, but contends that other non-price information, such as 
the number of trades and the volumes associated with each trade, is 
important information that will help determine the liquidity at various 
hubs for which prices are calculated. It recommends that the regulation 
be modified to state that pipelines and certificate holders should 
separately report other non-price

[[Page 66333]]

data associated with affiliate transactions.
---------------------------------------------------------------------------

    \54\ See ProLiance, NASUCA, EnCana, Hess, NEMA.
---------------------------------------------------------------------------

    83. Although the separate reporting of other non-price data 
associated with affiliate transactions may provide additional 
information regarding liquidity at certain points, the Commission finds 
that this information is not necessary for the purposes of these rules.
    84. Although commenters generally agree with reporting restrictions 
on transactions between affiliates in the June 26 NOPR, new Sections 
284.288(b) and 284.403(b) of the Final Rule provide that to the extent 
a Seller engages in the reporting of transactions to publishers of 
price indices, the Seller shall do so in a manner consistent with the 
procedures set forth in the Policy Statement. The Policy Statement 
states that ``a data provider should report each bilateral, arm's 
length transaction between non-affiliated companies in the physical 
(cash) markets at all trading locations.'' \55\ Therefore, an entity 
filing consistent with the Policy Statement will not include sales to 
affiliates in its report. Accordingly, the Commission believes the 
addition of these two regulations (Sections 284.288(d) and 284.403(d) 
of the June 26 NOPR) is redundant, and shall be deleted.
---------------------------------------------------------------------------

    \55\ See Policy Statement, 104 FERC ] 61,121 at P 34 (2003).
---------------------------------------------------------------------------

D. Remedies

1. General Issues
    85. Several commenters responded to the Commission's proposal that 
the violations of its code of conduct may result in various remedial 
actions by the Commission including the disgorgement of unjust profits, 
suspension or revocation of the blanket sales certificates or other 
appropriate remedies.
    86. In regard to the Commission's inclusion of disgorgement as a 
potential remedy various commenters argue that the Commission does not 
have authority to condition NGA Section 7 certificates with such a 
retroactive refund obligation.\56\ Commenters argue that the courts 
have held that the Commission's power to condition certificates cannot 
be permitted to diminish an entity's rights under NGA Sections 4 and 
5.\57\ These commenters argue the proposed disgorgement remedy is a 
refund condition that is not permitted under Section 5 of the NGA and 
that such disgorgement of unjust profits from a just and reasonable 
rate is tantamount to retroactive ratemaking because NGA Section 5 
provides only for prospective relief.\58\ The commentors argue the 
Commission is attempting to expand its authority to order retroactive 
refunds, or, change retroactively the filed rate. They argue that 
courts have been clear that the Commission cannot (i) use its 
conditioning authority to circumvent other provisions of the NGA and 
(ii) do indirectly what it may not do directly and therefore the 
Commission cannot condition rates as it proposes to do so here, and 
subject them to retroactive refunds because Congress did not include 
such authority in the NGA.
---------------------------------------------------------------------------

    \56\ See e.g., Comments of AGA, the FPL Group, NGSA, Duke, NGSA 
and Cinergy.
    \57\ Citing Panhandle Eastern Pipe Line Co. v. FERC, 613 F.2d 
1120 (D.C. Cir. 1979): Cf. Northern Natural Gas Co. v. FERC, 827 
F.2d 779 (D.C. Cir. 1987).
    \58\ Several commenters such as EnCana, Hess and Mirant argue 
that the term ``unjust profits'' is vague and subjective and 
therefore difficult to calculate. Hess requests that that the 
Commission either adopt a more workable formula for calculating 
monetary remedies or clarify how the unjust profits standard will be 
applied. Mirant and EnCana suggest that the Commission adopt a 
presumption that unjust profits will be defined as the difference 
between a reported transaction's fixed price and a then-existing 
published index price for the market and time period in question. 
Mirant asserts that it would oppose any Commission proposal to 
recreate or somehow adjust previously reported index prices based on 
an after-the-fact review of reported data.
---------------------------------------------------------------------------

    87. Several commenters express concern that the term ``unjust 
profits'' is vague and subjective, the calculation of which would 
necessitate a review of all market conditions.\59\ AGA recommends that 
the Commission limit the disgorgement of unjust profits to all illegal 
activity and not impose penalties for violation of those regulatory 
provisions associated with reporting activities.\60\ NJR Companies 
object to the disgorgement remedy when the violation is 
inadvertent.\61\
---------------------------------------------------------------------------

    \59\ See e.g., Mirant, Cinergy, EnCana, Hess.
    \60\ See AGA at 10.
    \61\ NJR Companies at 19.
---------------------------------------------------------------------------

    88. Several commenters argue that the Commission should consider 
additional remedies such as a remedy that would require the offending 
entity to make the market whole for losses incurred because of its 
actions.\62\ They argue that if an entity must simply disgorge unjust 
profits, even if is caught for every infraction of the code, it is no 
worse off than if it had followed the rules in the first place. 
Therefore, they argue that disgorgement of unjust profits does not 
serve as a penalty or deterrent to future, similar actions. In sum, 
they argue that the failure to comply with the filed rate by engaging 
in prohibited manipulative behavior should include a potential remedy 
that is greater than disgorgement, such as a make the market whole 
remedy.
---------------------------------------------------------------------------

    \62\ See e.g., CPUC, NASUCA, EMIT, PG&E, PSCNY and the Oversight 
Board.
---------------------------------------------------------------------------

    89. Regarding the issue of appropriate non-monetary penalties, 
PSCNY states that all violations of the regulations should be publicly 
disclosed in a public file that may be accessed by buyers and the 
public. A list of bad actors and dates could be maintained on the 
Commission's Web site. Such public disclosure, PSCNY argues, would 
provide an additional deterrent for companies to avoid the stigma 
associated with engaging in anticompetitive behavior. PSCNY states that 
in the event of a particularly blatant and serious violation, or 
multiple violations, the Commission should place parties on notice that 
appropriate remedies could include revocation of market-based rate 
authority. NASUCA recommends that the Commission clarify that 
revocation of market-based rate authority will be for a specified 
minimum period of time that depends on the severity of the violation.
    90. In Order No. 636, the Commission determined that after gas 
services were unbundled, sellers of gas supplies would not have market 
power over the sale of natural gas. This determination was based in 
large part upon Congress' finding that a competitive market exists for 
gas at the wellhead and in the gas field. The Commission determined 
that it would institute light-handed regulation and would rely on 
market forces at the wellhead to constrain sales for resale of natural 
gas within the just and reasonable standard set forth by the NGA. In 
implementing its findings in Order No. 636 and Order No. 547, the 
Commission issued blanket certificates to all persons who are not 
interstate pipelines which authorized such persons to make 
jurisdictional gas sales for resale at negotiated rates with pre-
granted abandonment.\63\ In issuing these certificates the Commission 
determined that the competitive natural gas market would lead all gas 
suppliers to charge rates that are sensitive to the gas sales market.
---------------------------------------------------------------------------

    \63\ See 18 CFR 284.401-402 (2003).
---------------------------------------------------------------------------

    91. The Commission has determined that in order to protect and 
maintain the competitive natural gas market and to continue its light-
handed regulation of the gas sales within its jurisdiction, it is 
necessary to place additional conditions on its grant of market-based 
sales certificates. In formulating such conditions to the market based 
rate certificates the Commission is fulfilling its obligation to 
appropriately monitor markets and to ensure that market-based

[[Page 66334]]

rates remain within the zone of reasonableness required by the NGA.\64\
---------------------------------------------------------------------------

    \64\ The Court of Appeals for the D.C. Circuit has held that, 
while the Commission ``enjoys substantial discretion in ratemaking 
determinations * * * by the same token, this discretion must be 
bridled in accordance with the statutory mandate that the resulting 
rates be `just and reasonable.' '' Farmers Union Cent. Exch. Inc. v. 
FERC, 734 F.2d 1486 at 1501 (D.C. Cir. 1984). In addition, the 
regulatory regime itself must contain some form of monitoring to 
ensure that rates remain within a zone of reasonableness and to 
check rates that depart from this zone. Id. at 1509. See also 
Louisiana Energy and Power Authority v. FERC, 141 F.3d 364 (D.C. 
Cir. 1998); Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C. Cir. 
1993).
---------------------------------------------------------------------------

    92. In order to find the market based sales service to be in the 
public convenience and necessity the Commission finds that the 
conditions herein must be met. Once the sales service is so 
conditioned, in the Commission's view adequate safeguards are in place 
so that the Commission may grant market based sales authority to 
jurisdictional sellers of natural gas. In so conditioning this service, 
the Commission is not prohibiting a jurisdictional seller of natural 
gas from requesting a certificate for a different form of service or 
filing pursuant to Section 4 of the NGA for a different rate or 
conditions of service. Neither does the Commission prohibit a customer 
of such a seller from raising objections under Section 5 of the NGA.
    93. Moreover, if the conditions of service are not met, the 
Commission has the authority to impose the appropriate remedy for the 
violation.\65\ In particular, the Commission does not agree with the 
comments that a violation of an existing condition of service may not 
be remedied by the Commission from the time the violation occurred. The 
Commission has the authority to remedy violations of certificate 
conditions.\66\ Moreover, the courts have held that the Commission has 
a great deal of discretion when imposing remedies devised to arrive at 
maximum reinforcement of Congressional objectives in the NGA.\67\ In 
devising its remedy the Commission is required to exercise its 
discretion to arrive at an appropriate remedy,\68\ and to explore all 
the equitable considerations, and practical consequences of its action 
and the purposes of the NGA.\69\
---------------------------------------------------------------------------

    \65\ See e.g., Coastal Oil & Gas Corp. v. FERC, 782 F.2d 1249 
(1986).
    \66\ Consolidated Gas Transmission Corp., et al., 771 F.2d 1536 
(D.C. Cir. 1985) (holding that the Commission has the authority 
under section 16 of the Natural Gas Act to order retroactive refunds 
to enforce conditions in certificates).
    \67\ 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 (D.C. Cir. 1984), quoting, Niagara Mohawk Power Corp. v. FPC, 
379 F.2d 153, 159 (D.C. Cir.1967).
    \68\ Gulf Oil Corp. v. FPC, 536 F.2d 588 (3rd. Cir. 1977), cert. 
denied, 4344 U.S. 1062 (1978), reh'g denied, 435 U.S. 981 (1978).
    \69\ See Continental Oil Co. v. FPC, 378 F.2d 510 (5th Cir. 
1967) and FPC v. Tennessee Gas Transmission Co., 371 U.S. 145 
(1962).
---------------------------------------------------------------------------

    94. This action of remedying a violation of a certificate condition 
is not the same as the Commission's action in finding an existing rate 
unjust and unreasonable after hearing under Section 5 of the NGA. At 
the initiation of an NGA Section 5 proceeding the existing condition 
has not yet been found to be unjust and unreasonable. In contrast, in a 
remedial proceeding the issue is whether the entity has violated an 
existing condition of the tariff or the regulations. Therefore, in a 
remedial proceeding, unlike an NGA section 5 proceeding, the regulated 
entity has notice of the conditions required for service at the time of 
the implementation of the service condition and the Commission may, at 
its discretion, fashion an appropriate remedy.
    95. In appropriate circumstances these remedies may include 
disgorgement of unjust profits, suspension or revocation of the blanket 
sales provision or other appropriate non-monetary remedies. Which of 
these remedies is appropriate will depend on the circumstances of the 
case before it and the Commission will not determine here which remedy 
or remedies it will utilize.\70\
---------------------------------------------------------------------------

    \70\ 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 code of conduct regulations.
---------------------------------------------------------------------------

2. 90-Day Time Limit on Complaints
    96. Several commenters raise concerns about the 60-day time limit 
on complaints proposed in the June 26 NOPR.\71\ Most of the commenters 
argue that the 60-day time period is unreasonably too short. Some 
commenters suggest a limit of six months.\72\ Many commenters suggest 
modification of the provision's discovery exception, by adopting a 
``reasonableness'' standard, i.e., a reasonable person exercising due 
diligence could not have known of the wrongful conduct.
---------------------------------------------------------------------------

    \71\ The Oversight Board, Mirant, NiSource, Cinergy, Sempra, 
Reliant, EMIT, EnCana, Hess, Coral, NGSA, CPUC, NASUCA, PG&E, 
Merrill Lynch and Morgan Stanley, ProLiance.
    \72\ See the Oversight Board, EMIT, Coral, NASUCA (suggesting 6 
months), and ProLiance (suggesting a two-year limit).
---------------------------------------------------------------------------

    97. Several commenters argue that the Commission errs in not 
applying the 60-day deadline to itself. They argue that if the 
Commission is allowed to initiate unlimited retroactive investigations, 
this vitiates any time constraints the rule otherwise places on private 
complainants. Commenters recommend that the scope of any investigation 
that might stem from a complaint, or the Commission's own motion, be 
narrowly defined, and require the demonstration and quantification of 
the individual harm resulting from the prohibited conduct.\73\ These 
commenters are concerned about the lack of finality for transactions 
under the proposed discovery exception to the 60-day requirement. 
Merrill Lynch and Morgan Stanley suggest either a hard and fast 
deadline of 60 days from the event with no exceptions or a rebuttable 
presumption the complainant knew about the alleged violation within the 
60-day time period.
---------------------------------------------------------------------------

    \73\ See also EPSA (arguing that the Commission should clarify 
that it will act quickly to review and discourage frivolous 
complaints).
---------------------------------------------------------------------------

    98. 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 regulations. 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 
regulations. 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 the language in Sections 284.288(e) and 
284.403(e), ``unless that person 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 impermissibly vague, this 
safeguard ensures a sufficient time-period for complainants to discover 
hidden wrongful conduct and submit a claim.
    99. We will also place a time limitation on Commission enforcement 
action for potential violations of these regulations. 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 these

[[Page 66335]]

code of conduct regulations 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 will take the form 
of a call to our Hotline alleging inappropriate behavior or 
communication with our enforcement Staff.
    100. We also clarify that in this context the Commission's action 
will have reference to a Commission order or to the initiation to a 
preliminary investigation by Commission Staff. If the Commission does 
not act within this period, the Seller will not be exposed to potential 
liability regarding the subject transaction. In such a proceeding, 
knowledge on the part of the Commission must take the form of a call to 
our Hotline alleging inappropriate behavior or communication with our 
enforcement staff.

VI. Administrative Finding and Notices

A. Information Collection Statement

    101. The code of conduct rules adopted herein would require 
jurisdictional gas sellers to retain certain records for three years 
and also require them to notify the Commission whether or not they 
engage in the reporting of natural gas sales transactions to publishers 
of gas indices.\74\
---------------------------------------------------------------------------

    \74\ See Sections 284.288(b)-(c), and 284.403(b)-(c).
---------------------------------------------------------------------------

    102. The Office of Management and Budget's (OMB) regulations 
require that OMB approve certain information collection requirements 
imposed by agency rule.\75\ This final rule does not make any 
substantive or material changes to the information collection 
requirements specified in the NOPR, which was previously submitted to 
OMB for approval on July 14, 2003. OMB has elected to take no action on 
the NOPR. Thus, the information collection requirements in this rule 
are pending OMB approval. Comments were solicited and received on the 
need for this information, whether the information will have practical 
utility, the accuracy of the provided burden estimates, ways to enhance 
the quality, utility, and clarity of the information to be collected, 
and any suggested methods for minimizing respondents' burden, including 
the use of automated information techniques. The Commission addressed 
these issues in sections III(C)(4)-(5) of this order. The burden 
estimates for complying with this proposed rule are as follows:
---------------------------------------------------------------------------

    \75\ 5 CFR 1320 (2003).

----------------------------------------------------------------------------------------------------------------
                                                     Number of       Number of       Hours per     Total annual
                 Data collection                    respondents      responses       response          hours
----------------------------------------------------------------------------------------------------------------
FERC-549:
    (Reporting).................................             222             222               1             222
    (Recordkeeping).............................             222             222               2             444
                                                 -----------------
        Totals..................................  ..............  ..............               3             666
----------------------------------------------------------------------------------------------------------------
Total annual hours for Collection (reporting + recordkeeping) = 666.

    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: Annualized Capital Startup 
Costs: 666 / 2080 x $117,041 = $37,475. This is a one time cost for the 
implementation of the proposed requirements.
    103. 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.
    104. Title: FERC-549, Gas Pipeline Rates: Natural Gas Policy Act, 
Section 311.
    105. Action: Proposed Data Collection.
    106. OMB Control No.: 1902-0086.
    107. Respondents: Businesses or other for profit.
    108. Frequency of Responses: On occasion.
    109. Necessity of Information: The code of conduct rules approved 
herein would revise the Commission's regulations to require that 
pipelines that provide unbundled sales service or persons holding 
blanket marketing certificates adhere to a code of conduct when making 
gas sales. In addition, the Commission will require blanket sales 
certificate holders to maintain certain data for a period of three 
years. The addition of the codes of conduct, retention of data and 
standards for accuracy are efforts by the Commission to ensure the 
integrity of the natural gas market that remains within its 
jurisdiction.
    110. Internal review: The Commission has reviewed the requirements 
pertaining to blanket sales certificates and has determined the 
proposed revisions are necessary to ensure the integrity of the gas 
sales market that remains within its jurisdiction. These requirements 
conform to the Commission's plan for efficient information collection, 
communication, and management within the natural gas 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 requirements.
    111. 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].]
    112. For submitting comments concerning the collection of 
information(s) and the associated burden estimate(s), 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].

B. Environmental Analysis

    113. 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.\76\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human

[[Page 66336]]

environment.\77\ 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.\78\ Therefore, an environmental assessment is unnecessary 
and has not been prepared in this rulemaking.
---------------------------------------------------------------------------

    \76\ 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).
    \77\ 18 CFR 380.4 (2003).
    \78\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27) 
(2003).
---------------------------------------------------------------------------

C. Regulatory Flexibility Act Certification

    114. The Regulatory Flexibility Act of 1980 (RFA) \79\ 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.\80\
---------------------------------------------------------------------------

    \79\ 5 U.S.C. 601-612.
    \80\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    115. The Commission does not believe that this rule would have such 
an impact on small entities. Most of the entities required to comply 
with the proposed regulations would be pipelines, LDCs or their 
affiliates who do not meet the RFA's definition of a small entity 
whether or not they are under the Commission's jurisdiction. It is 
likely that any small entities selling natural gas would be making gas 
sales that are no longer subject to 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.

D. Document Availability

    116. 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
    117. From FERC's Home Page on the Internet, this information is 
available using the eLibrary link. 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.
    118. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours at [email protected] or by 
calling (866) 208-3676 or for TTY, contact (202) 502-8659.

E. Effective Date and Congressional Review

    119. These regulations are effective December 26, 2003. The 
Commission has determined, with the concurrence of the administrator of 
the Office of Information and Regulatory Affairs of OMB, that this 
Final Rule is not a ``major rule'' as defined in Section 351of the 
Small Business Regulatory Enforcement Fairness Act of 1996. The 
Commission will submit the Final Rule to both houses of Congress and 
the General Accounting Office.

List of Subjects in 18 CFR Part 284

    Continental Shelf; Incorporation by reference; Natural gas; 
Reporting and recordkeeping requirements.

    By the Commission. Commissioners Massey and Brownell concurring 
in part with separate statements attached.
Linda Mitry,
Acting Secretary.

0
In consideration of the foregoing, the Commission is amending part 284, 
Chapter I, Title 18, Code of Federal Regulations, as follows.

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES

0
1. The authority citation for part 284 continues to read as follows:

    Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7532; 
43 U.S.C. 1331-1356.


0
2. Section 284.288 is added to read as follows:


Sec.  284.288  Code of conduct for unbundled sales service.

    (a) A pipeline that provides unbundled natural gas sales service 
under Sec.  284.284 is prohibited from engaging in 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 natural gas. Prohibited actions and 
transactions include but are not limited to:
    (1) 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''); and
    (2) collusion with another party for the purpose of manipulating 
market prices, market conditions, or market rules for natural gas.
    (b) 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 on Natural Gas and 
Electric Price Indices, issued by the Commission in Docket No. PL03-3-
000 and any clarifications thereto. Seller shall notify the Commission 
within 15 days of the effective date of this regulation 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.
    (c) A pipeline that provides unbundled natural gas sales service 
under Sec.  284.284 shall retain, for a period of three years, all data 
and information upon which it billed the prices it charged for natural 
gas it sold pursuant to its market based sales certificate or the 
prices it reported for use in price indices.
    (d) Any violation of the preceding paragraphs may subject Seller to 
disgorgement of unjust profits from the date when the violation 
occurred. Seller may also be subject to suspension or revocation of its 
blanket certificate under Sec.  284.284 or other appropriate non-
monetary remedies.
    (e) Any person filing a complaint against a pipeline for violation 
of paragraphs (a) through (c) must do so no later than 90 days after 
the end of the calendar quarter in which the alleged violation occurred 
unless that person could not have known of the alleged violation, in 
which case the 90-day time limit will run from the discovery of the 
alleged violation. The Commission will act within 90 days from the date 
it knew of an alleged violation of these code of conduct regulations 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

[[Page 66337]]

the Commission will take the form of a call to our Hotline alleging 
inappropriate behavior or communication with our enforcement Staff.

0
3. In Sec.  284.402, the second sentence of paragraph (a) is revised to 
read as follows:


Sec.  284.402  Blanket Marketing Certificates.

* * * A blanket certificate issued under Subpart L is a certificate of 
limited jurisdiction which will not subject the certificate holder to 
any other regulation under the Natural Gas Act jurisdiction of the 
Commission, other than that set forth in this Subpart L, by virtue of 
the transactions under this certificate.

0
4. Section 284.403 is added to read as follows:


Sec.  284.403  Code of conduct for persons holding blanket marketing 
certificates.

    (a) Any person making natural gas sales for resale in interstate 
commerce pursuant to Sec.  284.402 is prohibited from engaging in 
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 natural gas. Prohibited actions 
and transactions include but are not limited to:
    (1) 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''); and
    (2) Collusion with another party for the purpose of manipulating 
market prices, market conditions, or market rules for natural gas.
    (b) 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 on Natural Gas and 
Electric Price Indices, issued by the Commission in Docket No. PL03-3-
000 and any clarifications thereto. Seller shall notify the Commission 
within 15 days of the effective date of this regulation 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.
    (c) A blanket marketing certificate holder shall retain, for a 
period of three years, all data and information upon which it billed 
the prices it charged for the natural gas sold pursuant to its market 
based sales certificate or the prices it reported for use in price 
indices.
    (d) Any violation of the preceding paragraphs may subject Seller to 
disgorgement of unjust profits from the date when the violation 
occurred. Seller may also be subject to suspension or revocation of its 
blanket certificate under Sec.  284.284 or other appropriate non-
monetary remedies.
    (e) Any person filing a complaint against a blanket marketing 
certificate holder for violation of paragraphs (a) through (c) must do 
so no later than 90 days after the end of the calendar quarter in which 
the alleged violation occurred unless that person could not have known 
of the alleged violation, in which case the 90-day time limit will run 
from the discovery of the alleged violation. The Commission will act 
within 90 days from the date it knew of an alleged violation of these 
code of conduct regulations 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 will take the form 
of a call to our Hotline alleging inappropriate behavior or 
communication with our enforcement Staff.

    Note: This appendix will not appear in the Code of Federal 
Regulations.

Appendix

List of Commenters

Amerada Hess Corporation (Hess)
American Gas Association (AGA) *
Atmos Energy Corp.
BP America Production Company and BP Energy Company (BP)
California Electricity Oversight Board (Oversight Board)
Calpine Corporation
Cinergy Marketing & Trading, LP (Cinergy) *
Coalition for Energy Market Integrity and Transparency (EMIT)
Coral Energy Resources, L.P. (Coral)
Duke Energy Corporation (Duke)
Electric Power Supply Association (EPSA)
EnCana Marketing (USA) Inc. (EnCana)
FPL Group, Inc. (FPL Group)
Intercontinental Exchange, Inc. (ICE)
Merrill Lynch Capital Services, Inc. and Morgan Stanley Capital 
Group, Inc. (Merill Lynch and Morgan Stanley) *
Mirant Americas Energy Marketing, LP (Mirant)
Missouri Public Service Commission (Missouri PSC)
National Association of State Utility Consumer Advocates (NASUCA)
National Energy Marketers Association (NEMA)
Natural Gas Supply Association (NGSA)
New Jersey Resources Corporation (NJR Companies)
Nicor Gas (Nicor)
NiSource, Inc. (NiSource)
Pacific Gas and Electric Company (PG&E)
Peoples Gas Light and Coke Company, North Shore Gas Company, and 
Peoples Energy Resources Corp. (Peoples)
Piedmont Natural Gas Co., Inc.
Platts
ProLiance Energy, LLC (ProLiance)
Public Service Electric and Gas Co., PSEG Power LLC and PSEG Energy 
Resources & Trade LLC (collectively, PSEG Companies)
Public Service Commission of the State of New York (PSCNY)
Public Utilities Commission of the State of California (CPUC)
Questar Energy Trading Company (Questar)
Reliant Energy Power Generation, Inc. and Reliant Energy Services, 
Inc. (Reliant)
Select Energy, Inc. (Select)
Sempra Energy (Sempra)
Shell Offshore Inc. (Shell Offshore)
TXU Portfolio Management Company LP (TXU)
USG Pipeline Company, B-R Pipeline Company, and United States Gypsum 
Company (USG)
Virginia Industrial Gas Users' Association (VIGUA)
Virginia Natural Gas, Inc.**
Western Gas Resources, Inc. (Western)
------------
* Entities filing reply comments in addition to initial comments.
** Entity 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.

[[Page 66338]]

    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.
    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 or communications with our enforcement 
staff.
    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 rules on the electric and 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. 03-29300 Filed 11-25-03; 8:45 am]
BILLING CODE 6717-01-P