FERC Issues NOPR On Energy Market Manipulation

On October 20, 2005, the Federal Energy Regulatory Commission ("FERC") issued a Notice of Proposed Rulemaking ("NOPR") seeking comment on proposed rules to prohibit the employment of manipulative or deceptive devices or contrivances in connection with the purchase or sale of natural gas, electric energy, or transportation or transmission services subject to the jurisdiction of the FERC. (Docket No. RM06-3-000) The proposed rules would implement new section 222 of the Federal Power Act and new section 4A of the Natural Gas Act, which closely track language in section 10(b) of the Securities Exchange Act of 1934. Accordingly, the proposed rules are patterned after the SEC’s Rule 10b-5 and are intended to be interpreted consistent with analogous SEC precedent. This will provide greater certainty to entities subject to the new rules because the FERC intends to rely on the existing case law related to section 10(b) when applying its new authority. These new sections apply to "any entity," not just jurisdictional marketbased rate sellers, natural gas pipelines, or holders of blanket certificate authority. In other words, "any entity" includes not just regulated utilities, but governmental utilities and other market participants. Comments on the NOPR are due on November 17, 2005, and reply comments will be due November 25, 2005.

On October 12, 2005, the FERC and the Commodity Futures Trading Commission ("CFTC") entered into a Memorandum of Understanding ("MOU") on the sharing of confidential information between the two agencies. The MOU was executed in compliance with the requirement of the Energy Policy Act of 2005 that the FERC and the CFTC conclude such an understanding within 180 days of the law’s enactment on August 8, 2005. The MOU intends to facilitate the coordination of information requests in order to avoid duplication and to properly treat proprietary information.

Under the MOU, the FERC can request written futures and options trading data or other board of trade, exchange or market information under the control of the CFTC; and the CFTC can request the FERC for similar information. The MOU also authorizes the agencies to regularly share and discuss information with each other on oversight, investigative and enforcement activities of mutual interest. (The MOU does not affect the authority of each agency to directly obtain information from entities subject to their jurisdiction.) Both agencies will treat as confidential and non-public the information they receive from each other. Such information shall not be disclosed to others except upon prior written consent of the source agency or in a federal action or proceeding to which the FERC, the CFTC or the United States is a party. Moreover, any disclosures made pursuant to the MOU shall not constitute a waiver of the confidentiality or privilege of undisclosed data. The MOU also does not create any enforceable rights against the FERC, the CFTC or their personnel. The confidential treatment of data, however, does not apply to aggregate data or to information received by other means.

Unless prohibited by federal law relating to a particular proceeding, the FERC and the CFTC are required to notify each other of any informal or formal request or demand by any party (including any person within the federal government) for disclosure of information obtained by the agencies pursuant to the MOU. Each agency shall assert all legal exemptions or privileges that the other requests to be asserted against such requests, other than those made pursuant to the Freedom of Information Act. The MOU does not contain detailed provisions on third-party notice, and instead states that the two agencies shall confer on the coordination of procedures to conform to their respective third-party notice requirements.

On October 3, 2005, the FERC issued a NOPR seeking comment on proposed rules adopting procedures for the expeditious consideration of applications for the approval of dispositions, consolidations, or acquisitions of jurisdictional facilities under the recently amended section 203 of the Federal Power Act. (Docket No. RM05-34-000) The Energy Policy Act of 2005 amended section 203 of the Federal Power Act to: (i) increase to $10 million the value threshold for certain transactions subject to section 203; (ii) extend its scope to include transactions involving certain transfers of generation facilities and certain holding companies’ acquisitions with a value in excess of $10 million; (iii) limit FERC’s review of a public utility’s acquisition of securities of another public utility to transactions greater than $10 million; and (iv) require that FERC, when reviewing a proposed section 203 transaction, examine crosssubsidization and pledges or encumbrances of utility assets. FERC specifically seeks comments on whether "market value" is the appropriate measure of value for transactions between non-affiliated companies.

With respect to FERC’s new authority to review transfers of existing generation facilities used for interstate wholesale sales and over which the FERC has jurisdiction for ratemaking purposes, FERC proposes to define "existing generation facility" as a generation facility that is operational at the time the transaction is consummated. FERC also seeks comments on whether "at the time the transaction is consummated" is the appropriate time for determining whether a facility is an "existing" facility. Comments on this NOPR are due November 7, 2005.

As reported in the October issue of the Energy Client Alert, Alliant Energy Corporate Services, Inc. ("Alliant") filed a Petition for Declaratory Order with the FERC on August 12, 2005, seeking termination of the mandatory purchase obligation from a qualifying cogeneration facility or qualifying small power production facility (a "QF"). On October 11, 2005, FERC ruled that since the statute requires notice of an application of termination to be provided to all potentially affected QFs, and since applicant did not provide sufficient notice to all potentially affected QFs, it was therefore dismissing Alliant’s petition. (Docket No. EL05-143-000)

Alliant based its petition on Section 1253 of the Energy Policy Act, which amends the Public Utility Regulatory Policies Act of 1978 ("PURPA") such that no electric utility will be required to enter into a new contract or obligation if the FERC finds that the QF has non-discriminatory access to (i) wholesale markets and (ii) transmission services provided by a FERC-approved regional transmission entity. Alliant asserted that the QFs located in the service territories of its subsidiaries (Interstate Power and Light Company ("IPL") and Wisconsin Power and Light Company ("WPL")) have direct access to the competitive Midwest ISO markets.

FERC stated that Section 201(m)(3) of PURPA requires that "sufficient notice" be given to "potentially affected" QFs and establishes a time frame for FERC action. Specifically, Section 201(m)(3) states:

In order to meet the express statutory requirement of "sufficient notice" to potentially affected QFs, FERC stated that it will require Alliant to identify potentially affected QFs (including their names and current addresses) –including: (1) those QFs that have existing power purchase contacts with IPL and WPL; (2) other QFs that sell their output to IPL and WPL or that have pending requests for IPL and WPL to purchase their output; (3) any developer of generating facilities with whom IPL and WPL have agreed to enter into power purchase contracts or are in discussion with regard to power purchase contracts; (4) the developers of facilities that have pending state avoided cost proceedings; and (5) any other QFs that Alliant reasonably believes to be affected by its petition.

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