[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Proposed Rules]
[Pages 25614-25624]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10102]


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FEDERAL TRADE COMMISSION

16 CFR Part 317

[Project No. P082900]
RIN 3084-AB12


Prohibitions On Market Manipulation and False Information in 
Subtitle B of the Energy Independence and Security Act of 2007

AGENCY: Federal Trade Commission.

ACTION: Advance notice of proposed rulemaking; request for public 
comment.

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SUMMARY: The Federal Trade Commission (FTC or Commission) is requesting 
comment on the manner in which it should carry out its rulemaking 
responsibilities under Section 811 of Subtitle B of Title VIII of The 
Energy Independence and Security Act of 2007 (EISA).

DATES: Comments must be received on or before June 6, 2008.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. Comments should refer to ``Market 
Manipulation Rulemaking, P082900'' to facilitate the organization of 
comments. Comments containing material for which confidential treatment 
is requested must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with Commission Rule 4.9(c).\1\
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c) (2008).
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    Because paper mail in the Washington-area, and specifically to the 
FTC, is subject to delay due to heightened security screening, please 
consider submitting your comments in electronic form. Comments filed in 
electronic form should be submitted by using the following weblink: 
https://secure.commentworks.com/ftc-marketmanipulationANPR/ (and

[[Page 25615]]

following the instructions on the web-based form). To ensure that the 
Commission considers an electronic comment, you must file it on the 
web-based form at the weblink (https://secure.commentworks.com/ftc-marketmanipulationANPR/). If this notice appears at http://www.regulations.gov, you may also file an electronic comment through 
that Web site. The Commission will consider all comments that 
regulations.gov forwards to it. You may also visit the FTC website at 
(http://www.ftc.gov/opa/index.shtml) to read the Advance Notice of 
Proposed Rulemaking and the news release describing it.
    A comment filed in paper form should include the ``Market 
Manipulation Rulemaking, P082900'' reference both in the text and on 
the envelope, and should be mailed to the following address: Federal 
Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846, 
Fairfax, VA 22031-0846. This address does not accept courier or 
overnight deliveries. Courier or overnight deliveries should be 
delivered to: Federal Trade Commission/Office of the Secretary, Room H-
135 (Annex G), 600 Pennsylvania Avenue, NW, Washington, DC 20580.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. The Commission will consider all timely and responsive 
public comments that it receives, whether filed in paper or electronic 
form. Comments received will be available to the public on the FTC 
website, to the extent practicable, at http://www.ftc.gov. As a matter 
of discretion, the FTC makes every effort to remove home contact 
information for individuals from the public comments it receives before 
placing those comments on the FTC website. More information, including 
routine uses permitted by the Privacy Act, may be found in the FTC's 
privacy policy, at (http://www.ftc.gov/ftc/privacy.htm).

FOR FURTHER INFORMATION CONTACT: John H. Seesel, Associate General 
Counsel for Energy, Federal Trade Commission, Market Manipulation 
Rulemaking, P.O. Box 2846, Fairfax, VA 22031-0846, (202) 326-3772.

SUPPLEMENTARY INFORMATION:

I. Statutory Framework

    Subtitle B of EISA, which became effective on December 19, 2007,\2\ 
includes two substantive sections respectively entitled ``Prohibition 
On Market Manipulation'' (Section 811) and ``Prohibition On False 
Information'' (Section 812). Section 811 prohibits ``any person'' from 
directly or indirectly (1) using or employing ``any manipulative or 
deceptive device or contrivance,'' (2) ``in connection with the 
purchase or sale of crude oil gasoline or petroleum distillates at 
wholesale,'' (3) that violates a rule or regulation that the Federal 
Trade Commission ``may prescribe as necessary or appropriate in the 
public interest or for the protection of United States citizens.'' 
Section 812 prohibits ``any person'' from reporting information that is 
``required by law to be reported'' -- and that is ``related to the 
wholesale price of crude oil gasoline or petroleum distillates'' -- to 
a Federal department or agency if the person (1) ``knew, or reasonably 
should have known, [that] the information [was] false or misleading;'' 
and (2) intended such false or misleading information ``to affect data 
compiled by the department or agency for statistical or analytical 
purposes with respect to the market for crude oil, gasoline, or 
petroleum distillates.''
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    \2\ Pub. L. 110-140, 121 Stat. 1723 (December 19, 2007), Title 
VIII, Subtitle B, to be codified at 42 U.S.C. 17301-17305.
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    Section 813 provides that Subtitle B ``shall be enforced by the 
Federal Trade Commission in the same manner, by the same means, and 
with the same jurisdiction'' as though ``all applicable terms'' of the 
Federal Trade Commission Act (FTC Act) were incorporated into and made 
a part of Subtitle B. Consequently, any entity subject to Commission 
jurisdiction under the FTC Act is subject to the Commission's 
enforcement of Subtitle B, and must comply with Section 812 and any 
rule promulgated under Section 811 of Subtitle B.\3\ Section 813 
further provides that the violation of any provision of Subtitle B 
``shall be treated as an unfair or deceptive act or practice proscribed 
under a rule issued under section 18(a)(1)(B) of the Federal Trade 
Commission Act (15 U.S.C. 57a(a)(1)(B)),'' even though rules and 
regulations that the Commission may prescribe are to be issued under 
Subtitle B.\4\
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    \3\ Section 811 and Section 812 of Subtitle B expressly cover 
``any person.'' The Administrative Procedure Act, 5 U.S.C. 551(2), 
defines ``person'' as including ``an individual, partnership, 
corporation, association, or public or private organization other 
than an agency.'' Similarly, the FTC's jurisdiction under the FTC 
Act covers ``persons, partnerships, or corporations.'' 15 U.S.C. 
45(a)(2). While the FTC Act applies broadly, certain entities are 
wholly or partly exempt from Commission authority under that Act. 
These include banks, savings and loan institutions, federal credit 
unions, transportation and communications common carriers, air 
carriers, and livestock firms. 15 U.S.C. 45(a)(2). In addition, the 
term ``corporation,'' as defined in Section 4 of the FTC Act, does 
not extend to entities not organized to carry on business for their 
own profit or that of their members. 15 U.S.C. 44.
    \4\ See EISA Section 811 (defining acts or practices that shall 
be unlawful under ``rules and regulations as the Federal Trade 
Commission may prescribe as necessary or appropriate in the public 
interest or for the protection of United States citizens''). Because 
the rulemaking procedures for the issuance of trade regulation rules 
are limited to rules promulgated ``under'' Section 18(a)(1)(B) of 
the FTC Act (see 15 U.S.C. 57a(a)(1)(B)), the issuance of rules and 
regulations under EISA Section 811 is instead governed by the 
notice-and-comment requirements of the Administrative Procedure Act, 
5 U.S.C. 553, and Part 1, Subpart C, of the Commission Rules of 
Practice for the adoption of non-Section 18 rules. See 16 CFR 1.21-
1.26.
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    The Commission could seek a number of different types of relief 
against a person who violated Subtitle B. In particular, Section 13(b) 
of the FTC Act permits the Commission to file a federal court civil 
action seeking a temporary restraining order or a preliminary 
injunction to prevent any ``person, partnership, or corporation'' from 
violating a rule promulgated under EISA Section 811 or from violating 
EISA Section 812, and to secure a permanent injunction ``in proper 
cases.'' In such a proceeding, the Commission would also be able to 
secure corollary equitable relief, such as an asset freeze, 
disgorgement, and/or the appointment of a receiver. 15 U.S.C. 53(b). 
Moreover, Section 19 of the FTC Act permits the Commission to file a 
federal court civil action in its own name against any person, 
partnership, or corporation that ``violates any rule . . . respecting 
unfair or deceptive acts or practices . . . ,''\5\ and permits the 
court to grant relief needed:
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    \5\ 15 U.S.C. 57b(a)(1).

 to redress injury to consumers or other persons, partnerships, and 
corporations resulting from the rule violation . . . [including but not 
limited to] rescission or reformation of contracts, the refund of money 
or return of property, the payment of damages, and public notification 
respecting the rule violation. . . .\6\
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    \6\ 15 U.S.C. 57b(b).

Furthermore, Section 5(m)(1)(A) of the FTC Act permits the Commission, 
by referral to the Department of Justice, to file a federal court civil 
action to recover civil penalties of up to $11,000\7\ per violation 
from:
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    \7\ This amount has been adjusted upward from the original 
statutory amount of $10,000 pursuant to the Federal Civil Penalties 
Inflation Adjustment Act of 1990, as amended by the Debt Collection 
Improvement Act of 1996. 28 U.S.C. 2461.

 any person, partnership, or corporation which violates any rule under 
[the FTC Act] respecting unfair or deceptive acts or practices . . .

[[Page 25616]]

with actual knowledge or knowledge fairly implied on the basis of 
objective circumstances that such act is unfair or deceptive and is 
prohibited by such rule.\8\
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    \8\ 15 U.S.C. 45(m)(1)(A). Section 16(a)(1) of the FTC Act 
requires the Commission to refer such actions to the United States 
Attorney General in the first instance, and permits the Commission 
to file such actions in its own name if ``the Attorney General fails 
within 45 days after receipt of such notification to commence . . . 
such action.'' 15 U.S.C. 56(a)(1).

Because Section 813 of the EISA provides that a violation of Subtitle B 
shall be treated as a violation of such a rule, any person that 
violates Subtitle B is subject to these civil penalties.
    Section 814(a) of Subtitle B further provides that -- ``[i]n 
addition to any penalty applicable'' under the FTC Act -- ``any 
supplier that violates section 811 or 812 shall be punishable by a 
civil penalty of not more than $1,000,000.''\9\ Both Section 5(m)(1)(C) 
of the FTC Act, 15 U.S.C. 45(m)(1)(C), and Section 814(c)(1) of the 
EISA provide that each day of a continuing violation shall be 
considered a separate violation.
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    \9\ It is not clear whether the use of the term ``supplier'' in 
Section 814 is intended to limit use of the remedy available under 
that section to violations committed by suppliers through sales of 
crude oil, gasoline, or petroleum distillates, or was intended to 
extend to violations committed by suppliers through purchases of 
such products as well. Commenters are encouraged to discuss this 
point.
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    Section 815(a) provides that nothing in Subtitle B ``limits or 
affects'' Commission authority ``to bring an enforcement action or take 
any other measure'' under the FTC Act or ``any other provision of 
law.'' Section 815(b) provides that ``[n]othing in [Subtitle B] shall 
be construed to modify, impair, or supersede the operation'' (1) of any 
of the antitrust laws (as defined in Section 1(a) of the Clayton Act, 
15 U.S.C. 12(a)) or (2) of Section 5 of the FTC Act ``to the extent 
that . . . [S]ection 5 applies to unfair methods of competition.'' 
Section 815(c) provides that nothing in Subtitle B ``preempts any State 
law.''

II. Overview of the Advance Notice of Proposed Rulemaking

    Section 811 applies to violations of ``such rules and regulations 
as the Federal Trade Commission may prescribe as necessary or 
appropriate in the public interest or for the protection of United 
States citizens.'' This Advance Notice of Proposed Rulemaking seeks 
public comment from interested parties, including other federal 
agencies and the States, on whether, and if so in what manner, the 
Commission should promulgate a rule pursuant to Section 811 in order to 
ensure that the rule, on balance, carries out the objectives of the 
statute by prohibiting practices that constitute manipulative or 
deceptive devices or contrivances to the benefit of the public 
interest.\10\
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    \10\ The prohibitions embodied in Section 812 of EISA became 
effective with enactment of EISA on December 19, 2007. These 
prohibitions therefore already apply to any person subject to the 
jurisdiction granted to the Commission by the FTC Act, and the 
Commission may seek legal and equitable relief to remedy violations 
of Section 812 in the manner described above, through civil actions 
in federal court.
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    The Commission has devoted substantial resources to enforcing the 
antitrust laws in various parts of the petroleum industry, including in 
the refining and distribution of crude oil, gasoline, and petroleum 
distillates. The Commission has also expended significant research 
efforts in this same space. As a consequence, the Commission and its 
staff have experience with many parts of the petroleum industry. The 
Commission will draw upon this foundation in conducting this Rulemaking 
proceeding.
    The Commission's consumer protection efforts provide a second 
important foundation for conducting this Rulemaking proceeding, and in 
particular for determining the extent to which the law of unfairness 
and deception can inform the Commission's interpretation of a 
``manipulative or deceptive device or contrivance.''\11\ In 
interpreting Section 5 of the FTC Act, the Commission has determined 
that a representation, omission, or practice is deceptive if (1) it is 
likely to mislead consumers acting reasonably under the circumstances; 
and (2) it is material, that is, likely to affect consumers' conduct or 
decisions with respect to the product at issue.\12\ Section 5 also 
provides that an act or practice is unfair if the injury to consumers 
it causes or is likely to cause (1) is substantial; (2) is not 
outweighed by countervailing benefits to consumers or to competition; 
and (3) is not reasonably avoidable by consumers themselves.\13\
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    \11\ The term ``manipulative or deceptive'' arguably can be read 
as a single adjective. That is the approach the Federal Energy 
Regulatory Commission followed in promulgating the Final Rule 
discussed infra, in reliance on the fact that, with respect to 
Securities Rule 10b-5 cases, the Supreme Court had ``concluded that 
both [manipulative and deceptive] require `misrepresentation.''' 
Federal Energy Regulatory Commission, 18 CFR Part 1c: Prohibition of 
Energy Market Manipulation: Final Rule, 71 FR 4244, 4253 n. 107 
(January 26, 2006). By contrast, however, the FTC has for many years 
vigorously enforced the separate prohibition of ``deceptive acts or 
practices'' embodied in Section 5 of the FTC Act, 15 U.S.C. 45.
    \12\ See generally Federal Trade Commission Policy Statement on 
Deception, appended to Cliffdale Assocs., 103 F.T.C. 110, 174-83 
(1984).
    \13\ 15 U.S.C. 45(n); see generally Federal Trade Commission 
Policy Statement on Unfairness, appended to International Harvester, 
Co., 104 F.T.C. 949, 1070-76 (1984). Neither deception nor 
unfairness requires a showing of scienter.
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    As a consequence of the foregoing law enforcement, research, and 
related efforts -- through both its competition mission and its 
consumer protection mission -- the Commission and its staff have gained 
an understanding of the domestic petroleum industry; of how 
participants in the industry compete; of how prices of gasoline and 
other refined petroleum products are determined; and of how particular 
practices may, in specific circumstances, constitute either unfair 
methods of competition or unfair or deceptive acts or practices, in 
violation of Section 5 of the FTC Act. The Commission expects to use 
this experience and understanding to effectuate the objectives of 
Subtitle B. Through this Advance Notice of Proposed Rulemaking, the 
Commission expects to secure new and valuable information concerning 
how best to achieve those objectives. Commenters are encouraged to 
review this document in its entirety and offer comments concerning any 
of the points or questions raised, as well as any other relevant issue.

III. The Antecedents of Section 811 and Relevant Legal Precedent

    The manner in which the courts and regulatory agencies have 
interpreted provisions similar to those comprising Section 811 is 
relevant both to formulating a rule under Section 811 and to 
determining how the resultant formulation will fare in the courts. 
Public comment will provide critical information in that regard. While 
there are substantial similarities among prior interpretations and 
their contexts, there are substantial differences as well. In order to 
provide a framework within which commenters can develop and provide 
their own assessments for purposes of considering a rule under Section 
811, we offer a brief discussion of the statutory and regulatory 
antecedents of Section 811, and court interpretations of similar 
statutes and regulations. The Commission encourages comment on these or 
any other aspects of precedent that may help to guide the Commission's 
approach in this Rulemaking.
    Establishing a violation of Section 811 first requires a showing 
that a person\14\ directly or indirectly used or employed a 
``manipulative or deceptive device or contrivance.'' In determining the 
contours of this requirement --

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including determining the state of mind that is required -- commenters 
are encouraged to address the extent to which the Commission can or 
should rely on four separate sets of existing statutory and regulatory 
constructs, discussed below.
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    \14\ For the reasons discussed supra, the term ``person'' is 
used in this document to refer to ``person, partnership, or 
corporation,'' consistent with the jurisdictional reach of the FTC 
Act.
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A. The Securities Laws

    The phrase ``manipulative or deceptive device or contrivance'' 
derives from the Securities Exchange Act of 1934 (Exchange Act). 
Section 10(b) of that statute prohibits the use or employment of:

 any manipulative or deceptive device or contrivance in contravention 
of such rules as the [Securities and Exchange] Commission may prescribe 
as necessary or appropriate in the public interest or for the 
protection of investors.\15\
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    \15\ 15 U.S.C. 78j(b) (emphasis added). Section 9 of the 
Exchange Act more specifically addresses ``Manipulation of security 
prices,'' and prohibits or limits the use of certain practices with 
respect to ``[t]ransactions relating to purchase or sale of 
security;'' ``[t]ransactions relating to puts, calls, straddles, or 
options;'' ``[e]ndorsement or guarantee of puts, calls, straddles, 
or options;'' and ``practices that affect market volatility.'' 15 
U.S.C. 78i(a),(b),(c),(h).

The Securities and Exchange Commission (SEC) relied on Section 10(b) of 
the Exchange Act to promulgate Rule 10b-5, which makes it unlawful for 
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any person:

 (a) To employ any device, scheme, or artifice to defraud;
 (b) To make any untrue statement of a material fact or to omit to 
state a material fact necessary in order to make the statements 
made, in the light of the circumstances under which they were made, 
not misleading . . .; or
 (c) To engage in any act, practice, or course of business which 
operates or would operate as a fraud or deceit upon any person. . . 
.
    in connection with the purchase or sale of any security.\16\
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    \16\ 17 CFR 240.10b-5(a)-(c) (2008). In addition, the SEC's 
rules under Section 10(b) prohibit a number of specific practices in 
specific circumstances. See 17 CFR 240.10b-1 through 240.10b-18.
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    In 1976, the Supreme Court determined that a private cause of 
action for damages would not lie under Section 10(b) or Rule 10b-5 
without proof that the defendant possessed scienter; that is, the 
``intent to deceive, manipulate, or defraud.''\17\ In particular, the 
Court noted:
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    \17\ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); 
accord, e.g., Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 
------ (June 21, 2007), slip op. at 1-2, 7; In re Worlds of Wonder 
Securities Litigation, 35 F.3d 1407, 1424 (9th Cir. 1994), cert. 
denied, 116 S. Ct. 185 (1995); Loveridge v. Dreagoux, 678 F.2d 870, 
875 (10th Cir. 1982).

 Section 10(b) makes unlawful the use or employment of ``any 
manipulative device or contrivance'' in contravention of [Securities 
and Exchange] Commission rules. The words ``manipulative or 
deceptive'' used in conjunction with ``device or contrivance'' 
strongly suggest that [Section] 10(b) was intended to proscribe 
knowing or intentional misconduct.\18\
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    \18\ Ernst & Ernst, 425 U.S. at 197. The Court concluded that 
the terms ``manipulative,'' ``device,'' and ``contrivance'' . . . 
make unmistakable a congressional intent to proscribe a type of 
conduct quite different from negligence. Use of the word 
``manipulative'' is especially significant. It is and was virtually 
a term of art when used in connection with securities markets. It 
connotes intentional or willful conduct designed to deceive or 
defraud investors by controlling or artificially affecting the price 
of securities.
    Id. at 199 (internal citations omitted). See also Schreiber v. 
Burlington Northern, Inc., 472 U.S. 1, 6-7 (1985); Santa Fe 
Industries, Inc. v. Green, 430 U.S. 462, 476 (1977) (the term 
``manipulation'' ``refers generally to practices, such as wash 
sales, matched orders, or rigged prices, that are intended to 
mislead investors by artificially affecting market activity.'').

Moreover, the Court found that use of the terms ``[t]o use or employ'' 
supported ``the view that Congress did not intend [Section] 10(b) to 
embrace negligent conduct.''\19\ The Court concluded that ``the 
language of [Section] 10(b) . . . clearly connotes intentional 
misconduct. . . .''\20\ Soon thereafter, the Court determined that the 
SEC, as well as private plaintiffs, must:
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    \19\ Id. at 199 n. 20.
    \20\ Id. at 201, citing United States v. Oregon, 366 U.S. 643, 
648 (1961); Packard Motor Car Co. v. NLRB, 330 U.S. 485, 492 (1947); 
accord, e.g., Aaron v. Securities and Exchange Commission, 446 U.S. 
680, 690 (1980).

 establish scienter as an element of a civil enforcement action to 
enjoin violations of . . . [Section] 10(b) of the [Securities 
Exchange Act of 1934], and Rule 10b-5 promulgated under that section 
of the 1934 Act.\21\
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    \21\ Aaron v. SEC, 446 U.S. at 701-702.

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While the Supreme Court has reserved the question

 whether reckless behavior is sufficient for civil liability under 
Section 10(b) and Rule 10b-5, . . . [e]very Court of Appeals that 
has considered the issue has held that a plaintiff may meet the 
scienter requirement by showing that the defendant acted 
intentionally or recklessly, though the Circuits differ on the 
degree of recklessness required.\22\
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    \22\ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. ----
-- (June 21, 2007), slip op. at 7 n. 3, citing Ernst & Ernst v. 
Hochfelder, 425 U.S. at 194 n. 12; Ottman v. Hanger Orthopedic 
Group, Inc., 353 F.3d 338, 343 (collecting Court of Appeals cases).

More generally, the Court of Appeals for the Second Circuit has 
elaborated that, in order to establish a Rule 10b-5 violation, the SEC 
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must establish that the defendant:

 (1) [m]ade a material misrepresentation or a material omission as 
to which he had a duty to speak, or used a fraudulent device; (2) 
with scienter; and (3) in connection with the purchase or sale of 
securities.\23\
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    \23\ SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 
1999).
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B. The Natural Gas Act and the Federal Power Act

    The Energy Policy Act of 2005 amended the Natural Gas Act and the 
Federal Power Act, respectively, to prohibit the same type of conduct 
that Section 10(b) of the Exchange Act targets -- that is, the use or 
employment of ``any manipulative or deceptive device or contrivance (as 
those terms are used in [Section 10(b) of the Securities Exchange Act 
of 1934] . . . ).''\24\ In 2006, the Federal Energy Regulatory 
Commission (FERC) relied on those prohibitions to promulgate two rules 
-- respectively prohibiting natural gas market manipulation and 
electric energy market manipulation (collectively referred to as the 
Final Rule). The FERC Final Rule is identical in many respects to SEC 
Rule 10b-5.\25\ FERC also determined to interpret the Final Rule in a 
manner ``consistent with analogous SEC precedent that is appropriate 
under the circumstances.''\26\ In particular, FERC included a scienter 
requirement, noting that ``[t]he final rule is not intended to regulate 
negligent practices or corporate mismanagement, but rather to deter or 
punish fraud in wholesale energy markets,''\27\ and that ``there can be 
no violation of the final rule, or any of its sections, absent a 
showing of the requisite scienter.''\28\ FERC determined that a showing 
of recklessness would be sufficient to satisfy the scienter requirement 
under the FERC Final Rule.\29\ FERC expressly declined to incorporate 
``a specific intent standard'' into the Final Rule.\30\
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    \24\ Compare Section 4A of the Natural Gas Act, 15 U.S.C. 717c-
1, with Section 222 of the Federal Power Act, 16 U.S.C. 824v.
    \25\ 18 CFR 1c.1, 1c.2 (2008).
    \26\ Federal Energy Regulatory Commission, 18 CFR Part 1c: 
Prohibition of Energy Market Manipulation: Final Rule, 71 FR 4244, 
4246 (January 26, 2006).
    \27\ Id. at 4246.
    \28\ Id. at 4252; accord, id. at 4253, citing Ernst & Ernst v. 
Hochfelder, 425 U.S. at 197; Aaron v. SEC, 446 U.S. at 690.
    \29\ Id. at 4253-54 and n. 109 (``Courts of appeal are in 
general agreement that recklessness in some form satisfies the 
scienter requirement of SEC Rule 10b-5.'') (citations omitted).
    \30\ Id. at 4253.
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    FERC relied on the foregoing analysis to determine that it will 
take action pursuant to the Final Rule in cases where an entity:

 (1) [u]ses a fraudulent device, scheme or artifice, or makes a 
material misrepresentation or a material omission as to which there 
is a duty to speak under a Commission-filed tariff, Commission 
order,

[[Page 25618]]

rule or regulation, or engages in any act, practice, or course of 
business that operates or would operate as a fraud or deceit upon 
any entity; (2) with the requisite scienter; (3) in connection with 
the purchase or sale of natural gas or electric energy or 
transportation of natural gas or transmission of electric energy 
subject to the jurisdiction of the Commission.\31\
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    \31\ Id. at 4253.

FERC defined fraud ``generally . . . to include any action, 
transaction, or conspiracy for the purpose of impairing, obstructing, 
or defeating a well-functioning market.''\32\ FERC also provided 
examples of practices that would violate the Final Rule because the 
practices constituted ``manipulative or deceptive devices or 
contrivances.'' FERC's cited practices were already prohibited by its 
Market Behavior Rule 2 (since-repealed), but included in particular:
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    \32\ Id., citing Dennis v. United States, 384 U.S. 855, 861 
(1966).

 wash trades, transactions predicated on submitting false 
information, transactions creating and relieving artificial 
congestion, and collusion for the purpose of market 
manipulation.\33\
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    \33\ Id. at 4254.

FERC also determined to incorporate the ``safe harbor presumptions of 
compliance and affirmative defenses'' available under its Market 
Behavior Rules into its enforcement of the Final Rule.\34\ FERC 
rejected the argument registered by some commenters that its rule was 
``vague and overly broad,'' noting that it was modeled after SEC Rule 
10b-5, and that the courts have determined that the latter rule is 
neither vague nor overly broad.\35\
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    \34\ Id. at 4255. Thus, for example, FERC will presume that a 
market participant that ``undertakes an action or transaction that 
is explicitly contemplated in Commission-approved rules and 
regulations'' does not violate the Final Rule. Moreover, if a market 
participant takes an action or engages in a transaction -- at the 
direction of an Independent System Operator or a Regional 
Transmission Organization, but not approved by FERC -- it can assert 
that as a defense for the action taken.
    \35\ Id. at 4250, citing United States v. Persky, 520 F.2d 283 
(2d Cir. 1975); Todd & Co. v. SEC, 557 F.2d 1008, 1013 (3d Cir. 
1977).
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    FERC's statute specifically limited its application to actions ``in 
connection with a jurisdictional transaction.'' Relying on cases 
addressing Section 10(b) of the SEC, in its Final Rule, FERC defined 
``in connection with'' to mean that ``in committing fraud, the entity 
must have intended to affect, or have acted recklessly to affect, a 
jurisdictional transaction.''\36\
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    \36\ Id. at 4249.
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    FERC's first litigated case under the Final Rule provides a helpful 
illustration of how it intends to enforce the Final Rule in practice. 
In that case, FERC issued an Order to Show Cause and Notice of Proposed 
Penalties against hedge fund Amaranth LLC, and two traders, alleging 
that they had illegally manipulated the price of transactions subject 
to FERC jurisdiction by trading in the New York Mercantile Exchange 
(NYMEX) Natural Gas Futures Contracts for February, March, and April of 
2006. In particular, the Order alleged that the respondents 
intentionally manipulated the final, or ``settlement,'' price of the 
NYMEX Natural Gas Futures Contract -- on three occasions in 2006 -- by 
selling an extraordinary quantity of these contracts during the last 30 
minutes of trading before they expired, with the purpose and effect of 
driving down the settlement price. The settlement price is explicitly 
used to determine the price for a substantial volume of physical 
natural gas transactions subject to FERC jurisdiction, and Amaranth had 
previously taken positions in various financial derivatives that were 
several times larger -- and whose values increased -- as a direct 
result of the fall in the settlement price of each natural gas futures 
contract. As a consequence, for every dollar Amaranth lost on its sales 
of the futures contracts, Amaranth gained several dollars on its 
derivative financial positions.\37\ The Order gave Amaranth 30-days to 
show cause why it should not be assessed $200 million in civil 
penalties and be required to disgorge profits totaling $59 million, 
plus interest. The case remains in litigation.\38\
---------------------------------------------------------------------------

    \37\ Commission Takes Preliminary Action in Two Major Market 
Manipulation Cases, Federal Energy Regulatory Commission News (July 
26, 2007), available at http://www.ferc.gov/news/news-releases/2007/2007-3/07-26-07.pdf.
    \38\ On July 25, 2007, the Commodity Futures Trading Commission 
(CFTC) filed a civil enforcement action in federal district court 
against Amaranth challenging many of the same actions at issue in 
the FERC proceeding described above. The CFTC is seeking permanent 
injunctive relief, an award of civil penalties, and other remedial 
and ancillary relief. The CFTC and FERC both noted that they had 
coordinated their respective investigations, pursuant to the 
agencies' Memorandum of Understanding. The ultimate resolution of 
the CFTC and FERC cases will provide important guidance concerning 
the interaction between their respective statutes and rules with 
respect to manipulation. See U.S. Commodity Futures Trading 
Commission Charges Hedge Fund Amaranth and its Former Head Energy 
Trader, Brian Hunter, with Attempted Manipulation of the Price of 
Natural Gas Futures, Commodity Futures Trading Commission News (July 
25, 2007), available at (http://www.cftc.gov/newsroom/enforcementpressreleases/2007/pr5359-07.html.)
---------------------------------------------------------------------------

C. The Commodity Exchange Act

    Interpretation of the first component of Section 811 can also be 
informed by the manner in which the concept of ``manipulation'' has 
been defined in cases arising under the Commodity Exchange Act 
(CEA).\39\ That statute empowers the CFTC, inter alia, to bring an 
administrative enforcement action, or a civil injunctive action in 
federal district court against:
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    \39\ The CEA provides that the CFTC possesses, inter alia, 
``exclusive jurisdiction'' for ``transactions involving contracts of 
sale of a commodity for future delivery, traded or executed on a 
contract market . . . or derivatives transaction execution facility 
. . . or any other board of trade, exchange, or market. . . .'' 7 
U.S.C. 2(a)(1)(A). It further provides for non-exclusive CFTC anti-
manipulation authority over cash and physical transactions, as well 
as certain derivatives transactions relating to securities. 7 U.S.C. 
2(a)(1)(A), (C), (D).

 any person (other than a registered entity) [who] is manipulating 
or attempting to manipulate or has manipulated or attempted to 
manipulate the market price of any commodity, in interstate 
commerce, or for future delivery on or subject to the rules of any 
registered entity. . . .\40\
---------------------------------------------------------------------------

    \40\ 7 U.S.C. 9, 13b; see 7 U.S.C. 15. The statute defines a 
``registered entity'' as including certain boards of trade 
designated as contract markets; derivatives transaction execution 
facilities; and ``derivatives clearing organizations.'' 7 U.S.C. 
1a(29).

---------------------------------------------------------------------------
In addition, Section 9(a)(2) of the CEA makes it a felony for:

 [a]ny person to manipulate or attempt to manipulate the price of 
any commodity in interstate commerce, or for future delivery on or 
subject to the rules of any registered entity, or to corner or 
attempt to corner any such commodity . . . .\41\
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 13(a)(2).
---------------------------------------------------------------------------

    The CEA also requires any board of trade (defined as any organized 
exchange or other trading facility\42\ ) that wishes to be designated 
as a contract market, inter alia, to comply with a variety of statutory 
``Core Principles.''\43\
---------------------------------------------------------------------------

    \42\ 7 U.S.C. 1a(2).
    \43\ 7 U.S.C. 7(d).
---------------------------------------------------------------------------

    The Supreme Court decision in Merrill Lynch v. Curran provides an 
extensive discussion of the origins of futures trading and the CEA, and 
of how the foregoing statutory proscriptions of manipulation should be 
interpreted.\44\ In particular, the Court held that the primary purpose 
of the 1974 amendments to the CEA was to protect ``against manipulation 
of markets and to protect any individual who desires to participate in 
futures market trading.''\45\

D. The Sherman Act, the Clayton Act, and the Federal Trade Commission 
Act
---------------------------------------------------------------------------

    \44\ Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Curran, 456 
U.S. 353 (1982).
    \45\ Id. at 372, n. 50. Subsequently, the Commodity Futures 
Modernization Act of 2000 identified the purposes of the CEA as 
including, inter alia, ``to deter and prevent price manipulation or 
any other disruptions to market integrity. . .'' 7 U.S.C. 5(b). See 
also Frey v. Commodity Futures Trading Commission, 931 F.2d 1171, 
1175 (7th Cir. 1991).
---------------------------------------------------------------------------

    The enactment of Subtitle B raises the important question of the 
extent to which the Commission should rely

[[Page 25619]]

upon antitrust and consumer protection precedent as a frame of 
reference for this Rulemaking proceeding. The legislation gave the 
Commission new law enforcement tools to prevent both market 
manipulation and the reporting of false information. However, the 
extent to which law enforcement agencies have been able to prevent 
manipulation or deception in the past may provide useful lessons as 
commenters offer their input as to how best to effectuate EISA Section 
811 and the statutory objectives it represents.
    In the context of antitrust law, the term ``manipulative or 
deceptive device or contrivance'' is not a term of art. But, practices 
that potentially fall within the definition of those terms have been 
analyzed in the past through the prism of the Sherman Act Section 1 
prohibition against certain unreasonable contracts, combinations and 
conspiracies in restraint of trade; through the Sherman Act Section 2 
prohibition against monopolization, attempts to monopolize, and 
conspiracies to monopolize; and through the FTC Act prohibition against 
unfair methods of competition.
    For example, 60 years ago, the Supreme Court addressed the concept 
of manipulation in the petroleum industry in United States v. Socony-
Vacuum Oil Co. In that case, 12 oil companies and five individuals 
violated Section 1 of the Sherman Act by operating the ``Mid-Continent 
Buying Program'' and the ``East Texas Buying Program.''\46\ The 
defendant participants in these two programs agreed that they would 
purchase tank cars of ``distress gasoline'' from independent oil 
refiners.\47\ Thereafter, the participants in the Mid-Continent Buying 
Program held monthly meetings at which each participant would advise 
the others of ``how much his company would buy and from whom.''\48\
---------------------------------------------------------------------------

    \46\ United States v. Socony-Vacuum Oil Co., Inc., et al., 310 
U.S. 150, 181-90 (1940).
    \47\ For example, in the Mid-Continent oil field, 17 independent 
refiners did not have regular outlets for their gasoline, and 
because they had to keep their refineries running, they had to sell 
approximately 600 to 700 tank cars of gasoline each month at 
``distress'' prices. Id. at 178-79. For similar reasons, a number of 
independent refiners in the East Texas oil field had to sell a 
substantial number of tank cars of gasoline at ``distress'' prices. 
See id. at 185-90.
    \48\ Id. at 182. The East Texas Buying Program followed a 
similar approach with respect to independent refiners in the East 
Texas oil field. Id. at 185-90.
---------------------------------------------------------------------------

    The Supreme Court determined that the:

 whole scheme was carefully planned and executed to the end that 
distress gasoline would not overhang the markets and depress them at 
any time. And as a result of the payment of fair going market prices 
a floor was placed and kept under the spot markets. Prices rose and 
jobbers and consumers in the Mid-Western area paid more for their 
gasoline than they would have paid but for the conspiracy. 
Competition was not eliminated from the markets; but it was clearly 
curtailed, since restriction of the supply of gasoline, the timing 
and placement of the purchases under the buying programs and the 
placing of a floor under the spot markets obviously reduced the play 
of the forces of supply and demand.\49\
---------------------------------------------------------------------------

    \49\ Id. at 220.
---------------------------------------------------------------------------

    The Court determined that the purchases ``at or under the market 
are one species of price-fixing,''\50\ and that ``there was substantial 
competent evidence that the buying programs resulted in an increase of 
spot market prices, of prices to jobbers and of retail prices in the 
Mid-Western area.''\51\ The Court concluded that the buying programs, 
by stabilizing market prices, constituted ``one form of manipulation,'' 
and defined ``market manipulation in its various manifestations'' as:
---------------------------------------------------------------------------

    \50\ Id. at 223.
    \51\ Id. at 251. The Court rejected as irrelevant the 
defendants' arguments that the prices at issue were reasonable, and 
that their activities ``merely removed from the market the 
depressive effect of distress gasoline. . . .'' Id. at 229.

 an artificial stimulus applied to (or at times a brake on) market 
prices, a force which distorts those prices, a factor which prevents 
the determination of those prices by free competition alone.\52\
---------------------------------------------------------------------------

    \52\ Id. at 223.
---------------------------------------------------------------------------

    The Socony-Vacuum decision is among many in antitrust and consumer 
protection law that may provide useful guidance to the Commission in 
determining the metes and bounds of manipulative conduct under Subtitle 
B.\53\ To the extent commenters believe the Commission should be aware 
of particular antitrust or consumer protection law decisions, 
commenters are encouraged to discuss the cases and provide an 
explanation of the lessons to be incorporated from those opinions.
---------------------------------------------------------------------------

    \53\ Other cases that may be of interest include Verizon 
Communications Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 
U.S. 398 (2004); Eastman Kodak v. Image Technical Services, 504 U.S. 
451, 455-56 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing 
Corp., 472 U.S. 585, 601 (1985); and Virtual Maintenance Inc. v. 
Prime Computer Inc., 11 F.3d 660, 662 (6th Cir. 1993). This list is 
not intended to be exhaustive, but merely illustrative.
---------------------------------------------------------------------------

    In addition, unlike the SEC, CFTC, and FERC, the Commission has 
long had authority to prevent ``unfair or deceptive acts or 
practices.''\54\ That prohibition is not limited to ``devices or 
contrivances,'' and violations do not require proof of actual fraud or 
intent to deceive. The Commission seeks comments on any guidance its 
experience with unfair or deceptive acts or practices should or could 
provide in implementing its new authority.\55\
---------------------------------------------------------------------------

    \54\ See supra for the criteria the Commission uses under the 
FTC Act.
    \55\ Please note that nothing in connection with this Section 
811 Rulemaking, any subsequently enacted rules, or related efforts 
should be construed to alter the standards associated with 
establishing a deceptive practice or an unfair practice in a case 
brought by the Commission.
---------------------------------------------------------------------------

E. Reflecting on the Legal Framework -- Questions for Commenters

    The conduct component of Section 811 derives from a similar 
prohibition in Section 10(b) of the Securities Exchange Act of 1934 -- 
as implemented by the SEC through its promulgation and enforcement of 
Rule 10b-5 -- and from the 2005 amendments to the Natural Gas Act and 
the Federal Power Act, as implemented through regulations promulgated 
and enforced by FERC. The Commodity Exchange Act, as enforced by the 
CFTC, and the antitrust laws provide additional guidance as to the 
manner in which the Supreme Court and lower courts have interpreted the 
manipulation concept.
    Commenters are encouraged to assess whether, and if so to what 
extent, a Section 811 rule should incorporate or otherwise reflect any 
other aspects of these statutory and federal court precedents. 
Commenters are encouraged to assess whether these statutory and federal 
court precedents indicate that a Section 811 rule should prohibit a 
person from using or employing ``any manipulative or deceptive device 
or contrivance'' only if that person possesses the scienter -- to 
execute the allegedly manipulative strategy at issue -- that is 
analogous to the general intent to injure competition component of the 
monopolization offense under Section 2 of the Sherman Act and Section 5 
of the Federal Trade Commission Act. In addition, commenters are 
encouraged to assess whether, and if so to what extent, a Section 811 
rule should incorporate or otherwise reflect the FTC Act prohibition of 
unfair or deceptive acts or practices.\56\
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    \56\ The Commission notes that neither knowledge nor intent need 
be shown to prove a deceptive practice or an unfair practice under 
Section 5 of the FTC Act. See, e.g., FTC v. Bay Area Business 
Council, Inc., 423 F.3d 627, 635 (7th Cir. 2005); FTC v. Freecom 
Communications, Inc., 401 F.3d 1192, 1202 (10th Cir. 2005); FTC v. 
Amy Travel Serv., Inc., 875 F.2d 564, 573-74 (7th Cir. 1989).
---------------------------------------------------------------------------

    In addition, in the Commission's 2006 Investigation of Gasoline 
Price Manipulation and Post-Katrina Gasoline Price Increases Report to 
Congress,\57\ the Commission described and looked for a

[[Page 25620]]

number of types of practices and circumstances in various components of 
the petroleum refining and distribution system that might be viewed as 
manipulative.\58\ Commenters are encouraged to discuss whether a 
Section 811 rule should limit or prohibit any of these types of 
practices and, if so, in what circumstances, including discussing the 
direct and indirect benefits and costs of doing so. Commenters are also 
encouraged to discuss conduct in connection with the purchase and sale 
of crude oil, which, though outside the scope of the 2006 report, is 
within the reach of Section 811.
---------------------------------------------------------------------------

    \57\ Federal Trade Commission Report to Congress, Investigation 
of Gasoline Price Manipulation and Post-Katrina Gasoline Price 
Increases (Spring 2006). Commenters may consider this report a 
useful primer on the industry.
    \58\ The Commission examined: ``(1) all transactions and 
practices that are prohibited by the antitrust laws, including the 
Federal Trade Commission Act, and (2) all other transactions and 
practices, irrespective of their legality under the antitrust laws, 
that tend to increase prices relative to costs and to reduce 
output.'' Id. at ii (emphasis added). The Commission made clear, 
however, that this definition for purpose of the report represented 
neither existing legal prohibitions nor, in its view, an 
identification of practices that should be prohibited.
---------------------------------------------------------------------------

IV. Particular Questions For Commenters

    Below is a general framework within which commenters are encouraged 
to discuss what they believe the contours of a Section 811 rule should 
be. The Commission encourages commenters to answer specific questions, 
and to focus in particular on defining manipulative or deceptive 
behavior, in order to help the Commission formulate a workable rule 
that on balance benefits consumers.

A. Defining Market Manipulation

    The Commission is considering various possible definitions of 
market manipulation for the purpose of this Rulemaking under Section 
811. One possible definition is the following:

 Market manipulation shall mean knowingly using or employing, directly 
or indirectly, a manipulative or deceptive device or contrivance -- in 
connection with the purchase or sale of crude oil, gasoline, or 
petroleum distillates at wholesale -- for the purpose or with the 
effect of increasing the market price thereof relative to costs.

The Commission seeks comment on whether this proposed definition of 
market manipulation is one under which a rule may be adopted that is 
``necessary and appropriate in the public interest or for the 
protection of United States citizens,'' as required by Section 811. The 
Commission also seeks comment on whether an effect on prices should be 
a necessary element of proof under either a charge of market 
manipulation or a charge of attempted market manipulation. In addition, 
the Commission encourages commenters to suggest any other definitions 
that, in their view, may better address the public policy concern 
enunciated through the Commission's new rulemaking authority.

B. Manipulative or Deceptive Device or Contrivance

    As discussed above, Section 811 is modeled on authority previously 
granted to the SEC, FERC, and the CFTC. The Commission encourages 
commenters to address how Section 811's rulemaking authority should be 
exercised in light of the similar authority granted to the SEC and to 
FERC. In particular, the Commission seeks comments on how legal 
precedent established for violations of rules addressing manipulation 
or deceit in regulated behavior (such as securities trading or the 
execution of transactions carried out by regulated entities) should 
apply to unregulated behavior, such as the purchase and sale at 
wholesale of crude oil, gasoline, or petroleum distillates. To what 
extent (or in what particulars) should the jurisprudence under the 
other laws addressing manipulation apply under the Commission's new 
authority? What should not apply? The Commission encourages commenters 
to identify both general criteria and specific applications of the 
other laws, and to explain why each should or should not apply under a 
Section 811 rule, with a specific discussion of the costs and benefits 
of application
    The Commission also seeks comment on the potential costs or 
benefits of an FTC rule that simply mirrors the language of SEC Rule 
10b-5 or the language of the FERC Final Rule. In particular, could a 
Section 811 rule, that is similar to the rules adopted by the SEC and 
FERC for their specific purposes, provide sufficient clarity as to 
prohibited practices in the different context of crude oil, gasoline, 
and petroleum distillates transactions? In addition, commenters are 
asked to consider whether a rule that provides more specificity would 
be adequately broad and flexible to allow the Commission to address new 
and varied types of manipulation and deception. If the Commission 
develops a rule with more specific guidance and standards, what should 
those standards be?
    In the larger context discussed above, the Commission also seeks 
comment on the regulatory authority granted to the other federal 
agencies, and the potential or actual impact on consumer prices from 
the exercise of this authority. In addition, the Commission encourages 
commenters to address whether an anti-manipulation rule promulgated 
under Section 811 could be a mechanism for abuse by customers, 
competitors, or others.

C. Effect on the Market

    As indicated in a number of the cases discussed above, as well as 
the FERC rulemaking, the primary focus of the prohibition on 
manipulation appears to be on practices that are not a reaction to 
market forces. Instead, the focus is on practices that intentionally, 
willfully, or recklessly cause distortions in the market, such as 
artificially raising or depressing prices. Commenters are encouraged to 
consider whether this should be a focus of a potential Section 811 
rule.

D. Scienter/State of Mind

    In determining whether particular conduct violates any of the 
statutory and regulatory proscriptions, the federal courts have 
required a showing that the defendants or respondents were not simply 
negligent, but rather possessed at least the requisite scienter to 
execute the manipulative practice in question.
    For example, the courts have interpreted Section 10(b) of the SEA 
to require a showing of scienter -- that is, of intentional, willful, 
or reckless conduct designed to deceive or defraud by controlling or 
artificially affecting market prices or market activity. FERC relied on 
that precedent to incorporate a scienter requirement into its Final 
Rule. By contrast, the courts and the CFTC have interpreted the CEA and 
its implementing regulations as requiring a showing of a specific 
intent to injure a futures market through the execution of an 
intentionally manipulative strategy. The Commission seeks comment on 
the appropriate nature and level of scienter for a violation, and on 
whether that determination should depend on the nature of the practice 
at issue (and, if so, in what way). An additional question for 
consideration includes whether the Commission should incorporate either 
of the above scienter standards into a Section 811 rule. Commenters are 
encouraged to provide a specific discussion of the costs and benefits 
of the standard they recommend.

E. In Connection With

    Establishing a violation of Section 811 also requires establishing 
that the conduct at issue was used or employed ``in connection with the 
purchase or sale of crude oil[,] gasoline[,] or

[[Page 25621]]

petroleum distillates at wholesale.''\59\ As a consequence, Section 811 
does not extend to retail sales of gasoline. Instead, it arguably 
covers sales and purchases starting at the point at which crude oil, 
gasoline, or a petroleum distillate is sold by the producer or 
importer, and ending at the point at which it is purchased by a 
retailer. Commenters are encouraged to discuss how the phrase ``in 
connection with the sale or purchase of crude oil, gasoline, or 
petroleum distillates at wholesale'' should be interpreted. In relying 
on cases addressing Section 10(b) of the SEA to promulgate its Final 
Rule, FERC defined ``in connection with'' to mean that ``in committing 
fraud, the entity must have intended to affect, or have acted 
recklessly to affect, a jurisdictional transaction.''\60\ The 
Commission specifically seeks guidance as to whether the FERC model is 
appropriate for adoption by the Commission.
---------------------------------------------------------------------------

    \59\ The phrase ``crude oil gasoline or petroleum distillates,'' 
without commas, is used in Section 811 (as well as in the first 
clause of Section 812), while the phrase ``crude oil, gasoline, or 
petroleum distillates'' (with commas) is used in Section 812(3). 
This is presumably a non-substantive typographical error; therefore, 
all parts of both Sections should be read to cover all three types 
of products (that is, crude oil, gasoline, and petroleum 
distillates).
    \60\ 71 FR 4249, quoting SEC v. Zandford, 535 U.S. 813, 825 
(2002) (the Supreme Court has construed the ``in connection with'' 
requirement broadly, ``to encompass many circumstances where 
securities transactions `coincide' with the overall scheme to 
defraud'').
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F. In the Public Interest or For the Protection of United States 
Citizens

    Establishing a violation of Section 811 also requires a showing 
that the practices ``used or employed'' violate a rule that the 
Commission has prescribed ``as necessary or appropriate in the public 
interest or for the protection of United States citizens.'' Commenters 
are encouraged to address how the Commission may best ensure that a 
Section 811 rule satisfies this standard. Commenters are also 
encouraged to discuss whether antitrust or consumer protection 
principles should or should not be incorporated at all into a Section 
811 rule. For example, the Commission seeks comment on whether a 
Section 811 rule should conform to traditional antitrust analysis by 
requiring (1) the use or employment of ``any manipulative or deceptive 
device or contrivance'' to satisfy the anticompetitive conduct 
component of the offenses of monopolization and attempted 
monopolization prohibited by Section 2 of the Sherman Act and (2) the 
intent and market power components of those offenses to be satisfied 
under the standards explained throughout antitrust case law.\61\ 
Commentors are asked to explain whether such a construction is 
necessary or appropriate in the context of this Rulemaking.
---------------------------------------------------------------------------

    \61\ The Supreme Court has defined market power as the power 
```to force a purchaser to do something that he would not do in a 
competitive market,''' and as ```the ability of a single seller to 
raise price and restrict output.''' Eastman Kodak Co. v. Image 
Technical Services, 504 U.S. 451, 464 (1992), citing Jefferson 
Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 14 (1984); accord, 
e.g., United States v. Dentsply Int'l, Inc., 399 F.3d 181, 187 (3d 
Cir. 2005); United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. 
Cir.), cert. denied, 534 U.S. 952 (2001). Consistent with that 
determination, the Horizontal Merger Guidelines define market power 
as to a seller as ``the ability profitably to maintain prices above 
competitive levels for a significant period of time.'' U.S. Dep't of 
Justice & Federal Trade Comm'n, Horizontal Merger Guidelines (1992), 
Section 0.1, at 4; accord, Tops Markets, Inc. v. Quality Markets, 
Inc., 142 F.3d 90, 99 (2d Cir. 1998); United States v. Syufy 
Enters., 903 F.2d 659, 665-66 (9th Cir. 1990). As the Commission has 
noted, although the terms ``market power'' and ``monopoly power'' 
are often treated as synonymous from an economic perspective, market 
power can be thought of as a continuum along which the power to 
control prices varies, beginning with the complete absence of market 
power at one end and ending with monopoly power at the other. 
International Telephone & Telegraph Co., 104 F.T.C. 280, 411 n. 60 
(1984).
---------------------------------------------------------------------------

G. Penalties

    Section 814 provides civil penalty authority of up to $1,000,000, 
which can be assessed against ``suppliers'' for each violation for each 
day, taking into consideration the seriousness of the violation and any 
attempts by the violator to mitigate the harm. The Commission seeks 
comment on whether any potential chilling effect of these penalties on 
legitimate business behavior should affect the interpretation of, or 
required state of mind for, a ``manipulative deceptive device or 
contrivance.'' The Commission also seeks comment on whether the Section 
814 civil penalty authority extends only to violations committed by 
suppliers through sales of crude oil, gasoline, or petroleum 
distillates, or is intended to extend to violations committed by 
suppliers through purchases of such products as well.

H. Overlapping Jurisdiction

    As noted above, Congress has provided anti-manipulation authority 
to FERC and the CFTC to reach behavior previously not regulated by 
those agencies. In some cases, this authority may lead to a shared 
jurisdiction over the same behavior. The manipulation authority 
provided by Section 811 may subject market participants to similar 
overlapping agency oversight, and create the potential for market 
participants to be subject to differing standards of conduct and 
multiple levels of liability. The Commission seeks comment on the 
possible effects of this type of overlapping jurisdiction. The 
Commission also seeks comment on the usefulness of inter-agency 
information sharing on market manipulation regulation law enforcement; 
on reducing costs; on speeding enforcement actions; on other potential 
benefits or costs for consumers and businesses; and, on how it can best 
harmonize its enforcement efforts with those of FERC and the CFTC.

I. Potential Practices

    The Commission requests comment on the following topic list, but 
encourages commenters to present any other proposals for formal rule 
provisions that they may wish to suggest. This list is not to be 
perceived as a formal proposal to address any of the practices 
described pursuant to Section 811; rather, it is intended to be 
illustrative, and to encourage further thinking.
    <bullet> Certain refiners have made public announcements of planned 
reductions in the overall utilization of their refinery plant(s). The 
Commission seeks comment on: (1) whether such practices should be 
viewed as manipulative; (2) the perceived harm from such actions, if 
any; (3) whether such practices should or would manifest the intent 
necessary to violate Section 811; and (4) whether any business 
justifications balance the perceived harm.
    <bullet> Refiners engage in periodic scheduled maintenance and 
refinery downtime in order to prevent breakdowns or to change 
equipment. On the one hand, such maintenance and scheduled downtime are 
necessary for the safe and efficient operation of petroleum refineries; 
on the other hand, public announcements of downtime may enable 
competitors to collude inappropriately. The Commission therefore seeks 
comment on both the costs and the benefits of a rule restricting public 
pre-announcements of such downtime.
    <bullet> Wholesale petroleum market participants frequently rely on 
independent published data for market prices in effecting purchase and 
sale contracts and other supply arrangements. In the past, Commission 
staff have received allegations of false or misleading physical sales 
reports furnished to private reporting entities by market participants 
in thinly traded petroleum commodity markets. The Commission seeks 
comment on experiences with this practice, the likelihood the practice 
could drive false or misleading market prices, the ability of a market 
manipulation rule

[[Page 25622]]

effectively to police such activities, and the potential benefits or 
harm to public data sources or private data compilation services.
    <bullet> The Commission seeks comment on the circumstances, if any, 
under which a firm's decision regarding supplying a market (including 
whether to reduce, increase, or maintain unchanged the amount it 
supplies) should be considered manipulative or deceptive. Commenters 
are encouraged to address both the immediate and the long-term costs 
and benefits to consumers of permitting, prohibiting, or restricting 
such actions, as well as the effects such decisions would have during a 
time of national emergency or natural disaster.
    <bullet> Some have argued that market participants with terminal or 
other storage inventory should be under an affirmative obligation to 
release inventory during price spikes when the participant knows, or 
should know, that the release of the product will be profitable. The 
Commission seeks comment on when such an obligation should be imposed; 
what possible intent standard should be used as a test for liability; 
how one should measure profitability in such a circumstance; and, the 
costs and benefits to consumers of placing such an obligation on 
potential market suppliers.
    <bullet> FERC and state regulations govern open access to common 
carrier pipelines. In some circumstances, prospective shippers on a 
given common carrier pipeline may lack the ability to access that 
pipeline due to an inability to place product in a terminal from which 
to enter the pipeline system, or because those shippers lack a terminal 
from which to exit the pipeline system. The Commission seeks comment on 
whether a denial of access to a non-regulated terminal may be an act of 
market manipulation subject to Section 811, and on whether applying the 
rule to this behavior is likely to result in benefits that outweigh the 
costs.
    <bullet> Regulated petroleum pipelines may not allow new shippers a 
share of a pipeline's capacity when historical shippers seek to 
transport more petroleum products than the pipeline is capable of 
transporting. The Commission seeks comment on whether pre-announcements 
that pipelines are approaching capacity constraints may be a conduit 
for market manipulation or deceit under Section 811, and on whether 
applying the rule to this behavior is likely to result in benefits that 
outweigh the costs.
    <bullet> Accurate cost and volume data for wholesale transactions 
at all levels of trade, refinery or pipeline outage data, and import 
and inventory volumes are frequently difficult to construct or are 
unavailable. The Commission seeks comment on whether it possesses the 
authority to promulgate a rule under Section 811 requiring a covered 
person to maintain and submit such information to the Commission or any 
other government entity, and, if so, whether it should do so, and what 
particular data it should require.
    <bullet> The Commission seeks comment on how to determine an 
artificial price. For example, if an entity with market power that was 
not obtained by improper means, sets its prices above what would have 
been a competitive level, and as a result, prices in the market are 
higher than competitive prices, is this an artificial price? Commenters 
are encouraged to explain how the competitive price should be 
determined, including during a period in which capacity has declined 
unexpectedly because of a disaster. Commenters are encouraged to 
assess, in particular, whether setting the prices above a competitive 
level should be considered a manipulative device or contrivance; 
whether that answer would depend on other factors or circumstances, 
and, if so, on which ones; and what the direct and indirect, short- and 
long-term effects of treating this as a manipulative device or 
contrivance would be.
    <bullet> The Commission seeks comment as to what extent or in what 
circumstances should the distinction between forbidden and permitted 
business behavior be primarily a function of the intent, purpose, or 
knowledge of the actor? For example, if a firm holds back inventory 
during a supply shortage with the intent to raise or expectation of 
raising immediate prices, but the effect is that the inventory is sold 
later, when the shortage is more severe, and thus mitigates the more 
severe shortage, should that be a violation? If a firm decreases the 
amount of product sold in a tight market in order to grow its business 
elsewhere, regardless of whether prices in the tight market will rise, 
should that be a violation?
    <bullet> The Commission encourages commenters, in addressing any of 
the foregoing practices, to discuss whether, and if so how, a Section 
811 rule should account for the fact that the practice is used prior 
to, during, or in the aftermath of a natural disaster, such as an 
earthquake or a hurricane.

V. Questions Arising From Two Case Studies

    This part of the Advance Notice of Proposed Rulemaking focuses on 
two separate series of events that are frequently cited as examples of 
possible manipulation in energy markets.

A. BP Amoco/Atlantic Richfield, FTC Docket No. C-3938

    In BP Amoco/Atlantic Richfield, the Commission issued a consent 
order that remedied the anticompetitive effects of the proposed $27 
billion merger between BP Amoco p.l.c. (BP) and Atlantic Richfield 
Company (ARCO).\62\ Under the terms of the settlement, BP was required 
to divest, among other things, all of ARCO's assets relating to oil 
production on Alaska's North Slope (ANS) to Phillips Petroleum Company 
(Phillips). The divestitures required by the consent order fully 
resolved the competitive concerns that initially led the Commission to 
seek a preliminary injunction to block the transaction. By requiring 
the divestiture of all of ARCO's operations in Alaska, the Commission 
ensured that BP's market share in the exploration, production and 
transportation of ANS crude oil would remain unchanged, and that the 
number of players would remain the same.
---------------------------------------------------------------------------

    \62\ In the Matter of BP Amoco p.l.c. and Atlantic Richfield 
Company, FTC File No. 9910192, Docket No. C-3938 (August 25, 2000) 
(hereinafter BP Amoco/ARCO).
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    The divestiture itself is not remarkable for purposes of this 
Rulemaking. However, the Commission had reason to believe that BP 
occasionally had exported ANS crude oil to the Far East in order to 
increase spot prices for ANS crude oil on the West Coast, and that BP 
benefitted from those higher spot prices because of its status as a 
merchant marketer. Commenters are encouraged to discuss this scenario, 
whether this type of conduct is likely to recur, whether this type of 
conduct still occurs (and if so, how frequently), and whether this type 
of practice can be characterized as a manipulative or deceptive device 
or contrivance -- in connection with the purchase or sale of crude oil, 
gasoline, or petroleum distillates at wholesale -- that should be 
prohibited by a Section 811 rule. Commenters are also encouraged to 
address scenarios such as, for example, when a person or entity 
determines to hold a supply of crude oil or petroleum product off the 
coast of the United States for five days -- waiting for the price to go 
up, and thereby shorting the U.S. supply of crude oil or petroleum 
product -- and then sells the crude oil or petroleum product after the 
price has risen, thereby securing greater revenues than it would have 
secured if it had simply sold the supply on the first day rather than 
the fifth.

[[Page 25623]]

B. Enron

    The substantial disruptions in Western electricity and natural gas 
markets in 2000 and 2001 are often cited as the product of market 
manipulation by Enron Corp. and other energy traders, and the 
Commission is interested in securing comments on the extent to which 
those disruptions may provide guidance as to what may constitute the 
use of a manipulative or deceptive device or contrivance, in connection 
with the purchase or sale of crude oil, gasoline, or petroleum 
distillates at wholesale. In May 2001, FERC initiated a staff 
investigation to determine whether Enron or any other sellers 
manipulated electricity and natural gas markets in California and other 
Western states in 2000 and 2001. In a Final Staff Report issued in 
March 2003, the FERC staff found ``significant market manipulation,'' 
but also determined that

 significant supply shortfalls and a fatally flawed market design 
were the root causes of the California market meltdown. The 
underlying supply-demand imbalance and flawed market design greatly 
facilitated the ability of certain market participants to engage in 
manipulation.\63\
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    \63\ 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, Prepared by the Staff of 
the Federal Energy Regulatory Commission (March 2003), at ES-1 
(hereinafter FERC Staff Report), available at (http://www.ferc.gov/industries/electric/indus-act/wec/enron/info-release.asp)

The staff found in particular that markets for natural gas and 
electricity in California were inextricably linked; that dysfunctions 
in each market fed off the other during the crisis; that spot gas 
prices rose to extraordinary levels, facilitating the unprecedented 
price increase in the electricity market; and that the dysfunctions in 
the natural gas market appeared to stem, at least in part, from efforts 
to manipulate price indices compiled by trade publications.\64\ The 
FERC Staff Report concluded, inter alia, that Enron manipulated natural 
gas markets to the detriment of California electricity consumers.\65\
---------------------------------------------------------------------------

    \64\ FERC Staff Report at ES-1.
    \65\ Thereafter, in June 2007, an Administrative Law Judge 
issued a decision revoking Enron's market-based rate authorization 
as of January 1997 and ordering it to disgorge $1.6 billion of 
unjust profits. See the initial decision in the Gaming and 
Partnership Proceedings 119 FERC ] 63013 (2007), Docket No. EL03-
180-000, available at (http://www.ferc.gov/industries/electric/indus-act/wec/enron/info-release.asp) (hereafter Initial Decision).
---------------------------------------------------------------------------

    The FERC Staff Report provides an extensive discussion of a number 
of manipulative trading strategies that energy traders used, including 
two of particular relevance to this Rulemaking proceeding. First, a 
number of market participants provided false reports of natural gas 
prices and trade volumes to industry publications, including in 
particular Gas Daily and Inside FERC, which the staff characterized as 
``the most influential and relied-upon compilers of natural gas price 
indices.''\66\ The staff found that ``the false reporting included 
fabricating trades, inflating the volume of trades, omitting trades, 
and adjusting the price of trades.''\67\ The staff further found that:
---------------------------------------------------------------------------

    \66\ Id. at ES-6.
    \67\ Id.

 [t]he predominant motives for reporting false information were to 
influence reported gas prices, to enhance the value of financial 
positions or purchase obligations, and to increase reported volumes 
to attract participants by creating the impression of more liquid 
markets. Market participants that sold power in California, or that 
were affiliated with such sellers, also had incentives to manipulate 
reported prices because the clearing price set for power was based, 
in part, on natural gas spot prices.\68\
---------------------------------------------------------------------------

    \68\ Id.
---------------------------------------------------------------------------

    Second, the staff found that Enron used its subsidiary, EnronOnline 
(EOL), to carry out several different types of manipulation. The staff 
found that certain characteristics -- including in particular the fact 
that Enron served as the counterparty to every trade on EOL -- made the 
system ripe for abuse, and permitted Enron to use EOL to effect a 
number of different types of manipulation. In particular, the staff 
found that wash trades -- in which two parties would prearrange a pair 
of sales of the same product with no net change in ownership -- were 
common on EOL. The parties effected such ``trades'' in order 
artificially to influence the closing price on EOL, and/or to increase 
the apparent volume of trading in order deceptively to make the market 
for that product appear to be more liquid than was actually the case. 
The staff further found that EOL itself ``often posted its willingness 
to buy and sell at the same price;'' that Enron also manipulated prices 
on EOL ``by having affiliates on both sides of certain wash-like 
trades;'' and that these practices both created a false sense of 
liquidity and raised or otherwise distorted prices.\69\ The staff also 
found that EOL gave Enron a huge information advantage -- derived from 
its central position in the physical markets -- which enabled it to 
earn more than $500 million in 2000 and 2001 from its financial 
products, while sustaining trading losses at a much lower level in the 
``thinner physical markets.''\70\
---------------------------------------------------------------------------

    \69\ Id. at ES-11-12.
    \70\ Id. at ES-12.
---------------------------------------------------------------------------

    Four important characteristics of the markets for the physical 
products -- that is, for electricity and natural gas -- facilitated 
execution of the foregoing strategies. First, electricity cannot 
economically be stored more than a few seconds. As a result, 
electricity generation and transmission are necessarily ``just-in-
time'' activities. Because storing electricity is prohibitively 
expensive, electricity suppliers must essentially anticipate demand on 
a minute-by-minute basis, and errant forecasts can cause the system to 
become unstable and lead to blackouts. Moreover, the absence of storage 
capability may make physical withholding more attractive to a supplier 
-- because closing a plant or generation unit will then result in the 
immediate withdrawal of output from the market -- and unless such a 
reduction is offset by a competing supplier, this output reduction 
might be sufficient to produce an increase in price levels.
    Second, electricity suppliers may be able to increase profits by 
withholding capacity during peak demand periods because other rival 
facilities are already committed to production and cannot respond. 
Third, the regulation of wholesale electricity markets generates an 
enormous amount of publicly available information. In particular, the 
cost structure of electricity generators is publicly available, and 
this information may potentially support the exercise of market power. 
And fourth, electric utilities -- including in particular those in the 
California market -- have relied upon purchasing electricity on spot 
markets, rather than through the negotiation of long-term contracts, 
and that type of reliance may facilitate the exercise of market power 
by placing electricity suppliers in a repetitive situation that 
supports signaling.
    The Commission encourages commenters to consider the foregoing 
discussion, and to address in particular whether any of the types of 
manipulative strategies used in the electricity and natural gas markets 
might be used in the markets for crude oil, gasoline, and petroleum 
distillates.

C. Questions For Commenters Relating to Case Studies

    <bullet> Prior to 1995, Congress had imposed a ban on exports of 
Alaska North Slope crude oil. In 1995, Congress repealed that ban, but 
also granted the President the power to reimpose the export ban in 
certain circumstances. The Commission seeks comment on the effects of 
the export ban and of its repeal; on the residual authority of the 
President to reimpose the ban; and on

[[Page 25624]]

any implications these circumstances may have for a Section 811 rule.
    <bullet> Consider the following scenario: a supplier provides a 
particular type or formulation of product that cannot be obtained from 
other suppliers (not due to monopolization by the supplier). This 
particular product is needed in certain areas, and is not easily 
substituted for by other suppliers' products. The Commission seeks 
comment on whether the following practice would constitute a 
manipulative device or contrivance: if the supplier sold some of its 
product to certain areas but not to other areas, at a loss or for a 
profit that is not as great as it would likely have made in the area 
where it did not sell. In answering this question, commenters are 
encouraged to address whether their answers depend on the supplier's 
knowledge or motivation(s), such as that the supplier (1) might have 
had contractual arrangements elsewhere; (2) might have anticipated 
developing more business elsewhere; (3) might have anticipated that 
prices in the particular areas might go up, making the rest of its 
supply sold in those areas more profitable; or (4) might have taken the 
foregoing steps for the express purpose of causing the prices in those 
areas to go up. Commenters are also encouraged to address whether their 
answers depend on how difficult it is to substitute for or do without 
the product, and, if so, what constitutes an unreasonable degree of 
difficulty.
    <bullet> As noted above, market manipulation by certain firms 
(Enron and others) is often cited as a significant cause of the 
substantial disruptions in Western electricity and natural gas markets 
in 2000 and 2001. The Commission seeks comment on the extent to which 
such activities, including but not limited to the activities described 
above, may provide guidance as to what may constitute the use of a 
manipulative or deceptive device or contrivance, in connection with the 
purchase or sale of crude oil, gasoline, or petroleum distillates at 
wholesale.
    <bullet> In light of the electricity market characteristics 
identified by the FERC Staff Report, and the physical peculiarities of 
electricity storage and distribution, the Commission seeks comment on 
how relevant this experience may be to wholesale petroleum markets, and 
on whether (and if so to what extent) this experience can inform the 
Commission's approach to distinguishing manipulative or deceptive 
devices or contrivances from legitimate business practices.

VI. Regulatory Flexibility Act

    <bullet> Does Subtitle B of the EISA impose any disparate impact on 
small businesses? If so, how may this disparate impact be minimized?
    <bullet> Describe and, where feasible, estimate the number of small 
entities to which Subtitle B applies.

VII. Conclusion

    The Commission will proceed from this ANPR to a Notice of Proposed 
Rulemaking. The evaluation of comments submitted in response to this 
ANPR will comprise part of the Commission's rulemaking process.
    By direction of the Commission.

Donald S. Clark,
Secretary.
[FR Doc. E8-10102 Filed 5-6-08: 8:45 am]
BILLING CODE 6750-01-S