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[Federal Register Volume 70, Number 207 (Thursday, October 27, 2005)]
[Proposed Rules]
[Pages 61930-61933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-21423]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 47 and 159

[Docket No. RM06-3-000]

Prohibition of Energy Market Manipulation

Issued October 20, 2005.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Pursuant to Title III, Subtitle B, and Title XII, Subtitle G 
of the Energy Policy Act of 2005, the Federal Energy Regulatory 
Commission (Commission) is proposing rules to implement new section 222 
of the Federal Power Act and new section 4A of the Natural Gas Act, 
prohibiting the employment of manipulative or deceptive devices or 
contrivances. The Commission seeks public comment on the regulations 
proposed herein.

DATES: Comments are due November 17, 2005. Reply comments are due 
November 25, 2005.

ADDRESSES: Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. Commenters unable to 
file comments electronically must send an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Office of the 
Secretary, 888 First Street NE., Washington, DC 20426. Refer to the 
Comment Procedures section of the preamble for additional information 
on how to file comments.

FOR FURTHER INFORMATION CONTACT: Frank Karabetsos, Office of General 
Counsel, Federal Energy Regulatory, Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8133, [email protected].
    Mark Higgins, Office of Market Oversight and Investigations, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8273, [email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005) 
\1\ was signed into law. Sections 315 and 1283 of EPAct 2005, amending 
the Natural Gas Act \2\ and the Federal Power Act,\3\ respectively, are 
virtually identical, and prohibit the use or 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 Commission. These anti-
manipulation sections of EPAct 2005 closely track the prohibited 
conduct language in section 10(b) of the Securities Exchange Act of 
1934,\4\ and specifically dictate that the terms ``manipulative or 
deceptive device or contrivance'' are to be used ``as those terms are 
used in section 10(b).''
    2. The Securities and Exchange Commission (SEC) has adopted Rule 
10b-5,\5\ which implemented section 10(b) of the Exchange Act, and has 
developed a significant body of legal precedent related to both section 
10(b) of the Exchange Act and Rule 10b-5. Consistent with the mandate 
that the Commission's new authority be exercised in a manner consistent 
with section 10(b) of the Exchange Act, the Commission has modeled its 
proposed regulations on Rule 10b-5.\6\ This approach should provide 
benefits to entities subject to the new rule because there is a 
substantial body of precedent

[[Page 61931]]

applying the comparable language of Rule 10b-5.
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    \1\ Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594 
(2005).
    \2\ 15 U.S.C. 717 et al. (2004).
    \3\ 16 U.S.C. 791a et al. (2004).
    \4\ Securities and Exchange Act of 1934, 15 U.S.C. 78j(b) (2005) 
(Exchange Act).
    \5\ 17 CFR 240.10b-5 (2005).
    \6\ This reliance on the use of SEC precedent is consistent with 
Congress' expressed intent in sections 315 and 1283 that any 
``manipulative or deceptive device or contrivance'' is prohibited 
``as those terms are used in section 10(b) of the Securities and 
Exchange Act of 1934'' and Congress' modeling sections 315 and 1283 
of EPAct 2005 after section 10(b) of the Exchange Act.
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    3. In this Notice of Proposed Rulemaking (NOPR), the Commission 
proposes to add a Part 47 under Subchapter B (Regulations under the 
Federal Power Act) and a Part 159 under Subchapter E (Regulations under 
the Natural Gas Act) to Title 18 of the Code of Federal Regulations, 
and intends to issue final regulations by December 31, 2005. The 
Commission seeks comments on its proposals for the regulations 
discussed below.

Background

    4. In November 2003, the Commission issued the Market Behavior 
Rules to fill a void in the regulation of market-based trading 
activity.\7\ The Market Behavior Rules emanated from the Commission's 
investigation of trading activity in Western markets during 2000-2001, 
which uncovered a number of trading schemes intended to take advantage 
of the then-existing electricity market in California.\8\ The 
Commission also discovered abuses in reporting of natural gas prices to 
price index publishers for purposes of manipulating price indices.\9\
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    \7\ Investigation of Terms and Conditions of Public Utility 
Market-Based Rate Authorizations, ``Order Amending Market-Based Rate 
Tariffs and Authorizations,'' 105 FERC ] 61,218 (2003), reh'g 
denied, 107 FERC ] 61,175 (2004); Order No. 644, Amendment to 
Blanket Sales Certificates, FERC Stats. & Regs. ] 31,153 (2003), 
reh'g denied, 107 FERC ] 61,174 (2004).
    \8\ See 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); see also American Elec. Power Serv. Corp., 103 FERC ] 
61,345 (2003), reh'g denied, 106 FERC ] 61,020 (2004); Enron Power 
Mktg., Inc., 103 FERC ] 61,346 (2003), reh'g denied, 106 FERC ] 
61,020 (2004).
    \9\ Final Report, Docket No. PA02-2-000 (March 2003); Policy 
Statement on Natural Gas and Electric Price Indices, 104 FERC ] 
61,121 at 61,404 (2003) (addressing price index reporting abuses).
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    5. The Market Behavior Rules were adopted to establish guidelines 
applicable to the conduct of jurisdictional market-based rate sellers 
in wholesale power markets and to jurisdictional companies engaged in 
wholesale sales of natural gas under blanket certificate authority.
    6. An important provision of the Market Behavior Rules is Rule 2, 
which states that ``[a]ctions or transactions that are without a 
legitimate business purpose and that are intended to or foreseeably 
could manipulate market prices, market conditions, or market rules for 
electric energy or electricity products are prohibited.'' \10\ In 
addition, Market Behavior Rule 2(a) expressly prohibits wash trades, 
Rule 2(b) prohibits transactions predicated on submitting false 
information, Rule 2(c) prohibits creating and relieving artificial 
congestion, and Rule 2(d) prohibits collusion.\11\
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    \10\ Investigations of Terms and Conditions of Public Utility 
Market-Based Rate Authorizations, 105 FERC ] 61,218 at Appendix A 
(2003). Sections 284.288(a) and 284.403(a) of the Commission's 
regulations, promulgated in Order No. 644, contain substantially 
similar language: a pipeline that provides unbundled natural gas 
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 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.'' The Market Behavior Rules are currently being 
appealed. See Cinergy Mktg. & Trading, L.P. v. FERC, Docket No. 04-
1168 et al. (D.C. Cir. 2005).
    \11\ Order No. 644 expressly prohibits wash trades and collusion 
for natural gas sellers.
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    7. Sections 315 and 1283 of EPAct 2005 enhance the Commission's 
authority to prohibit manipulation of the energy markets. However, 
neither section 315 nor 1283 is a self-actuating provision. This 
rulemaking fulfills Congress' intent in adopting these provisions.

The Commission's Proposed Regulations

    8. Pursuant to section 4A of the Natural Gas Act and section 222 of 
the Federal Power Act, as added to the statutes by EPAct 2005, the 
Commission proposes to add a Part 47 under Subchapter B and a Part 159 
under Subchapter E to Title 18 of the Code of Federal Regulations. 
Under these proposed regulations, it shall be unlawful for any entity, 
directly or indirectly, in connection with the purchase or sale of 
electric energy or the purchase or sale of transmission services 
subject to the jurisdiction of the Commission, or in connection with 
the purchase or sale of natural gas or the purchase or sale of 
transportation services subject to the jurisdiction of the Commission, 
(1) to use or employ any device, scheme, or artifice to defraud, (2) 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 (3) to engage in any act, practice, or course of business that 
operates or would operate as a fraud or deceit upon any person.
    9. Sections 315 and 1283 of EPAct 2005 apply to ``any entity.'' 
Indeed, section 1283 expressly includes an ``entity described in 
section 201(f).'' Accordingly, these proposed regulations apply to the 
conduct of ``any entity,'' not just jurisdictional market-based rate 
sellers, natural gas pipelines, or holders of blanket certificate 
authority. ``[A]ny entity'' includes not only regulated utilities but 
also governmental utilities and other market participants.\12\
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    \12\ The Commission intends that the principles discussed in the 
Policy Statement on Enforcement that we are issuing today in Docket 
No. PL06-1-000 will also apply to ``any entity'' as defined herein.
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    10. As discussed in more detail below, subsections (a)(1)-(3) of 
these proposed regulations are patterned after the SEC's Rule 10b-5, 
and are intended to be interpreted consistent with analogous SEC 
precedent that is appropriate under the circumstances. Subsection (b) 
of the Commission's proposed regulations states that nothing in these 
provisions shall be construed to create a private right of action.\13\ 
This language is based expressly on sections 315 and 1283 of EPAct 
2005, and reflects Congress' intent that entities will not be subject 
to civil actions by third parties based on alleged violations of these 
proposed regulations.
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    \13\ However, subsection (b) is not intended to take away any 
other right that may otherwise exist.
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Securities and Commodity Law Precedent

    11. The Exchange Act addresses regulation of the securities 
markets. One of the most important provisions of the Exchange Act is 
section 10(b), which prohibits the use of ``any manipulative or 
deceptive device or contrivance'' in contravention of SEC Rules.\14\ 
The SEC promulgated Rule 10b-5 to enforce section 10(b).\15\
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    \14\ 15 U.S.C. 78j(b) (2005).
    \15\ Rule 10b-5 of the U.S. Securities and Exchange Commission 
reads:
    It shall be unlawful for any person, directly or indirectly, by 
the use of any means or instrumentality of interstate commerce, or 
of the mails or of any facility of any national securities exchange,
    (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.
    17 CFR 240.10b-5 (2005).
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    12. Section 10(b) and Rule 10b-5 might ``well be the most litigated 
provisions in the federal securities laws,'' \16\ having been described 
by the Supreme Court as ``a judicial oak which has grown from little 
more than a legislative acorn.'' \17\ The vast body of

[[Page 61932]]

section 10(b) case law provides substantial certainty to entities 
subject to section 10(b) because it has resolved many recurring 
questions of interpretation that have arisen under the rule.
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    \16\ SEC v. National Sec., Inc., 393 U.S. 453, 465 (1969).
    \17\ Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 
(1975); see also Louis Loss & Joel Seligman, Securities Regulations 
Sec.  9-B-3 (3d. ed. 2004) (regarding Rule 10b-5 ``[i]t is difficult 
to think of another instance in the entire corpus juris in which the 
interaction of the legislative, administrative rulemaking, and 
judicial processes has produced so much from so little.'').
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    13. Section 4b of the Commodity Exchange Act (CEA) is the Commodity 
Futures Trading Commission's (CFTC) general anti-fraud rule.\18\ 
Section 4b makes it unlawful for any person to ``cheat or defraud or 
attempt to cheat or defraud,'' or to make false reports or statements, 
or to deceive or attempt to deceive another in transactions under the 
CFTC's jurisdiction. Although the statutory language of section 10(b) 
of the Exchange Act and section 4b of the CEA are not identical, the 
Supreme Court stated that they are ``analogous'' and ``[t]he language 
of Sec.  4b [of the CEA] is similar to that of Sec.  10(b) of the 
Securities Exchange Act of 1934.'' \19\ Lower courts have gone further, 
noting that ``the elements of a claim under Sec.  4(b)(A) are basically 
the same as those under Rule 10b-5.'' \20\
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    \18\ 7 U.S.C. 6b (2005).
    \19\ Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 
353, 389 (1982).
    \20\ Trustman v. Merrill Lynch, Pierce, Fenner & Smith, 1985 
U.S. Dist. LEXIS 23154 at * 38; Fed. Sec. L. Rep. (CCH) P91,936 
(C.D.C.A. 1985); see also, Drexel Burnham Lambert, Inc. v. Commodity 
Futures Trading Comm'n, 850 F.2d 742, 748 (D.C. Cir. 1988) (court 
held recklessness satisfied the scienter requirement for section 4b 
just as it does under section 10(b) and Rule 10b-5).
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    14. The Commission proposes to pattern proposed sections 47.1 and 
159.1 of its regulations on the text of Rule 10b-5. This is not only 
consistent with the clear intent of sections 315 and 1283 of EPAct 
2005, but also should benefit the industry because it will provide 
greater certainty to entities subject to the new rules because the 
Commission intends to rely on the large body of case law interpreting 
and applying section 10(b) and Rule 10b-5 when applying its new 
authority.\21\
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    \21\ EPAct 2005, with its references to Section 10(b) of the 
Exchange Act, provides a level of substantial certainty with respect 
to how the proposed regulations will operate that the Commission is 
not typically able to provide where a preexisting body of law and 
precedent is not readily available.
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The Relationship of the Proposed Rules to the Commission's Market 
Behavior Rules

    15. Both Market Behavior Rule 2 and the proposed regulations 
prohibit manipulative conduct. For now, Market Behavior Rule 2 is 
retained, an approach consistent with that taken by both the SEC and 
CFTC.\22\ However, the Commission will address the possibility of 
revising or repealing Market Behavior Rule 2, and will seek comments in 
the near future. Moreover, as explained in the concurrent Policy 
Statement on Enforcement that we are issuing today (discussed below), 
we will not seek duplicative sanctions for the same conduct in the 
event that conduct violates both Market Behavior Rule 2 and proposed 
section 47.1.\23\
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    \22\ For example, section 10(b) and Rule 10b-5, the SEC's 
general anti-fraud provision (the Supreme Court described section 
10(b) as a ``general prohibition of practices * * * artificially 
affecting market activity in order to mislead investors'' designed 
as a broad anti-fraud ``catch-all clause.'' Schreiber v. Burlington 
Northern, Inc., 472 U.S. 1, 6-7 (1985); Aaron v. SEC, 446 U.S. 680, 
690 (1980)), exists alongside other, more targeted provisions, 
including but not limited to: section 9(a)(2) prohibiting 
manipulative conduct on national securities exchanges (15 U.S.C. 78i 
(2005)); section 14(e) prohibiting any person from making material 
misstatements or omissions and from engaging in fraudulent conduct 
in connection with any tender offer (15 U.S.C. 78n(e) (2005)); and 
section 17(a) prohibiting fraud in connection with the sale of 
securities (15 U.S.C. 77q(a) (2005)). Similarly, the CFTC's general 
anti-fraud provision in section 4b exists alongside other CFTC anti-
manipulation provisions, including but not limited to: section 4o 
prohibiting fraud by commodity trading advisors and commodity pool 
operators (7 U.S.C. 6m (2005)); Rule 30.9 prohibiting fraud in 
connection with foreign futures contracts (17 CFR 30.9 (2005)); and 
Rule 32.9 prohibiting fraud in connection with commodity option 
transactions (17 CFR 32.9 (2005)).
    \23\ The Commission will likewise not seek duplicative sanctions 
from natural gas sellers for the same conduct in the event that 
conduct violates both the Market Behavior Rules, 18 CFR 284.288(a) 
or 284.403(a) (2005), and proposed section 159.1.
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Concurrent Policy Statement on Enforcement

    16. The Commission's new EPAct 2005 authority under the anti-
manipulation provisions coupled with expanded civil penalty 
authority,\24\ provides us with more effective tools to assure workably 
competitive markets. The Commission is concurrently issuing a Policy 
Statement on Enforcement that sets out guidelines on the Commission's 
enforcement policies and practices and on how we will exercise our new 
civil penalty authority.\25\ The Policy Statement, like these new 
proposed regulations, draws from the experience of other Federal 
agencies, including the SEC and the CFTC, in explaining the factors 
that will be taken into account in applying remedies for misconduct, 
including the imposition of civil penalties. The Policy Statement 
provides that the Commission will exercise its enhanced authority in a 
firm but fair manner, and will take mitigating factors into account in 
resolving violations.\26\
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    \24\ Sections 314 and 1284 of EPAct 2005.
    \25\ Policy Statement on Enforcement, Docket No. PL06-1-000.
    \26\ Id.
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Information Collection Statement

    17. This proposed rule implements the existing requirements as set 
forth in sections 315 and 1283 of EPAct 2005 and does not include new 
information requirements under the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Environmental Analysis

    18. 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.\27\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\28\ The actions proposed 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 electric power that requires no construction of 
facilities.\29\ Therefore, an environmental assessment is unnecessary 
and has not been prepared in this NOPR.
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    \27\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \28\ 18 CFR 380.4 (2005).
    \29\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27) 
(2005).
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Regulatory Flexibility Act

    19. The Regulatory Flexibility Act of 1980 (RFA) \30\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small 
entities.\31\ The Commission is not required to make such analyses if a 
rule would not have such an effect.
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    \30\ 5 U.S.C. 601-12 (2000).
    \31\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small business concern'' as a business that is independently owned 
and operated and that is not dominant in its field of operation. 15 
U.S.C. 632 (2000). The Small Business Size Standards component of 
the North American Industry Classification System defines a small 
electric utility as on that, including its affiliates, is primarily 
engaged in the generation, transmission, and/or distribution of 
electric energy for sale and whose total electric output for the 
preceding fiscal years did not exceed 4 million MWh. 13 CFR 121.201 
(2004) (Section 22, Utilities, North American Industry 
Classification System, NAICS).
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    20. The Commission does not believe that this proposed rule would 
have such an impact on small entities. This proposed rule prohibits all 
entities,

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including small entities, from employing manipulative or deceptive 
devices or contrivances, and therefore may cause entities, including 
potentially small entities, to increase costs in order to comply. This 
prohibition, however, will improve market transparency to the economic 
benefit of all entities, including small entities. Therefore, the 
Commission certifies that this proposed rule, if finalized, will not 
have a significant economic impact on a substantial number of small 
entities.

Comment Procedures

    21. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice to be adopted, including 
any related matters or alternative proposals that commenters may wish 
to discuss. Comments are due November 17, 2005. Reply comments are due 
seven days thereafter. Comments must refer to Docket No. RM06-3-000, 
and must include the commenter's name, the organization they represent, 
if applicable, and their address in their comments. Comments may be 
filed either in electronic or paper format.
    22. Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. The Commission 
accepts most standard word processing formats and commenters may attach 
additional files with supporting information in certain other file 
formats. Commenters filing electronically do not need to make a paper 
filing. Commenters that are not able to file comments electronically 
must send an original and 14 copies of their comments to: Federal 
Energy Regulatory Commission, Office of the Secretary, 888 First Street 
NE., Washington, DC 20426.
    23. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

Document Availability

    24. 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.
    25. From FERC's Home Page on the Internet, this information is 
available in the eLibrary. The full text of this document is available 
in the eLibrary both 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.
    26. User assistance is available for eLibrary and the FERC's Web 
site during our normal business hours. For assistance contact FERC 
Online Support at [email protected] or toll-free at (866) 208-
3676, or for TTY, contact (202) 502-8659.

List of Subjects

18 CFR Part 47

    Electric utilities, Electric power, Investigations, Penalties.

18 CFR Part 159

    Natural Gas, Pipelines, Investigations, Penalties.

    By direction of the Commission.
Magalie R. Salas,
Secretary.
    In consideration of the foregoing, the Commission proposes to amend 
Chapter I, Title 18, Code of Federal Regulations, as follows:
    1. Part 47 is added to read as follows:

PART 47--PROHIBITION OF ENERGY MARKET MANIPULATION

    Authority: 16 U.S.C. 791-825r, 2601-2645; 42 U.S.C. 7101-7352.

Sec.  47.1  Prohibition of energy market manipulation.

    (a) It shall be unlawful for any entity, directly or indirectly,
    (1) To use or employ any device, scheme, or artifice to defraud,
    (2) 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
    (3) To engage in any act, practice, or course of business that 
operates or would operate as a fraud or deceit upon any person, in 
connection with the purchase or sale of electric energy or the purchase 
or sale of transmission services subject to the jurisdiction of the 
Commission.
    (b) Nothing in this Sec.  47.1 shall be construed to create a 
private right of action.
    2. Part 159 is added to read as follows:

PART 159--PROHIBITION OF ENERGY MARKET MANIPULATION

    Authority: 15 U.S.C. 717-717z; 42 U.S.C. 7101-7352.

Sec.  159.1  Prohibition of energy market manipulation.

    (a) It shall be unlawful for any entity, directly or indirectly,
    (1) To use or employ any device, scheme, or artifice to defraud,
    (2) 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
    (3) To engage in any act, practice, or course of business that 
operates or would operate as a fraud or deceit upon any person, in 
connection with the purchase or sale of natural gas or the purchase or 
sale of transportation services subject to the jurisdiction of the 
Commission.
    (b) Nothing in this Sec.  159.1 shall be construed to create a 
private right of action.

[FR Doc. 05-21423 Filed 10-26-05; 8:45 am]
BILLING CODE 6717-01-P
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