Regulating Electricity-Market Manipulation: A Proposal for a New Regulatory Regime to Proscribe All Forms of Manipulation

Congress broadly authorized the Federal Energy Regulatory Commission ("FERC") to protect consumers of electricity from all forms of manipulation in the electricity markets, but the regulations that FERC passed are not nearly so expansive. As written, FERC's Anti-Manipulation Rule covers only instances of manipulation involving fraud. This narrow scope is problematic, however, because electricity markets can also be manipulated by nonfraudulent activity. Thus, in order to reach all forms of manipulation, FERC is forced to interpret and apply its Anti-Manipulation Rule in ways that strain the plain language and accepted understanding of the rule and therefore constitute an improper extension of the fraud-based regulations to nonfraudulent activity. This Note argues that FERC ought to fix the current anti-manipulation regulatory regime, both as a matter of sound governmental regulation and to ensure fair notice to the regulated entities. In particular, this Note contends that FERC should redraft its Anti-Manipulation Rule and that, in doing so, it should use the Commodity Futures Trading Commission ("CFTC")'s rules as a model. By adopting the CFTC's rules, FERC could design a new anti-manipulation regulation that would properly and flexibly encompass all forms of potential manipulation in the electricity markets-a solution that would allow the law adequately to respond to future attempts at manipulation.INTRODUCTIONIn the summer of 2013, the Federal Energy Regulatory Commission ("FERC" or "Commission") concluded two of the largest investigations in its history. These investigations, which examined potential electricity-market manipulation by Barclays and JP Morgan, resulted in $720 million in penalties, $159.9 million in disgorged profits, and $18 million in penalties imposed against individual traders.1 Shortly thereafter, FERC launched another investigation, this time against BP America, seeking $28 million in civil penalties and $800,000 in disgorged profits.2 Such aggressive actions to regulate electricity-market manipulation indicate that FERC's enforcement efforts are likely to continue.3 This trend has made the Commission's regulatory scheme a significant issue, both for regulated entities and for those who use and benefit from well-functioning, reliable electricity markets.FERC is an independent agency charged with, among other things, regulating the interstate transmission4 of electricity.5 In 1920 Congress created the Federal Power Commission-the predecessor agency to FERC-to coordinate federal control of hydroelectric projects,6 and FERC has seen its congressionally delegated authority significantly expanded ever since.7 The most recent example is the Energy Policy Act of 2005, which gave FERC new tools to prevent and penalize the manipulation of electricity markets,8 as well as bestowed on the Commission considerably more authority and responsibility. FERC's expanded authority includes the ability to impose civil penalties of up to $1 million per day for each violation of the anti- manipulation regulations.9 FERC's Office of Enforcement is the agency branch most heavily involved in regulating electricity-market manipulation.10 The Obama Administration has increased the office's budget by almost 50 percent and has also increased its staff, which now includes experienced criminal investigators and specialists charged with detecting manipulation.* 11Defining and characterizing manipulation can be an exceedingly difficult task: the term manipulation has traditionally been used "imprecisely and indiscriminately."12 At one time or another, issues such as blameworthiness, artificiality, speculation, and collusion have all served as the touchstone of manipulation.13 FERC promulgated its Anti-Manipulation Rule pursuant to the Energy Policy Act, and it used the Securities and Exchange Commission ("SEC")'s own Anti-Manipulation Rule as a model.14 Although Congress granted FERC broad authority to proscribe all forms of manipulation, the rule is crafted specifically to proscribe only fraudulent manipulations. …