Academic journal article Michigan Law Review

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

Academic journal article Michigan Law Review

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

Article excerpt

INTRODUCTION

In 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.* 11

Defining 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.15 By prohibiting this activity, FERC sought to protect consumers from unfairly high electricity prices by ensuring that all rates are "just and reasonable."16 Indeed, consumers foot the bill when electricity markets are manipulated.

Understanding the basic vulnerabilities of electricity markets is key to appreciating the weakness in FERC's regulatory regime and the manner in which electricity markets can be manipulated in nonfraudulent ways. In a simplified but realistic example, the entity that creates the electricity, the generator, does not directly deliver that electricity to consumers.17 Rather, the generator sells the electricity on a special market by submitting bids that specify the price, quantity, and time of generation.18 Based on their expected demand, utilities and large consumers, such as a major industrial factory, bid to purchase electricity on the same market,19 and then the utilities resell that electricity to their customers.20 In most of the United States, entities called Independent System Operators ("ISOs") manage these wholesale electricity markets, which are subject to FERC regulation.21 The wholesale markets are complex and do not simply reflect supply and demand: they are specially designed to handle the unique characteristics of electricity production. Because electricity generation and consumption must be instantaneous and because storing electricity in batteries remains impractical for largescale energy needs, the markets must strike a delicate balance between supply and demand in order to ensure reliable service. …

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