On May 1, 2008, the Federal Trade Commission (FTC) announced an Advanced Notice of Proposed Rulemaking seeking public comments on the interpretation and enforcement of the market manipulation provisions of the Energy Independence and Security Act (Energy Act), which was signed into law in December 2007. The FTC requested comments on a proposed definition of market manipulation and on a number of theoretical and practical questions for how a market manipulation provision might be interpreted and enforced on actors in the petroleum markets.
Section 811 of the Energy Act gave the FTC the power to create rules or regulations in order to prohibit “any person” from directly or indirectly using or employing “any manipulative or deceptive device or contrivance in connection with the purchase or sale of crude or gasoline or petroleum distillates at wholesale.” To enforce the regulations it creates, the FTC can issue fines of up to $1 million per violation per day. In addition, the FTC can sue for equitable relief to enforce its rules and regulations. Such equitable relief may include, for example, an injunction stopping the improper conduct, disgorgement of profits, freezing assets, appointment of a receiver, contract rescission or reformation, paying damages to injured parties and public announcements of the violation.
The request for comments suggested “one possible definition” of market manipulation:
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 FTC asked for comments on this definition and encouraged those who comment to suggest alternatives.
The FTC also asked for suggestions on the interpretation of various components of the proposed definition. First, the FTC requested comments on the intent requirement for violating the market manipulation provision. Should it be a recklessness requirement as is the case with the Federal Energy Regulatory Commission (FERC) market manipulation provision, or should it require a specific intent to injure the market more similar to the provisions enforced by the Commodities Futures Exchange Commission (CFTC)? Second, the FTC asked whether an effect on prices should be a necessary element of proof. Third, the FTC asked how the phrase “in connection with sale or purchase of crude oil, gasoline, or petroleum distillates at wholesale” should be interpreted. Should FTC jurisdiction for this market manipulation provision extend into the retail markets? Should the FTC adopt the FERC interpretations of “in connection with”? Fourth, the FTC asked how a competitive price should be determined so that it can be contrasted to a “manipulated” or artificial price.
In addition, the FTC asked for comments on more general questions concerning its powers and jurisdiction applying the market manipulation provisions of the Energy Act. For example, the FTC asked for comments on the potential effects of the overlapping jurisdiction over market manipulation with FERC and the CFTC that any new FTC rules would create. The FTC also queried whether the FTC should be able to require suppliers to submit cost and volume data to the FTC or other agencies and, more generally, what appropriate penalties should be for violations of the new rules.
Finally, the FTC set out a number of specific oil industry practices and requested comments on whether they might violate the proposed rules against market manipulation under Section 811 of the Energy Act. For example, the FTC asked for comments on the following practices:
- Refiners making public announcements about reductions in capacity or about timing of scheduled maintenance and refinery downtime
- Suppliers making false or misleading sales reports to independent, non-government data collectors, such as trade publications
- Not releasing inventory during price spikes (e.g., during natural disasters) when suppliers know, or should know, that the release of the product will be profitable
- Denial of access to non-regulated terminals
- Pre-announcements that pipelines are approaching capacity
- Engaging in “wash trades” in order to influence price, perceptions of trading volume and/or perceptions of liquidity
- Selling crude oil abroad in order to benefit from increase in spot prices on domestic markets
Comments to the FTC on this Advanced Notice of Proposed Rulemaking are due by June 6, 2008. It is expected that the final rule will be proposed by September 2008 and adopted by the end of 2008.