Energy Independence and Security Act of 2007 Prohibits Certain Petroleum Industry Conduct and Authorizes FTC Enforcement Authority and Million Dollar Civil Penalties

The Energy Independence and Security Act of 2007 (“the Act”), signed into law by President Bush on December 20, 2007, outlaws two new categories of conduct and makes them subject to Federal Trade Commission enforcement and million dollar civil penalties: “market manipulation” and false price reporting with respect to wholesale crude oil[,] gasoline and petroleum distillates. (Pub. L. No. 110-140, title VIII, subtitle B.)

Specifically, §811 of the Act, headed “Prohibition on Market Manipulation,” makes it illegal to directly or indirectly use or employ any manipulative or deceptive device or contrivance in connection with the wholesale purchase or sale of crude oil, gasoline or petroleum distillates that violates rules and regulations to be promulgated by the FTC. Section 812, headed “Prohibition on False Information,” makes it illegal to falsely report information related to the wholesale price of crude oil, gasoline or petroleum distillates to a Federal department or agency in response to a legally-mandated reporting obligation with the intent to affect data compiled by the department or agency for statistical or analytical purposes.

Among other terms, the Act fails to define “market manipulation” or “manipulative device,” leaving unwelcome uncertainty -- at least until the FTC issues clarifying regulations -- as to the practical scope and limits of conduct proscribed under §811. While FTC advertising rules and guidelines provide solid footing to anticipate what the FTC may deem a deceptive device, what may constitute illegal manipulation in the petroleum industry is less well settled. The FTC’s Spring 2006 report to Congress on the “Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases,” may offer some early insight into its approach for construing the contours of its §811 “market manipulation” enforcement task, however. In that report, after noting that neither antitrust law nor economics defines “price manipulation” precisely, the Commission defined the term to include “(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 reduce output.” In a footnote, the Commission tempered the impact of the definition’s very open-ended second-prong by stating that unilateral conduct to raise prices or reduce output occasioned by supply disruptions “arising by natural disasters or sudden and unanticipated changes in demand ... should not be illegal because it entails each individual firm’s independent decisions about how to allocate sales of its products among markets.”

With one noteworthy difference, the Act’s §811 language closely tracks language in the Energy Policy Act of 2005 (“the EPAct 2005”) prohibiting 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 FERC jurisdiction. The EPAct 2005, however, specifically directs that the terms “manipulative or deceptive device or contrivance” be used “as those terms are used in section 10(b) of the Securities Exchange Act of 1934.” Accordingly, the resulting FERC rules (18 C.F.R. Part 1c) are modeled on SEC Rule 10b-5 and framed chiefly towards prohibiting acts of fraud and deceit. The Energy Independence and Security Act of 2007, however, contains no similar directive to the FTC -- presumably in deference to the agency’s own extensive expertise prosecuting deceptive and unlawful trade practices. This leaves the FTC discretion to take a rulemaking approach different from FERC’s.

The Act does not clearly delineate the boundaries between the new enforcement powers it grants the FTC and the Commodity Futures Trading Commission’s (“CFTC’s”) jurisdiction to investigate and punish manipulation of commodity prices under the Commodities Exchange Act (“CEA”). Potential overlap between CFTC jurisdiction over commodities traded on futures exchanges and FERC jurisdiction over energy markets has exposed firms in the natural gas and electricity industries to the risk of duplicative investigations and penalties. Depending on the agencies’ enforcement policies, firms in the oil, gasoline, and petroleum distillate industries may face similar risks of overlapping jurisdiction and parallel enforcement actions.

The potential breadth and current uncertainty associated with the Act’s prohibitions, as well as the potential for significant penalties for noncompliance, weigh in favor of a cautious approach by firms engaged in wholesale transactions involving the covered products. In particular, the new prohibitions underscore the importance of identifying, assessing and seeking legal counsel for conduct with potential to raise prices or reduce output, or that involve questionable representations. Firms also should be attentive to rulemaking initiatives or further guidance from the FTC.