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					                         NO. 05-0480
                             IN THE SUPREME COURT OF TEXAS



                      TXU GENERA TION COMPANY, L.P., ET AL.,
                                                                       Petitioners,
                                                v.
              PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,
                                                                       Respondents.


              No. 03-04-00       148-CV in the Third Cour of Appeals at Austin

              REPLY BRIEF OF PETITIONER TEXAS GENCO LLC

Edmund Danels                                    Robert J. Hearon, Jr.
General Counsel                                  State Bar No. 09346000
NRG Texas LLC                                    Mary A. Keeney
State Bar. No. 00787325                          State Bar No. 11170300
1301 McKinney, Suite 2300                        Graves, Dougherty, Hearon & Moody,
Houston, Texas 77010                                A Professional Corporation
(713) 795-6000 Telephone                         401 Congress Avenue, Suite 2200
(713) 795-7444 Facsimile                         P. O. Box 98
                                                 Austin, Texas 78767-0098
Mark A. Walker
Director of Regulatory Affairs                   (512) 480-5607 Telephone
NRG Texas LLC                                    (512) 472-8389 Facsimile
State Bar No. 20717318
1001 Congress A venue, Suite 360
Austin, Texas 78701
(512) 473-8895 Telephone
(512) 473-8712 Facsimile

                             ATTORNEYS FOR TEXAS GENCO LLC
                                         March 24, 2006
                                                   TABLE OF CONTENTS

                                                                                                                                       Pa2e
TABLE OF CONTENTS ........ .................. ...... .............. .......... ...... ............ ..... .............. ........ i

INDEX OF AUTHORITIES .............................................................................................. iii

INTRODUCTION... .... ... ....... ...... .... ........ .... ...... ........ ... ..... ......... ........ .... ......... ... ........... ...... 1

ARGUMENT ...................................................................................................................... 3

          A. Intent is an element of                      the activities prohibited by the Rule. .......................3

          B. Appellate counsel's concession that intent is an element of market
                      power abuse conflicts with the Commssion's Order adopting the
                      Rule and cannot form a basis for upholding it............................................. 5

          C. The equivocal nature of           the Commssion's admssion that intent is a
                      required element further confirm that the Rule must be set aside............... 6

          D. Rule 25.503(h) imposes an invalid burden on market paricipants to
                      establish an affirmative defense to the charge of a violation of the
                     prohibited activities in Rule 25.503(g). ........................................................ 8

          E. Absent incorporation of an intent requirement, the Rule is
                     unconstitutionally vague. .... ..... ........................ ........................................ ..... 9

         F. The Commssion's attempts to justify its Rule by relying on the
                     FERC rule and case law interpreting antitrst statutes is misplaced. ......... 11

         G. The Commssion's reliance on unrelated statutes in PURA for its
                     equivocal argument that intent may not be required should be
                     rejected. ....... ..................................... ............. ........................................ ...... 12

                     1. Section 39.151 does not give the Commssion authority to
                                 regulate wholesale market power or to redefine what
                                 constitutes market power abuse. ...................................................... 13

                    2. The Commission's reliance on statutes governg retail
                                competition defeats the Legislatue's goal of competition in
                                the wholesale market. .............. ..... ......... .... .............. ..... ..... ........ ...... 15

                    3. The Commssion's statutory authority over ancilar services
                          provides no basis for regulating wholesale market power. ............. 18

                                                                     i
         H. The challenged provisions of                   Rule 25.503 are invalid. .............................. 20
CONCLUSION AND PRAYER ...................................................................................... 21

CERTIFICATE OF SERVICE ....... ...... ............... ............ ........... ........ .......... ...... .............. 22




                                                          11
                                            INDEX OF AUTHORITIES

                                                                                                                           Pa2e
 CASES

 Barshop v. Medina County Underground Water Conservation District,
       925 S. W.2d 618 (Tex. 1996) ..................................................................................10

 Gorman v. Life Ins. Co. of N. Am.,
      811 S. W.2d 542 (Tex. 1991) ...... ........................... ................. .......... ..... ................... 8

Heggy v. American Trading Employee Retirement Account Plan,
      123 S.W.3d 770 (Tex. App.-Houston (14th Dist.) 2003, pet. denied) ...................8

Motor Vehicle Manufacturers Ass'n v. State Farm Mutual Auto. Ins. Co.,
      463 U.S. 29, 103 S.Ct. 2856 (1983) .........................................................................5

National Ass'n of Independent Insurers v. Texas Dep't of Ins.,
          925 S. W.2d 667 (Tex. 1996) '" ......... .................... ........ ......... ......... ............. ............. 5

Railroad Comm 'n v. Lone Star Gas Co.,
       844 S. W.2d 679 (Tex. 1992) .................................. .......... ........ ,...... ......... ..............20

State v. Public Uti!. Comm 'n,
          131 S.W.3d 314 (Tex. App.-Austin 2004, pet. denied) ........................................7

Texas Commercial Energy v. TXU Energy, Inc.,
      413 F.3d 503 (5th Cir. 2005) ...................................................................................19

Texas Health Care Info. Council v. Seton Health Plan, Inc.,
      94 S.W.3d 841 (Tex. App.-Austin 2002, pet. denied) ..........................................5

Texas Nat. Resource Conservation Comm'n v. Lakeshore Utile Co.,
      164 S. W.3d 368 (Tex. 2005) ............ ........... ..... ..... .......... ...... ....... ..... ........ .......... ...17

TXU Generation Co, L.P. V. Public Utile Comm 'n,
          165 S.W.3d 821 (Tex. App. - Austin 2005, pet. filed) .............................3, 5, 11, 13
                                                                                                                       passim
Village of Hoffan Estates V. Flipside, Hoffman Estate, Inc.,
      455 U.S. 489, 102 S.Ct. 1186 (1982) .................................................................9, 10



                                                              11
STATUTES

TEX. GOV'T CODE ANN . (Vernon 2004)
            § 402.004.. ..... ................... ...... .......... .......... ........... ............ ............. .................... ....... 5
            § 2001.033 ............................ ............ ........ .... ............ ............................ .......... ..........5


TEX. UTIL. CODE         ANN. §§ 11.001-64.158 (Vernon 1998 & Supp. 2005)
            § 15.023 .......................... ................. ...................... .......... ..... ....... .................. ...........4
            § 35. 004( e) .. . .. .... .. .. .. ....... ............ .. ........ ... ........... ...... ...... .......... .... ............. .. . ... 18, 19
            § 39.00 1 (d) ... .................... ....... ..... ............ ............. ........ ........................... ............. .20
            § 39.101 ........................................................................................................... .16, 17
            § 39.101 (a) ............................................................................................................ .16
            § 39.101 (b )( 6) ........................................................................................................ 16
            § 39.15 1 ................................................................................................................. ..13 '
            § 39.157................................................................................................... 6, 10, 12, 13
                                                                                                                                              passim
           § 39.157 (a) ....... ........... ...... ........ ..... ...... ......... .............. ............. ............ ........ ........ 7, 9
           § 39.1515 ..................................................................... .............. ................... ......... .13


PUC RULES

Substantive Rules

16 TEX. ADMIN. CODE (1994)
      § 25.503..... ................ ...... .................. ............. .......... .............. .................1, 12, 13, 19
                                                                                                                                              passim
           § 25 .503( c)( 1).. .................... ........ ............... .............. ........... .............. ..................... .14
           § 25 .503( f)( 6) ..... ......................................... .................. ........ .......................... ..........1
           § 25 .503( f)(7) ................ ....... ............. ....... ................. ................... .................. ....... ....1
           § 25 .503( f)(8) ..................... ........ ................. ............... .... ..... .... .................. .......... ......1
           § 25.503(g) ...................................................................................................1,4, 6, 8
                                                                                                                           passim
           § 25 .503(g)( 1) . .......... ....... ........ ......... ..... ........................ ................ ....................... .14
          § 25.503(g)(2) ......... ................ ............ ................................. .......................... ..14, 15
          § 25 .503(g)( 5) ........ ........................ ........................ ........ .... ..................... ........... ....15
          § 25.503(g)(7) ................... ...... ........ .......... ...... ........... .......... .......... ..... ....... .............. 6
          § 25 .503 (h) ......... ..................................................................................................1, 8




                                                                          iv
Texas Register

       28 Tex. Reg.
             6468............................................................................................................. .13

       29 Tex. Reg. 1899 (Feb. 27, 2004)
                 1906-08 . ......... ....... ................ ............. .......................... ................. ................3
                 1908 .......................................................................................................... .2, 4
                 1908-1909 ............... .............. .................. ................... ......... ...........................1
                 1909......................................................................................................... .2, 12
                 1930-1933 . ............ ......... ..... ........ ................. ...... ........ ........... .......... ......... ......3
                 1931 ... ..................... ........ ............. ....... .......... ..... ................. .............. .............4
                 1932................................................................................................................ 4
                 1933 ............................................................................................................... 4


OTHER AUTHORITIES

Prohibition of Energy Market Manipulation,
      No. RM06-3-000, 114 FERC P 61,047,2006 WL 147554,
      Order No. 670 at ir 52 (Jan. 19,2006) ("January 2006 FERC Order") .....11, 12, 15

Charles R.P. Pouncy, The Scienter Requirement and Wash Trading in
      Commodity Futures: The Knowledge Lost in Knowing,
      16 Cardozo L. Rev. 1625 (1995) ...........................................................................15




                                                                 v
 TO THE SUPREME COURT OF TEXAS:

             Petitioner Texas Genco LLC1 submits this reply to the Brief on the Merits filed by

 the Respondent Public Utility Commssion of           Texas ("Commssion").

                                              INTRODUCTION

             In adopting Rule 25.503, the Commission refused to include intent as an element

 of the prohibited activities in subsection (g) and in subsection (h) placed the burden of

 proof on market participants to establish lack of intent as a defense to imposition of

 admstrative penaltes. 29 Tex.Reg. 1908-09.


            Texas Genco challenges the validity of subsections (g) and (h),2 focusing

 specifically on the Commssion's refusal to include intent as an element of the prohibited

 activities and the Commssion's decision to place the burden of proof on market

paricipants to prove a lack of intent as an affirmative defense. The Commssion

incorrectly asserts that Petitioners contend the Rule "had to include an intent requirement

for all violations ofPUR." Briefat 19. Texas Genco does not challenge the validity of

the Rule in its entirety and does not assert that intent is an essential element with respect

to all other conduct addressed by PURA.


       i NRG Energy, Inc. acquired 100% of the membership interests of Texas Genco LLC (thus also
acquirg all Texas Genco's affliates, assets, and obligations) on Februar 2, 2006. NRG Energy Inc.
had no operational activity in the ERCOT Power Region prior to the acquisition. The activities of Texas
Genco and its affiliates are essentially unchanged since the acquisition. Effective March 15,2006, Texas
Genco LLC amended its registration with the Texas Secretar of State to reflect that the name of Texas
Genco LLC is now "NRG Texas LLC." However, for the puroses of this proceeding, Petitioner wil
continue to refer to itself by its former name (Texas Genco LLC) for clarty's sake and may be so
referenced by other paries and the Court. As a matter of full disclosure, Petitioner Texas Genco wished
to inform the Cour and paries of this recent change, although it has no impact on paricipation in ths
proceeding.
     2 Texas Genco also challenged subsections 6, 7, and 8 of subsection (f), which contains simlar
prohibited activities to which the Commssion refused to impute intent.
               Appellate counsel for the Commssion now appear to concede that intent is a

 necessary element of market power abuse and that the Commssion bears the burden of

 proving that intent. As shown in the table below, the position of appellate counsel stands

 in stak contrast to the Commssion's Order adopting the Rule:

                     PUC ORDER                                      PUC APPELLATE BRIEF


 "(T)he Commssion concludes that intent is "(A)ny requisite state-of-mind element
 not an element that it must prove in order to need not be included in the text of the Rule,
 establish a violation of the statute II           but may be inferred as an inerent element
 admnistrative enforcement actions." 29            of the violation when the Rule is enforced."
 Tex. Reg. 1908                                    p.14

"Lack of intent, i.e., the fact that an action "(T)he Commssion has the burden of
was accidental or inadvertent, is an proving a violation at all times, including
affirmative defense that may be raised by the burden to prove any state of mind that
the person alleged to have commtted a may be an inherent element of a particular
violation." 29 Tex. Reg. 1908                      offense." p. 14.




"The Commission finds that these cited "The very authorities Petitioners rely upon
cases do not establish that the commssion plainly demonstrate that any requirement to
has the need or the abilty to imply an      prove a market participant's state of mid
intent element when the Legislature has not need not be expressly stated in a rule or
included one in PURA." 29 Tex. Reg. statute, but may simply be inerred as an
1909                                               inherent element of that violation when that
                                                   provision is enforced." pp. 18-19.


"The commission disagrees with comments "(T)o the extent the Commssion must
suggesting it should add intent as a    prove anticompetitive intent as an element
necessary element of a findig of a of a Rule violation, that requirement may
         the rule." 29 Tex. Reg. 1908
violation of                            be inferred by the Commssion at the
                                                   enforcement stage, and need not be
                                                   included in the text of   the Rule." p. 21




                                               2
           Reversal of the Rule is required because intent is an element on which the

 Commssion has the burden of proof, as Justice Pemberton's dissenting opinion in the

court of     appeals explains. TXU Generation Co. v. Public Utile Comm 'n, 165 S.W.3d 821,

848-52 (Tex. App.-Austin 2005, pet. filed). Statements by appellate counsel canot

rewrite the Order and Rule that the Commission adopted.

           Furthermore, the statements by appellate counsel cannot be relied on to cure


deficiencies in the Rule because the statements themselves are equivocaL. The
Commission's arguments in its Brief are altogether unclear whether or when intent would

be inferred by the Commission, leaving market participants with no reasonable guidance

as to the conduct required of them. Whether the Cour looks to the Commssion's Order

adopting the Rule, which refuses to include an intent element, or to the arguments of

appellate counsel, the Rule remains impermissibly vague.

                                        ARGUMENT

A. Intent is an element of the activities prohibited by the Rule.

           In the rulemaking, several parties objected to the Rule because compliance was

measured by the outcomes of an action without regard to intent for such outcomes and

urged that an intent element was required. 29 Tex. Reg. 1906-08. Despite repeated

requests by market paricipants, the Commssion expressly declined to add an intent

element to the prohibitions in § 25.503(g). See 29 Tex. Reg. 1930 - 33. The Commssion




                                              3
 rejected these arguments, reasoning that PUR § 15.023, which deals with crimial and

 administrative penalties,3 did not include an intent element. The Commssion stated:

         Applying this concept, the commission concludes that intent is not an
         element that it must prove in order to establish a violation of the statute in
         administrative enforcement actions. Lack of intent, i.e., the fact that an
         action was accidental or inadvertent, is an affirmative defense that may be
         raised by the person alleged to have commtted a violation. In order to
         reflect this, the commssion has included language in the rule recognizing
         ths affirmative defense.


 29 Tex. Reg. 1908. (Emphasis added.) The Commission added a new subsection (h),

which states that "a market paricipant wil have the opportty to show that a reliabilty

problem was caused by an inadvertent event as a defense if necessary." Id. at 1931. It

canot reasonably be disputed that the Rule omits intent as an element of any prohibited

conduct, except to the extent its absence can be established as part of the affirmative

defense provisions in the Rule.

         For the reasons set out in pages 13 though 21 of Texas Genco's Intial Brief,

intent is plainly an essential element of proof of a violation of the activities prohibited by

subsection (g). Because appellate counsel now essentially concedes that intent is an

element of "market power abuse," it largely declines to respond to the arguments

presented in the initial briefs explaining why intent is an essential element of proof for

each of the challenged provisions. Nor does the Commssion address Justice
Pemberton's dissenting conclusion that the absence of the "balancing factor of an intent

requirement" in the rule would "chill competition in a manner inconsistent with the


     3 Section 15.023, which sets out the procedures for a heag to consider administrative penalties,
does not deal with the substantive provisions of the Rule.


                                                     4
 legislatue's intent." 165 S.W.3d at 850. These unebutted arguments require

 invalidation of the challenged provisions of the Rule.

 B. Appellate counsel's concession that intent is an element of market power
             abuse conflicts with the Commission's Order adopting the Rule and cannot
             form a basis for upholding it.

             Any concession by appellate counsel that intent may well be required to prove

 market power abuse cannot form a basis for affirmance of the Rule because the

 Commssion's Order adopting the Rule explicitly rejects intent as an element. "(C)ours

may not accept appellate counsel's post hoc rationalizations for agency action." Motor

 Vehicle Manufacturers Ass'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 50, 103

S.Ct. 2856, 2870 (1983). "(A)n agency's action must be upheld, if at all, on the basis

ariculated by the agency at the time of the rule makg." Id. Cf, TEX. GOV'T CODE

AN. § 2001.033 (requiring agency to set out reasoned justification of rule at time of

adoption); National Ass'n of Independent Insurers v. Texas Dep't of Ins., 925 S.W.2d

667,669 (Tex. 1996) (lookig to agency's explanation of       its rule at time of   its adoption in

evaluating validity of                rule).

            Appellate counsel has no authority to rewrte the Commssion's Rule through its

briefing to this Court. Statements by the Attorney General would not necessarily bind the

Commssion to any particular interpretation of its Rule. Texas Health Care Info. Council

v. Seton Health Plan, Inc., 94 S.W.3d 841, 847-48 (Tex. App.-Austin 2002, pet. denied)

("(A)dmssions made in the withdrawal letter by the Attorney General concerned a
question of law and therefore would not necessarly bind the Councilor the State to any

particular interpretation of the Code."). See also TEX. GOV'T CODE AN. § 402.004.


                                                         5
 ("An admission, agreement, or waiver made by the attorney general in an action or suit to
 which the state is a part does not prejudice the rights of                  the state.").

 C. The equivocal nature of the Commission's admission that intent is a required
             element further confirms that the Rule must be set aside.

             Appellate counsel's statements regarding the requirement of an intent element


should also be rejected as a basis for upholding the Rule because those concessions


remain equivocaL. On page 14, the Commssion's Brief suggests that actions may be

prohibited under the Rule without regard to intent pursuant to "PURA' s mandate to

protect consumers from unfair, misleading, and deceptive practices, and to ensure

reliabilty of the electric network." On page 23, the Brief states, "If Petitioners are

correct that § 39.157 incorporates antitrst law, then the Rule's market power standards

canot be properly criticized for failng to include an express intent requirement."


(Emphasis added.) The Commssion's argument that the Rule does not penalize acts that

result in minor impacts (Brief at 16) clearly.                    suggests that the Commission wil disregard

the intent requirement when the impact of conduct on the market is signficant.

Statements such as these make it unclear whether (1) the Commssion is conceding that

intent is an element for proving market power abuse under subsection (g)(7) but not for

the other market conduct prohibited by Rule 25.503(g), or (2) the Commssion contends

that even market power abuse may occur without intent when the Commssion contends

that the exercise of market power affects the reliability of the network or is "unfair" to

consumers.




                                                              6
          If the Commission determnes that a prohibited activity has occured simply on the

 basis of the effect of conduct rather than on the intent underlying the conduct, the


 Commssion oversteps its authority. A generation company could have a legitimate basis

 for shutting down a plant for performng maintenance yet that shut down could have an

 unintended and unown material adverse impact on the market. Under the Rule as

 written and interpreted by the Commission in its Order adopting the Rile - and perhaps

 even as interpreted by the Commssion in its Brief - the company would be in violation

 of   the Rule. The Legislatue did not intend for § 39.157(a) to be a vehicle for imposing

strct liability for admstrative penalties on generation companies for legitimate


business decisions solely because those decisions may have some unntended or unkown

consequence for the wholesale electric markets.

         The Commssion's contentions that either intent is not required or intent wil be

inferred are contradictory, alternative arguments that have no place in defense of an

agency rule. A rule must comply with the statutes on which it is based. State v. Public

Uti!. Comm 'n, 131 S.W.3d 314, 321 (Tex. App.-Austin 2004, pet. denied). If, as

Petitioners contend, § 39.157(a) requires a showing of intent to accompany conduct that

the Commission prohibits in an effort to control market power and market manpulations,

the Rule violates the statute because the Order adopting the Rule rejects that intent

requirement. It is no defense to say that intent wil be inferred if and when the cours

ultimately determne that intent is required, while at the same time continuing to maintain

that certain conduct may be prohibited without proof of intent.




                                             7
 D. Rule 25.503(h) imposes an invalid burden on market partcipants to establish
      an affirmative defense to the charge of a violation of the prohibited activities
             in Rule 25.503(g).

             The Commssion's argument that the effect of its affirative defense provision

 does not shift the burden of proof should also be rejected       as an ilogical redefinition of


 what an affirmative defense is. The Commission argues that, where the law requires

 intent to be inferred, the Commssion must prove intent, and the affrmative defense

provision "simply provides fuher assurance" that the market paricipant may avoid

liabilty. Brief at 26. This argument ignores the common meanng of the term

"affirmative defense" and, therefore, conflicts with the language of the Rule itself. "An

affirmative defense does not rebut the factual proposition of the plaintiffs' pleading, but,

intead, allows the defendant to introduce evidence to establish an independent reason


why the plaintiff should not prevaiL." Heggy v. American Trading Employee Retirement

Account Plan, 123 S.W.3d 770, 778 (Tex. App.-Houston (14th Dist.) 2003, pet. denied).

"(A)n affirmative defense is one of avoidance, rather than a defense in deniaL." Gorman

v. Life Ins. Co. ofN. Am., 811 S.W.2d 542,546 (Tex. 1991). If a defense merely rebuts a

prosecutor/plaintiff s case-in-chief, it is an avoidance, not an affirmative defense. If

intent a required element of the Commission's burden, placing the obligation on the

accused to disprove that intent is not an affirative defense.


           Again, appellate counel is attempting an impermissible post-hoc rationalization of

the Rule that ignores the plain language and intent of the Rule. These affirmative defense

provisions cannot be corrected by counsel's attempts to rewrite the Rule. The



                                                              8
 Commssion itself must be required to do that through further rulemakng after the

challenged provisions are set aside.

E. Absent incorporation of an intent requirement, the Rule is unconstitutionally
      vague.

       The Rule should also be reversed because neither the Rule, the Commission's

Order adopting it, nor appellate counsel gives any guidance as to when, if ever, intent

would be "inferred." Whether the challenged provisions of the Rule are evaluated under

either quasi-criminal or civil standads, they are unconstitutionally vague. The

Commssion's argument that the Rule should be upheld because market participants

recognize that some conduct violates § 39.l57(a) (Brief at 48) misses the point. Simply

because market paricipants know that under some circumstaces hockey stick pricing

may be a violation does not mean that they have any reasonable guidance as to what their

conduct should be to avoid Commssion fines and sanctions.

       The Commission cites Vilage of Hoffman Estates v. Flipside, Hoffman Estate,

Inc., 455 U.S. 489, 102 S.Ct. 1186 (1982), for the proposition that the Rule "should be

upheld unless the challenged provisions are impermssibly vague in all their
applications." Brief at 48. However, the standards set fort in that decision support

setting aside the challenged provisions of this Rule. Quoting an earlier Supreme Cour

decision, the Court in Hoffman Estates sets out precisely why the Rule here is
inapermssibly vague:


      Vague laws offend several important values. First, because we assume that
      naan is free to steer between lawful and unawful conduct, we insist that
      laws give the person of ordinar intellgence a reasonable opportty to
      know what is prohibited, so that he may act accordigly. Vague laws may


                                          9
        trap the inocent by not providing fair warning. Second, if arbitrary and
        discrimiatory enforcement is to be prevented, laws must provide explicit
        standards for those who apply them. A vague law impermissibly delegates
       basic policy matters to policemen, judges, and jures for resolution on an ad
       hoc and subjective basis, with the attendant dangers of arbitrar and
       discriminatory applications.

 455 U.S. at 498, 102 S.Ct. at 1193. The Commission's Rule suffers from each of these

 infirmties. Without a clear delineation of when or even if intent is required as an

element of prohibited conduct, market participants have no "reasonable opportty to


know what is prohibited." Id. Furer, the Rule permts arbitrar and discriminatory


applications because it delegates to the Commission and its staff basic policy decisions

that may be contrary to the policies and standards already defined by the Legislatue in


§ 39.157.

       The Commssion misinterprets Barshop v. Medina County Underground Water

Conservation District, 925 S.W.2d 618 (Tex. 1996), the other case it cites for the same

proposition. Barshop did not even involve a vagueness challenge. This Cour held in


Barshop that a facial challenge to a statute requires a showing that the "statute, by its

term, always operates unconstitutionally." Id. at 627. Texas Genco's facial challenge to

the Rule here meets that test in that, absent imputation of intent as an element of market

power abuse, the Rule is always unconstitutional because it is outside the Commssion's

stàtutory authority under § 39.157 to address wholesale market power.

      Unclear or ambiguous rule provisions chill competition by creating situations in

which a market participant canot know whether it wil be called to task, as an example,




                                           10
for "witholding production" when a power plant is necessarily shut down for
maintenance. As the dissenting opinion correctly states:

       Without the balancing factor of an intent requirement, these featues of rule
       25.503 chill competition in a manner inconsistent with the legislatue's
       intent.

165 S.W.3d at 850. Justice Pemberton accurately observes that "(a)bsent an intent

requirement, 'market power abuse' is rather unclear." 165 S.W.3d at 849. He did not

reach the constitutional vagueness argument, however, because he would have required

inclusion of intent as an essential element of market power abuse. This Cour similarly

need not reach the vagueness issue in ths case if it determnes the Rule invalid for

omitting intent as a necessary element of market power abuse.

F. The Commission's attempts to justify its Rule by relying on the FERC rule
      and case law interpreting antitrust statutes are misplaced.

       The Commssion may not properly rely on the refusal of the Federal Energy

Regulatory Commssion ("FERC") to incorporate an express intent element into its

market manipulation rule. Brief at 24. Here, the Commssion in its Order adopting the

Rule has refused to incorporate an intent element on the ground that intent is not required.

In contrast, the FERC declined to add an explicit requirement of intent because it

recognzed that the applicable law already imposed an intent requirement:

       The Commssion rejects as unecessar commenters' requests to
       incorporate a specific intent standad into the Final Rule. Congress directed
      that the terms 'manipulative or deceptive device or contrvance" as they
      appear in sections 1283 and 315 of EP Act 2005 be interpreted in
                                   the Exchange Act. According to the
      accordace with section 1 O(b) of


       Supreme Cour, "(t)he words 'manipulative or deceptive' used in
      conjunction with 'device or contrvance' strongly suggest that § 10(b) was
      intended to proscribe knowing or intentional misconduct . . . conduct


                                            11
            designed to deceive or defraud investors by controllng or artificially
            affecting the price of securties." Based on the foregoing, any violation of
            the Final Rule requires a showing of scienter.

Prohibition of     Energy Market Manpulation, No. RM06-3-000, 114 FERC P 61,047, 2006

WL 147554, Order No. 670 at ir 52 (Jan. 19, 2006) ("Januar 2006 FERC Order"). The

Commission's express rejection of the argument that proof of intent is required is

inconsistent with incorporating an intent element by inference.

           Nor may the Commission rely on the fact that antitrst statutes and federal

securties regulations do not expressly require intent as an element of a violation of those

laws to justify the Commssion's refusal to include an element of intent in the
prohibitions in subsection (g). As the Commission notes, courts interpreting those

antitrst statutes and securities regulations have held that intent is a necessary element of

any violation of those laws. Brief at 21-22. Here, however, the Commssion rejected

case law imputing intent as an element, finding that "these cited cases do not establish

that the commssion has the need or the ability to imply an intent element." 29 Tex. Reg.

1909. The Commssion's express rejection of intent as an element of market power

abuse needs to be corrected in ths appeal, which is the sole statutory vehicle for

reviewing the facial validity of the rule.

G. The Commission's reliance on unrelated statutes in PURA for its equivocal
     argument that intent may not be required should be rejected.

          The Commssion's argument that other provisions in PURA may eliminate the

need to prove intent is incorrect. The sole basis for evaluating the Commssion's

authority to promulgate subsection (g) should be § 39.157. Reliance upon provisions that



                                                12
 have nothing to do with competition or market power to regulate market participants is

 contrary to the Legislature's intent. As Justice Pemberton states in his dissent, "(b)y

 departing from the requirements of section 39.157, rule 25.503 distorts the legislature's

 careful balancing of the dual policy goals reflected in the statute, encouraging the

 inovation and risk-taking of competition while protecting the integrity of market

 mechanisms." 165 S.W.3d at 849.

            1. Section 39.151 does not give the Commission authority to regulate
                        wholesale market power or to redefine what constitutes market power
                        abuse.

            The Commssion errs in relying on § 39.151 as support for eliminating intent from

the prohibited activities in subsection (g) of the Rule. As the Commssion itself stated in

its initial publication of       proposed Rule 25.503, the limited role that § 39.151 plays in the

Rule is that it "requires the commssion to oversee and review the procedures established

by an independent organization (ERCOT), directs market parcipants to comply with


such procedures, and authorizes the commssion to enforce such procedures." 28 Tex.

Reg. 6468. There is nothing in this statute that indicates the Commission is empowered

to redefine antitrst concepts of market power abuse for the purose of ensurng the

reliability of the network. Precisely the opposite is indicated by the fact that the
Legislatue does not mention market power or anticompetitive practices in § 39.151;

those issues are addressed solely in § 39.157.4 The Commssion's authority to regulate



      4 In 2005, after the adoption of Rule 25.503, the Legislatue passed PUR § 39.1515, which
authories the establishment of a wholesale electric maket monitor to address market manpulation
strategies. That statute, however, is not a basis for the Commssion's authority here.


                                                    13
 competition in wholesale power in a deregulated market is limited to its express authority

 in § 39.157 to address market power.

             The prohibitions in subsection (g) concern various forms of market power abuse

and market manipulation that give participants an unfair competitive advantage in the

wholesale market or that may adversely impact the reliabilty of the network. As the

Rule expressly states, these practices are prohibited because they are "acts and practices

that have been found to cause prices that are not reflective of competitive market forces

or to adversely affect that reliabilty of the electrc network." Rule 25.503(g). Section

39.157 defines the Commssion's authority to address these acts and practices.

            The Commssion's suggestion that some of the prohibitions in § 25.503(g) ensure

reliabilty of the network rather than competition in the wholesale market misses the

point. Virtally all of     the prohibitions in § 25.503(g) may also be constred to ensure the

reliabilty of the network. Market power abuse obviously has the potential to adversely

affect the reliabilty of the network. That does not mean, however, that the Commssion

is free to ignore the intent element required by antitrst law to prove market power abuse.

            The Commssion's apparent suggestion that the prohibitions in subsections (g)(I)

though (6) do not require a showing of knowledge or intent conflicts with the plain

language of those prohibitions. For example, subsection (g)(1) prohibits scheduling


generation in a way that creates "artificial congestion." Subsection (c)(1) of the Rule

defines artificial congestion as being "created when multiple foreseeable options exist for

scheduling" and "a market participant chooses an option that is not the most economical"

and that choice "results in the market paricipant being paid to relieve the congestion it


                                               14
 caused." (Emphasis added.) Such action necessarily must have been taken with

 knowledge and intent. Similarly, subsection (g)(5) prohibits "fraudulent behavior,"

 necessarily including an intent element.

             The Commission's suggestion that conduct such as the wash trades prohibited by

 subsection (g)(2) "do not involve 'antitrst' or anticompetitive conduct" and do not need

 a showing of intent (Brief at 16) is also incorrect. One of the key puroses of wash trades

 is market manipulation, including the effort to create a market and the power that

accompanies it. See Charles R.P. Pouncy, The Scienter Requirement and Wash Trading

in Commodity Futures: The Knowledge Lost in Knowing, 16 CAROZO L. REy. 1625,

 1637-38 (1995). The plain language of       the prohibition in subsection (g)(2) against wash

trades, which bars execution of "pre-arranged offsetting trades . . . which involve no

material risk and no material net change in beneficial ownership," indicates a showing of

intent is required.

            Prohibitions against artificial congestion, wash trades, offerings of non-existent

products, and other market price manpulations require an element of intent. As the


FERC recognized in its Januar 2006 FERC Order, these activities are "examples of

prohibited manipulation" of the market, each of which "requires a showing of scienter."

January 2006 FERC Order at irir 59,52.

           2. The Commission's reliance on statutes governig retail competition
                defeats the Legislature's goal of competition in the wholesale market.

           The Commssion also erroneously relies upon provisions addressing "unfair,

misleadig, and deceptive practices" against retail customers to support elimiatig an



                                                15
 intent requirement from the conduct prohibited by § 25.503(g). Brief at 14. In setting


 out the Commission's authority to address market power abuse, § 39.157 does not

 mention these terms. These provisions are found in § 39.101, which even the majority

 opinion recognizes "was established to protect retail customers." 165 S.W.3d at 833-34.

 The majority opinion neverteless relies on these provisions as support for omitting an

 intent element on the ground that "issues relating to reliabilty or price in the wholesale

 market wil necessarily be reflected in the retail market." Id. Recognizing that this

 strained reasoning cannot support utilzing § 39.101 to regulate wholesale pricing, the

Commssion makes the even more tenuous argument that § 39.101 (b)( 6) "protects

consumers from harmful deceptive practices whether they occur at the retail or wholesale

leveL." Brief at 33.

            The Commission's assertion that § 39.101(b)(6) applies to wholesale power is

simply wrong. The Commssion fails to proffer any logical reason why § 39.101, which

is in a subchapter that by its title addresses only "Retail Competition," would apply to

wholesale competition as well. Section 39.101 deals        exclusively witn retail competition

and canot be utilized to provide "back door" regulation of the wholesale electrc market.

The Legislatue deregulated the wholesale electrc market in 1995, and clearly did not

intend to reregulate that market when it expanded deregulation to retail electrc services

by enacting Chapter 39 in 1999.


           Nothig in the language of § 39.101 indicates that the coverage of the statute is

intended to apply to wholesale competition. Section 39.101(a) directs the Commssion to

"ensure that retail customer protections are established," and the wholesale market is


                                                      16
 never mentioned in any portion of § 39.101. The Commssion observes that subsection

 (b)( 6) does not specifically limit its application to retail customers. Brief at 33. There is

 no need, however, for the Legislatue to restate in each subsection that these customer

 safeguards are only for retail competition. The intent is clear from the language of the

provision as whole. See Texas Nat. Resource Conservation Comm'n v. Lakeshore Util.

Co., 164 S.W.3d 368, 378 (Tex. 2005) (applying rule that legislative intent is determned

"by reading the statute as a whole").

       As Justice Pemberton notes in his dissent, "the Commssion must act in
conformty with the broader statutory objectives and framework of the electrcity

deregulation statutes." 165 S.W.3d at 851. Reading the Commssion's general duty in

§ 39.101 to ensure "safe, reliable, and reasonably priced electrcity" in the retail market

to give it authority to regulate the wholesale market would mean that ths provision

essentially places no limits on what power the Commssion could invoke under this

provision. See id. Under the Commssion's reasonig, complete regulation of pricing

would be permssible if the Commssion determned that such regulation was necessary

to ensure "safe, reliable and reasonably priced electrcity." Id. Such autlority would

contradict "the legislatue's explicit mandate that "(r)egulatory authorities . . . shall

authorize or order competitive rather than regulatory methods to achieve the goals of

(Chapter 39)." Id.




                                             17
             3. The Commission's statutory authority over ancilary services provides
                   no basis for regulating wholesale market power.

             The Commission's argument that its authority in § 35.004(e) over ancilary

 services gives it additional power to regulate wholesale market power should also be

 rejected. Brief at 38. The Commssion correctly observes that § 35.004(e) directs the

 Commssion to "ensure that ancilar services are available at reasonable prices with

 terms and conditions that are not unreasonably preferential, prejudicial, discriminatory,

predatory, or anticompetitive." Brief at 38. In that same provision, however, the


Legislatue decrees that the Commission's obligations to perform this fuction are


"deemed" satisfied when customer choice is introduced in the ERCOT power region:

            (o)n the introduction of customer choice in the ERCOT power region,
            acquisition of generation-related ancilar services on a nondiscriminatory
            basis by the independent organzation in ERCOT on behalf of entities
            sellng electrcity at retail shall be deemed to meet the requirements of ths
            subsection.

PURA § 35.004(e). The Commssion argues that ths provision merely termnates its

authority over the terms and conditions under which ERCOT buys ancilary services, not

the term and conditions under which market paricipants offer to sell to ERCOT. Brief

at 39. This is not a reasonable readig of               the statute. The plain language of   the statute


refers to the entire transaction of purchase by ERCOT and sale by market paricipants of

ancilary services. Thus, this language termnates the Commssion's obligations and

authority under ths provision upon the introduction of customer choice in 2002.

           But even if          the Commssion retains any authority under § 35.004(e), that authority

is only as to ancilar services, which is but "a small component of the wholesale




                                                        18
 electricity market." 165 S.W.3d at 851 (J. Pemberton, dissenting). Such a limited

 provision cannot be the basis for the broad-ranging power that the Commssion asserts it

 has to regulate all wholesale market power. As Justice Pemberton's dissent correctly

 notes, the Commssion's reliance on § 35.004(e) is inappropriate because it "could be

 invoked to justify virally any manner of regulation (in the wholesale market) if in the

Commssion's judgment, such actions would ensure 'reliabilty' and 'reasonable prices.'"

Id. Such a result "overlooks the context" of § 35.004(e) and would be clearly contrar to


the general objective of deregulation of    the wholesale market. Id.

            Contrar to the Commssion's suggestion (Brief at 41), the Fift Circuit's decision

in Texas Commercial Energy v. TXU Energy, Inc., 413 F.3d 503 (5th Cir. 2005), does not

support a contrar view. In that case, the Fifth Circuit merely determned that under the

Commssion-approved ERCOT market rules and associated energy pricing, wholesalers

are entited to the protections of the filed rate doctrine because the Commssion has

sufficient oversight and review of the wholesale electric market to invoke that doctre.

Id. at 509. The cour did not attempt to interpret the specifics of the Commssion's

regulatory authority and in no way addressed the issues before ths Cour in ths case. In


fact, the cour relied upon case law holding that the filed-rate doctrne applied to market-

based energy rates subject to oversight and review by the FERC, which has imposed the

very scienter requirement Petitioners contend is required here. Id. at 509-10. Thus, the

result in Texas Commercial Energy is in no way impacted by Petitioners' assertion here

that intent is an essential element of proof with respect to the conduct prohibited by

subsection (g) of the Rule.


                                               19
 H. The challenged provisions of Rule 25.503 are invalid.

        As the dissenting opinion correctly concludes, the Rule as adopted rus counter to

 the general objectives and puroses of the legislation it purports to implement and is not

 "in harony with the general objectives of the Act involved." 165 S.W.3d at 852,


quoting Railroad Comm'n v. Lone Star Gas Co., 844 S.W.2d 679,685 (Tex. 1992). The

Commssion describes the legislature's instrction in § 39.001(d) to use "competitive

methods instead of regulatory methods" as merely "directory guidance." Brief at 28.

Nevertheless, such a legislative direction must be considered in determning whether the

challenged portions of Rule 25.503 are consistent with legislative intent not to burden

wholesale competition with broad and ambiguous regulatory requirements. The plain

language of § 39.157 makes clear that its provisions are the sole statutory authority for

the Commssion to regulate and oversee wholesale competition and prevent market

power abuses. Justice Pemberton's dissent properly notes that the Commssion's reliance

on other, unelated provisions to justify its Rule is a slippery slope that "would permit

(the Commssion) broad power to regulate conduct thoughout the entire wholesale
market." 165 S.W.3d at 851. The Legislatue has carefully defined the extent of the

Commssion's authority and never intended to give it the discretion to reregulate

wholesale competition. Chapter 39 of PURA plainy indicates that the Legislature did

not intend to create a state regulatory strctue that would be more invasive than

analogous federal stadards for oversight of the wholesale electrc market - a result that

would surely discourage investment in the Texas wholesale market.




                                           20
                                 CONCLUSION AND PRAYER

            For the reasons stated, ths Cour should grant review and invalidate the

challenged portons of    Rule 25.503 as in excess of            the Commission's authority.

                                                            Respectfully submitted,



Edmund Daniels                                              Robert J. Hearon, Jr.
General Counsel                                             State Bar No. 09346000
NRG Texas LLC                                               Mar A. Keeney
State Bar. No. 00787325                                     State Bar No. 11170300
1301 McKiey, Suite 2300                                     Graves, Doughert, Hearon & Moody,
Houston, Texas 77010                                          A Professional Corporation
(713) 795-6000 Telephone                                    401 Congress Avenue, Suite 2200
(713) 795-7444 Facsimile                                    P. O. Box 98
                                                            Austin, Texas 78767-0098
Mark A. Walker                                              (512) 480-5607 Telephone
Director of Regulatory Affairs                              (512) 472-8389 Facsimile
NRG Texas LLC
State Bar No. 20717318
1001 Congress, Suite 360
Austin, Texas 78701
(512) 473-8895 Telephone
(512) 473-8712 Facsimile                                    By: ~2;Id~(r
                                                                 Robert J. Hearon, Jr.


                        ATTORNEYS FOR TEXAS GENCO LLC




                                                       21
                             CERTIFICATE OF SERVICE

          I hereby certify that the foregoing document was served on this 24th day of
March, 2006, by certified mail, retu receipt requested on the following counsel of
record:

Nathan M. Bigbee                               Chrs Reeder
John R. Hulme                                  Brown McCarroll
Elizabeth B. Sterling                          1 1 1 Congress, Suite 1400
Assistant Attorney General                     Austin, Texas 78701
Natual Resources Division
P.O. Box 12548, Capitol Station                Richard P. Noland
Austin, Texas 78711-2548                       Sutherland Asbil & Brennan, L.L.P.
                                               Austin Centre
David C. Duggins                               701 Brazos Street, Suite 1040
Clark, Thomas & Winters                        Austin, Texas 78701-2559
A Professional Corporation
P.O. Box 1148                                  Robert A. Rima
J\ustin, Texas 78767                           Law Office of Robert A. Rima
                                               8240 N. MoPac Expressway, Suite 130
                                               Austin, Texas 78759




                                                 ri E2il~.ÇJ r
                                               Robert J. Hearon, Jr.




                                                                            639646vI3/24/2006




                                          22

				
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