United States: Massachusetts Case First Criminal Prosecution For Violating FERC's Anti-Manipulation Rule

On March 30, 2016, the United States Attorney's Office for the District of Massachusetts ("USAO") filed an Information charging Power Plant Management Services LLC ("PPMS") with felonies of conspiring to violate and violating the Federal Energy Regulatory Commission's ("FERC") prohibition of energy market manipulation ("the Anti-Manipulation Rule").  The Information alleged that PPMS violated the Anti-Manipulation Rule by implementing a scheme to conceal generator maintenance work and associated outages from ISO New England, Inc. ("ISO-NE"), a FERC-regulated wholesale market operator.  The USAO simultaneously filed a plea agreement in which PPMS agreed to plead guilty to the charges, pay a fine of $500,000 and to make $250,000 in community service payments.  On the same day the USAO brought criminal charges, FERC approved a civil settlement with PPMS resolving FERC's investigation of the same conduct.  This case is significant because it reflects the first time a party has been criminally charged with violating FERC's Anti-Manipulation Rule, rendering potential criminal liability for FERC market conduct no longer merely a theoretical risk.

FERC's Investigation and Settlement

FERC initiated an investigation of PPMS and Berkshire Power Company LLC ("Berkshire") in June 2014, following a referral from the USAO.  Berkshire owns an approximately 245 MW natural gas-fired, combined-cycle generating facility in Agawam, Massachusetts ("the Plant").  During the relevant time (January 2008 through March 2011), Berkshire hired PPMS to provide project management and administrative services at the Plant.  PPMS hired a Projects General Manager for the Plant who, before joining PPMS, served in numerous high-level roles at the Plant and had served as Berkshire's representative in various capacities related to the Plant. Beginning in 2009, PPMS hired a third-party company to provide operations and maintenance services at the Plant.  All of the employees at the Plant except the Projects General Manager then became employees of the third-party company.  Plant employees viewed the Projects General Manager as the ultimate decision maker at the Plant.

In the investigation, FERC's Office of Enforcement ("OE") determined that Berkshire and PPMS violated the Anti-Manipulation Rule by engaging in a fraudulent scheme to perform unreported maintenance work and to conceal that work and associated outages from ISO-NE, which was paying Berkshire capacity payments for being available to generate electricity when needed.  FERC found that the Projects General Manager for the Plant directed and implemented the scheme, continuing it even after a third-party plant manager confronted him and informed him that his actions likely were illegal.  OE found that as part of the scheme, the Projects General Manager instructed employees to submit incorrect generator availability data to ISO-NE.  OE also found that the Projects General Manger instructed employees to misrepresent the Plant's availability to ISO-NE in response to dispatch instructions, falsely asserting, if necessary, that the Plant had experienced unanticipated problems during start-up.  OE found that there were at least six instances in which employees of the third-party company, acting pursuant to the Projects General Manager's instructions, falsely represented to ISO-NE in response to dispatches that the Plant was starting up or was able to start up when it was, in fact, unavailable.  OE determined that in total, Berkshire failed to report at least 16 separate periods of significant maintenance-related outages between January 2008 and March 2011, when the Projects General Manager—who has since passed away—was removed from his position at the Plant due to the discovery of potential violations of federal and state environmental laws. 

OE also found that Berkshire violated Sections 35.41(a) and (b) of FERC's regulations, which require, among other things, that "sellers" comply with Commission rules and market rules when operating units and scheduling outages, and not provide the Commission or grid operators with misleading or inaccurate information.  PPMS was not a "seller" during the relevant time and thus, unlike Berkshire, was not subject to these specific regulations.  In addition, FERC found that Berkshire's conduct violated ISO-NE tariff provisions FERC Reliability Standards.

To resolve the matter with FERC, PPMS and Berkshire agreed to pay a civil penalty of $2 million (for which they are jointly and severally liable) for their joint violations of the Anti-Manipulation Rule and for Berkshire's violations of ISO-NE's tariff and Sections 35.41(a) and (b) of the Commission's regulations.  Berkshire also agreed to disgorge $1,012,563 (based on revenues received from ISO-NE when the Plant was not in fact available) and to pay an additional $30,000 fine for violating FERC-approved Reliability Standards. 

Information and Plea Agreement

In the Information, the USAO charged PPMS with the felonies of conspiring to violate and violating the Anti-Manipulation Rule, as well as certain environmental violations.  In the simultaneously-filed plea agreement, PPMS agreed to plead guilty to the charges, pay a $500,000 fine and make $250,000 in community service payments.  The plea agreement included as an exhibit PPMS and Berkshire's FERC settlement.  A hearing on the matter has not yet been scheduled.

The USAO did not charge Berkshire with violating the Anti-Manipulation Rule, although Berkshire was charged with environmental violations.  As with PPMS, on March 30, 2016, the USAO simultaneously filed an Information and plea agreement concerning Berkshire. 

Implications of the Case

FERC has aggressively enforced its Anti-Manipulation Rule for several years, bringing enforcement actions against financial institutions, power marketers and other energy market participants for allegedly manipulating wholesale electricity and natural gas markets.  While FERC has assessed substantial civil penalties (including nine-figure fines), such cases have not previously resulted in criminal liability.  The PPMS case, therefore, is a game changer, highlighting the potential for criminal enforcement of FERC's Anti-Manipulation Rule.

That said, we do not expect criminal enforcement of the Anti-Manipulation Rule to become the "new normal."  FERC initiated its investigation of PPMS and Berkshire following a referral from the USAO.  Thus, unlike with most FERC investigations, the USAO was involved in this matter from the beginning.  Most FERC investigations, on the other hand, arise from sources such as market monitor referrals and hotline tips, or through FERC's internal market surveillance program.   While FERC itself can refer matters to criminal authorities, we expect that FERC would do so only in limited circumstances.

While we do not expect criminal prosecutions for Anti-Manipulation Rule violations to become the norm, we also do not think the PPMS case will be the last.  Market participants, therefore, must understand and account for the potential for criminal liability, particularly when facing a FERC investigation or enforcement action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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