United States: U.S. District Court For Massachusetts Denies Motions To Dismiss FERC Penalty Enforcement Actions And Affirms Individual's Potential Personal Liability For Penalty Under FERC's Anti-Manipulation Rule

On April 11, 2016, the U.S. District Court for the District of Massachusetts issued an opinion denying motions filed by Lincoln Paper and Tissue Company ("Lincoln"), Competitive Energy Services, LLC ("CES") and Richard Silkman ("Mr. Silkman") seeking dismissal of two federal proceedings commenced by FERC to affirm civil penalties. FERC imposed the penalties on the three respondents for allegedly manipulating ISO-New England Inc.'s ("ISO-NE") Day-Ahead Load Response Program ("DALRP"). The court held that: (1) FERC's enforcement actions were not barred by the applicable statute of limitations; (2) FERC clearly had jurisdiction over demand-response programs such as DALRP given the Supreme Court's recent opinion so holding; (3) respondents received fair notice that their conduct was proscribed by Federal Power Act ("FPA") Section 222 and FERC's Anti-Manipulation Rule; (4) FERC plead its claims alleging fraud with the sufficient particularity required by F.R.C.P. 9(b); (5) respondents would not be liable were they mere "aiders and abbetters," but FERC alleges they were primary violators themselves, who directly gave fraudulent information to ISO-NE; and (6) a natural person, such as Mr. Silkman, may be an "entity" subject to FPA Section 222 and FERC's Anti-Manipulation Rule and the penalties imposed thereunder. With respect to this last holding, the court becomes the second federal court to hold that a natural person can be an "entity" under FERC's Anti-Manipulation Rule and be personally liable for penalties imposed by FERC.

FERC has found that respondents manipulated DALRP by creating inflated baseline levels of electrical consumption for Lincoln and for another company, Rumford Paper Company, through reducing the energy output of onsite electric generators during the baseline setting period, taking subsequent steps to maintain the resulting inflated baseline level for drawing on the market for electricity, and collecting DALRP payments for reducing electricity consumption below the inflated baseline levels to the normal consumption levels experienced prior to DALRP. On February 8, 2008, ISO-NE changed the DALRP to ensure that such schemes to inflate the baseline would not be profitable. FERC's Office of Enforcement ("OE") commenced an investigation of respondents that same month, leading to letters notifying them of OE's intent to seek action by the Commission. FERC issued Orders to Show Cause to respondents on July 17, 2012. Respondents opted to skip an administrative hearing before a FERC ALJ and, instead, have FERC issue penalty assessments pursuant to FPA Section 31(d)(3)(A), 16 U.S.C. § 823b(d)(3)(A). On September 14, 2012, respondents submitted answers to the Show Cause Orders, to which the Office of Enforcement filed replies. After reviewing these briefs and the evidentiary record, FERC issued orders on August 29, 2013, assessing civil penalties on Lincoln, CES and Mr. Silkman of, respectively, $5.0 million, $7.5 million, and $1.25 million. Respondents failed to pay. So, pursuant to FPA Section 31(d), 16 U.S.C. § 823b, FERC filed petitions with the court seeking affirmance of its civil penalty orders against respondents.

In its April 11, 2015 opinion, the court first addressed FERC's claim that respondents had waived their statute of limitations and lack of jurisdiction defenses by failing to raise them before FERC. The court first held that such waivers generally apply to civil penalty defenses in proceedings before FERC: "as a matter of general principles and the application of the relevant FERC agency rules, defenses to a civil penalty order may be waived if a party fails to raise them in response to an Order to Show Cause issued by FERC." In reaching this conclusion, the court considered respondents' claim that this "raise-or-lose" rule can only apply where a statute or agency rule clearly mandates it. The court held that FERC's relevant rule, found in section 385.213(c)(2) of its regulations, expressly requires a party to "set forth every defense relied on," thus meeting the criterion raised by respondents, assuming its correctness. The court rejected respondents' claim that the court's exercise of de novo review made application of waiver rules inappropriate, holding that the exercise of de novo review "does not alter the basic rule that an argument may be waived by the failure to raise it ... at the time required by the agency's rules."

However, turning to the two specific defenses that FERC claimed had been waived, the court held that respondents had not waived their statute of limitations defense because, at the time they were before FERC, the statute of limitations had not run, and parties are not required to foresee and raise defenses that may accrue in the future. Turning to the lack of jurisdiction defense, the court found that two U.S. Supreme Court cases, albeit in dicta, have suggested that a defense of lack of agency jurisdiction may be raised on appeal, even if not raised below, and that the First Circuit has applied such a rule. The court therefore concluded that respondents' lack of jurisdiction over demand-response programs defense could be raised before the court, despite respondents' failure to raise it before FERC.

The court rejected respondents' statute of limitations defense on the merits. Relying heavily on a First Circuit opinion, United States v. Meyer, 808 F.2d 912 (1st Cir. 1987), the court concluded that the five-year statute of limitations set out in 28 U.S.C. § 2462 for "an action, suit or proceeding for the enforcement of any civil fine" actually applies twice under the circumstances here. FERC had five years to initiate its administrative proceeding from the time that the claim of the alleged violation first accrued, and "the agency has an additional five years in which to bring an action for enforcement of [the resulting] penalty. In other words, there are two separate sets of claims at issue here, each subject to" the five year period of limitations. The first set of claims was based on the alleged substantive violations, the second on the refusal to pay the penalty imposed by FERC within 60 days. FERC met the limitations period by issuing the Show Cause Orders in July 2012, within five years of the alleged violations, and met the second five-year limitations period by filing its petitions in federal court within five years of issuing its penalty assessment orders. In reaching this conclusion, the court rejected respondents' claim that FERC's penalty assessment orders were "akin to a prosecutorial determination" and were not the culmination of an adjudicatory proceeding. The court held that "FERC's proceeding may have been less formal and offered fewer procedural protections than some adjudications under the APA – or even the adjudication in Meyer – but it was significantly more than a prosecutorial determination." The court also held: "That the statutory scheme makes the Commission's determination only the first step in a legal process does not strip those determinations of their content and shrink them into the equivalent of a 'charging letter.' FERC did more than decide to bring suit. It conducted an adjudication."

The court rejected respondents' defense of lack of jurisdiction. It held that the Supreme Court's recent decision in F.E.R.C. v. Elec. Power Supply Ass'n, No.. 14-840, 2016 WL 280888 (U.S. Jan. 25, 2016), in which the Supreme Court held that demand response programs such as DALRP clearly fall within FERC's statutory authority under the FPA, resolved any questions about FERC's authority to operate demand response programs – and, hence, to impose penalties for the manipulation of such programs. The court concluded: "No jurisdictional challenge against this demand response-related enforcement action is available."

The court rejected the argument that FERC failed to give fair notice of what conduct it deemed unlawful. The court first noted that "fair notice" claims rest on two objectives: that a statute or related agency rule permit ordinary people or regulated entities to understand what conduct is prohibited, and, second, that the statute or rule be sufficiently clear to discourage arbitrary and discriminatory enforcement. The court next observed that the "fair notice" doctrine has "more limited scope" in the circumstances before it, because (1) potential vagueness is offset by the scienter element of "willful" conduct contained in the statute and rule at issue here, and (2) "the doctrine is applied more leniently in the sphere of economic regulation of sophisticated parties." These counter weights gained further strength here because there was available to respondents "a process for parties 'to obtain an official government answer ... before they engage[d] in potentially unlawful conduct.'" The Court found that while neither ISO-NE's Load Response Manual nor its Tariff set forth how a DALRP participant should conduct operations during the period when its baseline was set, ISO-NE's Tariff provided some relevant guidance when it explained that DALRP's incentive payments were available to participants for "a reduction in their electricity consumption ... during peak demand periods," and further explained that: "The [DALRP] is not intended to pay for load reductions that would have been scheduled in any event, such as facility shut-downs." The Court found that respondent Lincoln received more specific guidance in letters from its "enrolling agent," Constellation New Energy, which letters expressed concern that some program participants may have improperly increased their electricity usage while ISO-NE was determining their baselines, and offered to review participants' practices with them and ISO-NE to determine "whether your current actions are permissible." The court held that FERC's Anti-Manipulation Rule is not void for vagueness if, given the information available to it, a respondent should have been aware that its conduct – "reducing the usage of its on-site generator to below normal levels so as to create a DALRP baseline energy consumption level above normal operating conditions" – could be deemed fraudulent. The court further held that there was sufficient guidance available to Lincoln that, instead of being "unwary" of its alleged violation, "it was informed that the conduct was unlawful – and given an invitation to receive further guidance from either Constellation or ISO-NE." The court concluded that "Lincoln knew or should have known that its conduct was proscribed. I find no due process violation here."

The court held that FERC plead its claims with the sufficient particularity required by Federal Rule of Civil Procedure 9(b). The Court held that to satisfy Rule 9(b), the "complaint must specify the time, place and content of an alleged false representation." The court held: "Generally, FERC alleges the scheme that it believes to be fraudulent in detail. It provides the detailed timeline and factual allegations that normally are at issue in a challenge to the particularity of a pleading."

The court agreed with respondents' claim that under FPA Section 222 and FERC's Anti-Manipulation Rule, "a party that only aided and abetted the manipulations of another is not subject to liability." There is no "aider and abetter" liability under the statute and rule. The court noted that its holding was in accord with the Supreme Court's holding that there is no aider and abetter liability under section 10(b) of the Securities Exchange Act of 1934, on which FPA Section 222 and FERC's rule are based. The court held that: "in enacting Section 222 and the Anti-Manipulation Rule, Congress and FERC can be presumed to have limited the reach of these provisions to primary violators." However, the court denied dismissal of the action on this ground. It noted that "CES and Mr. Silkman may be primary violators in their own right, even if they also were aiders and abetters of fraud [by Rumford Paper Company]." Although the court held that merely "hatch[ing] the scheme" and "present[ing] it to Rumford to be executed by the latter" would be "an insufficient basis for imposing primary liability," and that "[i]t is not enough that an entity assisted or provided advice to another company in support of the latter's execution of a fraudulent scheme," here FERC makes allegations that CES and Mr. Silkman "participat[ed] in the actual execution of a fraudulent scheme." According to FERC, CES and Mr. Silkman "communicated daily to ISO-NE Rumford's availability to provide approximately 20 MW of electricity reduction." These daily bids not only resulted in incentive payments from ISO-NE, they also were necessary "to freeze the baseline at the allegedly inflated level." The petition also alleges that "CES submitted registration information to ISO-NE that fraudulently represented Rumford's load reduction capacity." The court found that FERC thus alleges that CES and Mr. Silkwood "perpetrated [the fraud] themselves by providing allegedly false statements to ISO-NE regarding their client's participation in DALRP." "These allegations," the court concluded, "would render them direct violators of FPA Section 222 and not merely aiders and abettors of another's primary violation."

Finally, the court held that FPA Section 222 applies to natural persons, such as Mr. Silkwood, and not merely to legal persons. The court noted that the proper interpretation of the word "entity" in FPA Section 222 was recently addressed – seemingly for the first time – in FERC v. Barclays Bank PLC, 105 F. Supp. 3d 1121 (E.D. Cal. 2015). The Barclays court held that "entity" was meant by Congress to include natural persons. The Barclays court based this conclusion on its findings that: (i) other enforcement provisions enacted concurrently with FPA § 222 used "entity" and "person" interchangeably; (ii) the provisions of the FPA under which FERC assessed penalties allow penalties against "any person," which indicated that Congress's statutory scheme envisaged enforcement against natural persons; (iii) and FPA § 222 was modeled after Section 10(b) of the Securities Exchange Act, which indisputably allows for actions against individuals. The Massachusetts court found that it reached the same conclusion as the Barclays court, but through a different route. The court held that "entity" was ambiguous, and in its view the statutory structure did not adequately clarify that ambiguity. Relying on the Chevron doctrine, therefore, it accepted as reasonable, and deferred to, FERC's interpretation that "entity" in FPA § 222 encompasses natural persons. Accordingly, the court held that "Mr. Silkman is not exculpated from liability under FPA § 222 by virtue of being a natural person."

The court's opinion was issued on April 11, 2016 in Civil Action Nos. 13-13054-DPW and 13-13056-DPW.

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