United States: Virginia District Court Orders Discovery In FERC Enforcement Case Against Powhatan

Last Updated: January 9 2018
Article by Russell Kooistra and Christopher Zentz

On December 28, 2017, the U.S. District Court for the Eastern District of Virginia ("District Court") held that Powhatan Energy Fund LLC, Dr. Houlian Chen, and two funds owned by Dr. Chen (collectively, "Respondents") are entitled to a full civil trial in FERC's action to enforce penalties against Respondents for allegedly manipulating electricity markets.  Notably, the District Court held that a plenary civil trial was required because Respondents elected to forego a formal hearing before a FERC Administrative Law Judge ("ALJ").  In lieu of a hearing before a FERC ALJ, Respondents instead elected to have FERC assess penalties upon finding a violation occurred, based on the investigative record. Thus, according to the District Court, a proper administrative record was never developed and Respondents were never permitted an opportunity to conduct their own independent discovery.

In August 2013, FERC Office of Enforcement ("OE") Staff issued its preliminary findings that Respondents violated the Federal Power Act ("FPA") and FERC's Anti-Manipulation Rule.  Specifically, OE Staff alleged that Respondents manipulated PJM Interconnection, L.L.C.'s ("PJM") energy markets by creating a scheme to receive excess Marginal Loss Surplus Allocation ("MLSA") payments from PJM by artificially creating round-trip Up-To Congestion transactions solely to reserve transmission service and collect the corresponding MLSA payments.

In December 2014, FERC issued an Order to Show Cause directing Respondents to demonstrate why they should not be penalized for manipulating PJM's energy markets.  As required by the FPA, FERC's Order to Show Cause also ordered Respondents to elect either (1) a formal hearing before an ALJ prior to the assessment of a penalty ("Default Option") or (2) to have FERC "promptly" assess penalties upon finding a violation had occurred ("Alternate Option").  Under the Default Option, FERC assesses a penalty after the ALJ determines a violation has occurred, based on the record formed during a formal hearing.  Thereafter, the person against whom the penalty is assessed can "institute an action" in the appropriate U.S. court of appeals for review of FERC's order.  Regarding the Alternate Option, the alleged wrongdoer must notify FERC within 30 days of receiving the Order to Show Cause that it elects to have the Alternate Option apply.  Under the Alternate Option, FERC "promptly" issues an order assessing the penalty without a formal hearing before an ALJ.  If the person against whom the penalty is assessed fails to pay the penalty within 60 days, FERC must "institute an action" in the appropriate U.S. district court for an order affirming the penalties, and the district court has "authority to review de novo the law and the facts involved."

After Respondents elected the Alternate Option, FERC issued an order in May 2015 assessing a total of $30.52 million in civil penalties and over $4.7 million in disgorgement against Respondents (see June 8, 2015 edition of the WER).  Subsequently, Respondents declined to pay the penalties within 60 days, and FERC filed an action in the District Court to enforce the penalties.

At the District Court, the parties disputed the scope of the District Court's review.  FERC argued that the Alternate Option under the FPA merely granted the District Court discretion to determine the appropriate procedures, but did not require a de novo trial in accordance with the Federal Rules of Civil Procedure ("FRCP") and Federal Rules of Evidence ("FRE").  Thus, FERC argued that the District Court was not required to order full discovery, but could permit additional discovery on discrete issues if necessary.  By contrast, Respondents argued that the Alternate Option does not result in a complete administrative record, and thus a de novo review of law and facts required the District Court to develop a full record.

In its opinion, the District Court held that its de novo review required an ordinary civil action, including typical discovery, pursuant to the FRCP and FRE.  First, the District Court reasoned that Congress intended the de novo review to be a plenary trial because important differences between the Alternate Option and Default Option suggest that the Alternate Option is similar to a typical civil action in district court.  Second, the District Court reasoned that, under the Alternate Option, there is no ordinary administrative record created at FERC, and thus, there is no consistent standard to judge the law and facts involved.  Lastly, the District Court found that a potential for due process violations exists if full discovery is not permitted because Respondents were not provided an opportunity to conduct their own independent discovery.

The District Court's decision marks the sixth time that a U.S. district court has ruled that a respondent is entitled to a plenary trial upon electing the Alternate Option.  Most recently, the U.S. District Court for the Eastern District of California has ordered discovery in FERC's cases against Barclays Bank PLC, et al. (see November 14, 2017 edition of the WER) and Etracom LLC (see March 20, 2017 edition of the WER).

A copy of the opinion is available  here.

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Authors
Russell Kooistra
Christopher Zentz
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