United States District Court, D. Massachusetts
MEMORANDUM AND ORDER REGARDING MOTIONS TO DISMISS
DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE.
Two petitions by the Federal Energy Commission (“FERC”) seeking affirmance of two of its orders assessing civil penalties have been pending before me. One petition (Case No. 13-cv-13056) seeks affirmance of a civil penalty against Lincoln Paper and Tissue Company (“Lincoln”). The second (Case No. 13-cv-13054) seeks affirmance of a civil penalty against Richard Silkman and Competitive Energy Services, LLC (“CES”). Both penalties relate to participation by the respondents in the “Day-Ahead Load Response Program” (“DALRP”), a program administered by ISO New England (“ISO-NE”), a delegate of FERC, which is designed to provide energy users with an incentive to reduce their electrical usage during times of increased demand and higher prices.
The respondents seek to have the cases dismissed in motion practice turning on the pleadings. I have kept the motions under advisement pending a Supreme Court decision that would be dispositive of the jurisdictional issue in this case. Meanwhile, the respondent Lincoln filed for bankruptcy. Now that the Supreme Court has provided guidance and the Maine Bankruptcy Court has stated that the enforcement dimension to the Lincoln case is not subject to the automatic stay, I act through this Memorandum to deny the respondents’ motions. In a separate Memorandum and Order issued today, I will transfer the cases to the United States District Court for the District of Maine for further proceedings.
A. Relevant Entities
Petitioner FERC is an administrative agency of the United States, organized pursuant to the Federal Power Act, 16 U.S.C. § 791a, et seq. Lincoln Compl. ¶ 13.
Respondent Lincoln is a limited liability company organized under the laws of Maine with a principal place of business in Maine. Lincoln Compl. ¶ 13.
Respondent CES is a limited liability company organized under the laws of Maine with a principal place of business in Maine. Silkman Compl. ¶ 15. Respondent Silkman is an employee and managing member of CES. Silkman Compl. ¶ 14.
ISO-NE is an independent, non-profit, Regional Transmission Organization (“RTO”) tasked with ensuring the day-to-day reliable operation of New England’s bulk electric energy generation and transmission system. Lincoln Compl. ¶ 2.
B. The Day-Ahead Load Response Program
As part of its operations, ISO-NE administers load response programs that encourage large electric energy users to reduce their consumption or electric “load” during periods when the bulk electric system is experiencing peak demand. The reduction in peak demand reduces stress on the electric grid and can also serve to reduce electricity prices. Lincoln Compl. ¶ 3. The specific program at issue in this matter is the Day-Ahead Load Response Program (“DALRP”). As FERC describes the DALRP, participants bid to reduce their energy consumption below their normal usage rate. If their bid was accepted, the participant would be compensated for the reduction in their electricity consumption below normal levels. Lincoln Compl. ¶¶ 26, 30. See also FERC v. Elec. Power Supply Ass'n, No. 14-840, 2016 WL 280888 (U.S. Jan. 25, 2016) (describing demand response programs like the DALRP).
In order to calculate the reduction in a DALRP participant’s electricity consumption, ISO-NE must establish a baseline level of electricity consumption. To do so, ISO-NE measures the average of the participant’s use of electricity from the grid in the hours from 7:00 am through 6:00 pm during the five days following the participant’s approval for participation in DALRP, but before the entity begins reducing its demand under DALRP. The demand reduction is calculated from this baseline by subtracting the actual electrical consumption from the grid during the hours in which ISO-NE has accepted the participant’s bid. Lincoln Compl. ¶¶ 27-28.
After the initial baseline consumption level is established, it is not left static. Rather, it is updated on a rolling basis to reflect a participant’s actual load data on days when the participant either did not bid to participate in DALRP or its bid was not accepted by ISO-NE. Lincoln Compl. ¶ 29. According to FERC, this adjustment is intended to reflect any changes in a participant’s normal operations to ensure that a participant is not compensated for reductions in electrical consumption that would have occurred absent the incentives provided by DALRP. Lincoln Compl. ¶ 28. Because the rolling baseline is intended to measure the participant’s electricity consumption absent participation in DALRP, the rolling average baseline consumption calculation excludes days in which a participant’s bid into DALRP was accepted. Lincoln Compl. ¶ 29. Because of this exclusion, if a participant bid into DALRP every day, and its bid was accepted on each day, its baseline load figure would remain unchanged. Lincoln Compl. ¶ 30. A participant bids into DALRP by evaluating whether it could reduce its load on the next day and, if so, offering to reduce its consumption by a certain number of kilowatts or megawatts (“MWh”) per hour during the peak period at a certain price--between $50/MWh and $1, 000/MWh. Id.
C. Lincoln’s Participation in DALRP
Lincoln is a paper mill in Lincoln, Maine with approximately 400 employees. In 2007, when fully operational, Lincoln consumed approximately 20 MW of electricity without appreciable fluctuation from day to night. Lincoln obtained electricity from two sources: (1) its own 4 MW steam-powered turbine Westinghouse generator; and (2) purchasing approximately 16 MW of electrical energy from the grid. Lincoln Compl. ¶¶ 33, 34.
Lincoln enrolled in the DALRP in July 2007. Lincoln Compl. ¶ 35. The initial baseline for Lincoln’s electricity consumption was calculated based on its electric energy purchases on July 25, 26, 27, 30, and 31, 2007 between the hours of 7:00 a.m. and 6:00 p.m. Lincoln Compl. ¶ 37.
On those days, Lincoln curtailed the use of its on-site generator, reducing output from 4 MW to 1 MW from 7:00 a.m. to 6:00 p.m. As a result, instead of purchasing 16 MW from the grid and obtaining the remaining 4 MW from its on-site generator (its typical consumption pattern), Lincoln obtained 19 MW from the grid. Lincoln Compl. ¶ 38. Thus, Lincoln’s baseline electrical draw from the grid was higher than its typical electrical purchases for its ongoing operations.
As a result of curtailing its use of the on-site generator during the baseline setting period, Lincoln was required to purchase $10, 000.00 of additional electrical energy from the grid, despite being able to generate electricity on-site at lower cost. Lincoln Compl. ¶ 39.
Having created an inflated baseline level of electrical consumption, Lincoln next took actions to freeze its baseline at this inflated level. Lincoln Compl. ¶ 41. To accomplish this, it consistently offered the minimum bid price for reducing its electrical consumption from the grid, thereby ensuring that its bids would almost always be accepted and the rolling baseline would not reset to reflect Lincoln’s typical electrical consumption pattern. Lincoln Compl. ¶ 42. Lincoln employed a third party, Constellation NewEnergy, Inc., as its DALRP enrolling agent. In July and August of 2007, Lincoln verified with Constellation that this strategy would have the result of freezing its baseline at the inflated level. Lincoln Compl. ¶ 43.
As anticipated by Lincoln, its bids were accepted nearly every day and, as a result, Lincoln’s baseline was not updated to reflect the normal use of the on-site generator. The only occasions in which Lincoln's offers failed to clear the bidding process were when Lincoln made an error such as failing to submit an offer by the daily deadline. Lincoln Compl. ¶ 44.
Lincoln obtained revenues from the DALRP for almost every day it participated between August 1, 2007 and February 7, 2008. Lincoln Compl. ¶ 45. On the days and months that Lincoln participated in the DALRP, Lincoln ran its on-site generator at normal capacity. Lincoln Compl. ¶ 46. Thus, Lincoln did not reduce its electrical consumption from the grid below its typical consumption pattern, although it reduced its consumption from the grid as compared to the baseline period.
In November and December 2007, Lincoln replaced the Westinghouse generator with a new generator with capacity of 13.5 MW and used the new generator to produce additional energy on-site. Prior to installation, Lincoln notified Constellation that it planned on adding the new generator. On November 29, 2007, Constellation advised Lincoln via email that Lincoln’s baseline should be adjusted to reflect the greater on-site generation capacity and the reduction in normal energy consumption from the grid that would be necessary to support Lincoln’s daily operations. Lincoln Compl. ¶ 48. On January 11, 2008, Constellation sent Lincoln a follow up email asking if the new generation unit was in operation and if Lincoln would readjust its baseline. Lincoln Compl. ¶ 49. Lincoln did not respond to either the November 29, 2007 or January 11, 2008 emails.
Instead, Lincoln brought the new generator on-line and claimed the newly generated electricity as a reduction from Lincoln’s baseline level as part of its participation in the DALRP. Lincoln Compl. ¶ 50. Because Lincoln offered daily bids to participate in DALRP, the baseline remained frozen and did not adjust to reflect the additional on-site generation capacity that Lincoln employed for normal daily operations. Lincoln Compl. ¶ 47.
From July 2007 through February 2008, ISO-NE paid $445, 901.21 to Lincoln and Constellation for Lincoln’s participation in the DALRP. Of those payments, Lincoln received 85 percent, or $379, 016.03; Constellation retained the remaining amount as compensation for its work as Lincoln’s enrolling agent in the DALRP. Lincoln Compl. ¶ 52. Approximately 40 percent of these payments occurred in December and January, after Lincoln had begun using the new generator to generate additional on-site electricity. Lincoln Compl. ¶ 51.
On July 23, 2008, Constellation sent Lincoln a letter notifying Lincoln of Constellation’s support for a new proposal by ISO-NE which would modify the DALRP bidding rules and would result in “customer’s bids clearing less frequently and their baseline being adjusted more regularly.” Lincoln Compl. ¶ 53. Lincoln never responded to this letter. Lincoln Compl. ¶ 54.
D. CES’s DALRP-Related Activities
CES provides energy consulting and other services to clients throughout North America. Silkman Compl. ¶ 35. One client of CES and Mr. Silkman is Rumford Paper Company, a paper mill in Maine. Silkman Compl. ¶ 36.
As a result of their work with Rumford, Mr. Silkman and CES knew that, although Rumford was connected to the electrical grid, it typically used a large and relatively inexpensive on-site generator to meet the substantial majority of its electricity needs. Silkman Compl. ¶ 36. In the spring of 2007, Mr. Silkman approached Rumford and suggested that the paper mill enroll in DALRP. Silkman Compl. ¶ 37.
As part of this proposal, Mr. Silkman and another CES partner suggested that Rumford reduce the amount of electricity the mill generated with its on-site generator during the baseline setting period (similar to what Lincoln allegedly did) and purchase unusually large amounts of electricity from the grid - thereby inflating the DALRP baseline. Mr. Silkman knew that this would be uneconomical in the short term for Rumford because grid electricity was relatively more expensive than Rumford’s on-site generation. Silkman Compl. ¶ 42.
Mr. Silkman also understood that the scheme he proposed would not work unless Rumford’s baseline continued to reflect the mill’s abnormal curtailing of its on-site generator. He realized the continued inflation of the baseline could be accomplished by designing daily bids to ISO-NE to participate in the DALRP in a manner such that the offers were almost always guaranteed to be accepted. Mr. Silkman informed Rumford personnel that if the continuing bids were accepted, Rumford would receive payments under the DALRP for simply resuming routine operation of its on-site generator without reducing its electrical consumption from the grid. Silkman Compl. ¶ 44.
Although Rumford managers expressed concern about the scheme to Mr. Silkman and CES, explaining that it appeared they would be paid for doing nothing, Rumford authorized CES to register Rumford in the DALRP and to facilitate the scheme. Silkman Compl. ¶ 45.
CES, including Mr. Silkman, then daily communicated to ISO-NE Rumford’s availability to provide approximately 20 MW of electricity reduction. This phantom reduction was roughly equal to the amount by which Rumford curtailed its on-site generation during the baseline period. Silkman Compl. ¶ 45. CES continued the scheme by making these offers at a price that effectively guaranteed that each bid would be accepted, thereby assuring that Rumford’s baseline would remain unchanged. Silkman Compl. ¶ 45.
The scheme designed by Mr. Silkman and CES continued from late July 2007 through early February 2008. During this time, Rumford did not actually reduce its electrical consumption below the levels of its routine business activities. Silkman Compl. ¶ 47.
In January 2008, ISO-NE made a presentation notifying market participants that ISO-NE expected to make changes to the program because it had learned that some market participants had wrongly attempted to profit by intentionally establishing and then maintaining an inflated baseline. The presentation clearly described precisely the scheme designed by Mr. Silkman and CES and executed by them in conjunction with Rumford. Mr. Silkman was aware of the presentation and forwarded it to Rumford managers. Neither he nor anyone else at CES recommended that Rumford cease its participation in the DALRP. Silkman Compl. ¶ 48.
Also in January 2008, Mr. Silkman received a phone call and a letter from Constellation explaining its concerns that program participants had artificially increased their electrical usage during their baseline setting periods and warned that enrollees could be subject to sanctions if ISO-NE determined that the enrollee committed fraud to extract load response program payments. Despite these communications, Mr. Silkman, CES, and Rumford continued their involvement in the DALRP as previously. Silkman Compl. ¶ 49.
During the period of Rumford’s participation in the DALRP, ISO-NE paid $3, 336, 964.43 for load response that it contends did not occur. Those payments were shared by CES and with Mr. Silkman as the owner of CES, along with Rumford and Constellation. CES’s share was $166, 841.13, equal to 5% of the total.
II. PROCEDURAL BACKGROUND
A. FERC Proceedings Against Respondents
1. The Investigation by FERC Enforcement
On February 8, 2008, ISO-NE changed the DALRP to ensure that schemes to inflate the baseline would not be profitable. After analyzing electrical usage data, ISO-NE suspected that Lincoln and Rumford, and perhaps related entities, had committed fraud and referred them to the Commission for possible enforcement action. Lincoln Compl. ¶ 55; Silkman Compl. ¶ 50.
FERC’s Office of Enforcement (“FERC Enforcement”) commenced an investigation of Lincoln, CES, and Mr. Silkman in February 2008, obtaining and reviewing thousands of pages of documents including electrical consumption data, load response offer data, and internal emails and memoranda. FERC Enforcement also took the depositions of various witnesses, including employees of the Respondents and third-parties. Lincoln Compl. ¶ 58; Silkman Compl. ¶ 52.
Based upon this investigation, FERC Enforcement determined that Lincoln had devised and implemented a scheme to inflate the baseline electrical consumption figure used for its participation in DALRP and by doing so, violated FERC’s Anti-Manipulation Rule (discussed below). Lincoln Compl. ¶ 58. FERC Enforcement determined that CES and Mr. Silkman had violated the same rule based upon the role they played in Rumford’s similar scheme. Silkman Compl. ¶ 53.
FERC Enforcement issued letters notifying Respondents of its intent to seek action by the Commission to which Respondents provided detailed responses. FERC Enforcement provided Respondents’ responses, along with earlier correspondence, to the Commission. Lincoln Compl. ¶ 60; Silkman Compl. ¶ 54. Pursuant to Commission procedures, FERC Enforcement also provided its staff report and recommendation to the Commission. In the report, Enforcement detailed its findings and recommended that the Commission issue Orders to Show Cause to Lincoln, CES, and Mr. Silkman. Lincoln Compl. ¶ 61; Silkman Compl. ¶ 55.
2. Issuance of Orders to Show Cause
On July 17, 2012, the Commission issued an Order to Show Cause to Lincoln, attaching the Enforcement Staff Report, in which the Commission required Lincoln to show cause as to why it should not be found: (1) to have violated FPA Section 222, 16 U.S.C. § 824v, and FERC’s Anti-Manipulation Rule; (2) be assessed a civil penalty of $4, 400, 000.00; and (3) be required to disgorge $379, 016.03 in unjust profits. Lincoln Compl. ¶ 62.
That same day, the Commission issued Orders to Show Cause to CES and Mr. Silkman, in which the Commission required CES and Mr. Silkman to show cause as to why: (1) they should not be found to have violated FPA Section 222, 16 U.S.C. § 824v, and FERC’s Anti-Manipulation Rule; (2) Mr. Silkman should not be assessed a civil penalty of $1, 250, 000.00; (3) CES should not be assessed a civil penalty of $7, 500, 000.00; and (4) CES should not to be required to disgorge $166, 841.13 in unjust profits. Silkman Compl. ¶ 55.
In the Orders to Show Cause, the Commission explained that the Show Cause Order also constituted a notice of a proposed penalty, as required by Section 31 of the FPA, 16 U.S.C. § 823b(d). Respondents were required to elect either an administrative hearing before an Administrative Law Judge pursuant to FPA Section 31(d)(2), 16 U.S.C. § 823b(d)(2), or, alternatively, an immediate penalty assessment by the Commission under FPA Section 31(d)(3)(A), 16 U.S.C. § 823b(d)(3)(A). FERC explained in its notice to Lincoln:
If Respondent elects an administrative hearing before an ALJ, the Commission will issue a hearing order; if Respondent elects an immediate penalty assessment, and if the Commission finds a violation, the Commission will issue an order assessing a penalty. If such penalty is not paid within 60 days of assessment, the Commission will commence an action in a United States district court for an order ...