This week’s enforcement update includes rulings in the Lincoln Paper/Silkman demand response proceeding and the spoofing case against Michael Coscia, as well as filings in the TOTAL and Powhatan/Chen proceedings in federal district court.
Also, on April 29 in Houston, we will host a special enforcement roundtable event about developments in California from the recent multi-month leak at Aliso Canyon gas storage, together Dr. Shaun Ledgerwood and Matt O’Loughlin of The Brattle Group (details below):
Judge denies Lincoln Paper and Silkman motions to dismiss, and transfers case to Maine. On April 11, Judge Woodlock denied the pending Lincoln Paper and Silkman motions to dismiss and transferred the cases to the U.S. District Court for the District of Maine. In transferring the cases, Judge Woodlock noted that “the center of gravity for these cases is business activity in the District of Maine.” In denying the motions to dismiss, Judge Woodlock addressed de novo review, the statute of limitations, fair notice and due process, the application of FERC’s anti-manipulation rule to individuals, and other relevant arguments raised by the respondents.
Commenting on de novo review in the context of claims about waiver of certain defenses, Judge Woodlock asserted that “de novo review may allow for the evaluation of evidence that was not a part of the agency administrative record and may or may not require other trial-like proceedings.” According to Judge Woodlock, 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. Nonetheless, Judge Woodlock found that the respondents did not waive the relevant defenses in this case.
With respect to the statute of limitations, Judge Woodlock ruled that by initiating formal proceedings through the Order to Show Cause within five years of the alleged violation, FERC complied with the relevant statute of limitations. After those proceedings reached their conclusions, FERC’s claims for the enforcement of civil penalties in federal court ripened. FERC then had five years within which to bring the enforcement actions in federal court.
In response to the respondents’ fair notice arguments, Judge Woodlock found no due process violation. According to Judge Woodlock, FERC’s anti-manipulation rule is not void for vagueness if, given the information available to it, Lincoln Paper should have been aware that its conduct — reducing the usage of its on-site generator to below normal levels so as to create a demand response baseline energy consumption level above normal operating conditions — could be deemed fraudulent. Although recognizing that the rule does not provide a precise delineation of the outer boundaries of prohibited conduct, Judge Woodlock ruled that Lincoln Paper knew or should have known that its conduct was proscribed.
Judge Woodlock also found that FERC’s interpretation that Section 222 of the Federal Power Act applies to natural persons to be reasonable. Under Chevron deference, Judge Woodlock accepted FERC’s interpretation that “entity” includes individuals, and thus found that Mr. Silkman was not exculpated from liability by virtue of being a natural person.
On April 12, FERC filed notices of supplemental authority containing Judge Woodlock’s order in its pending enforcement cases in district court against Barclays, Powhatan/Chen, City Power and Maxim Power. FERC Enforcement also filed that decision as supplemental authority in our Coaltrain case.
FERC and Lincoln Paper file status reports in district court proceeding. Previously, on April 6, FERC filed a status report in the District of Massachusetts regarding Lincoln Paper’s ongoing bankruptcy proceeding. The status report notes that the Bankruptcy Court granted FERC’s motion for a declaratory order that the automatic stay does not apply to FERC’s district court enforcement case. The Bankruptcy Court held that FERC’s enforcement case falls within the “regulatory power” exception to the automatic stay, so the district court enforcement case is not stayed under the Bankruptcy Code.
The same day, Lincoln Paper filed a response to the status report. According to Lincoln Paper, FERC refused to file a joint status report because it rejected inclusion of the following language, which details an express limitation the Bankruptcy Court orally placed on the order:
In issuing the order, the Bankruptcy Court indicated that while the order granted FERC the relief it requested, that relief “is limited,” and that “if FERC seeks further relief, for example if it wishes to pursue an action pursuant to § 823b(d)(5), it must, as it conceded at the hearing last week, seek further relief from the stay.” … Thus, the automatic stay provision of the Bankruptcy Code continues to apply to any district court collection action under Section 31(d)(5) of the Federal Power Act, 16 U.S.C. § 823(b)(d)(5), and FERC would need to seek relief in bankruptcy court from the automatic stay provision of code should a collection action ever occur.
Judge denies Coscia motion for acquittal and new trial. On April 6, Judge Harry D. Leinenweber of the U.S. District Court for the Northern District of Illinois issued an order denying Michael Coscia’s motion for acquittal and for a new trial. As you may recall, in November 2015, a jury convicted Coscia on six counts of commodities fraud and six counts of spoofing. Coscia faces a maximum sentence of 25 years in prison and a $250,000 fine for each count of commodities fraud, and a maximum sentence of 10 years in prison and a $1 million fine for each count of spoofing. In denying the motion, the judge found that the government introduced ample evidence from which a reasonable jury could find intent to deceive. The judge also rejected Coscia’s argument that the criminal spoofing statute is void for vagueness.
FERC moves to dismiss TOTAL complaint. On April 5, FERC filed a motion to dismiss the complaint filed TOTAL Gas & Power North America, Inc. (“TGPNA”) and two individual traders seeking declaratory relief with a U.S. district court in Texas. TGPNA asked the court to issue a declaratory judgment to prevent FERC from pursuing its enforcement action against TGPNA in a hearing before an administrative law judge at FERC. The motion to dismiss argues that the court lacks subject matter jurisdiction because Section 19(a) of the Natural Gas Act (15 U.S.C. § 717r) vests exclusive jurisdiction in the courts of appeals to review FERC’s penalty assessment orders. FERC also argues that binding Fifth Circuit precedent holds that in a Natural Gas Act enforcement proceeding, there is no case or controversy ripe for judicial resolution unless and until FERC determines that a violation occurred and assesses a penalty, which has not happened here.
In addition to arguing that the district court lacks jurisdiction, FERC argues that the complaint lacks any allegations establishing venue in a U.S. District Court for the Western District of Texas. Finally, FERC asks the court to decline to exercise its discretion to hear the declaratory judgment action.
On the same day, FERC also filed an opposition to TGPNA’s request for expedited treatment of the complaint. FERC requests that the court reject TGPNA’s attempt to short-circuit the ordinary course of civil litigation. According to FERC, the court should adjudicate FERC’s threshold defenses in the motion to dismiss before considering TGPNA’s claims on the merits.
Powhatan/Chen file rebuttal to FERC opposition to motion for leave to file supplemental material. On April 4, counsel for Powhatan/Chen filed a rebuttal to FERC’s opposition to their motion for leave to file supplemental material in the pending proceeding before Judge M. Hannah Lauck of the Eastern District of Virginia. As you may recall, the supplemental material is a brief that FERC filed with the Fifth Circuit in 2009 discussing the procedures under Section 31(d)(3) of the Federal Power Act involving the de novo district court review procedures, in which FERC states that Section 31(d)(3) “requires the immediate assessment of a civil penalty without additional agency procedures.”
In their rebuttal, Powhatan/Chen argue that FERC was better positioned to bring its own prior brief to the court’s attention as a “FERC statement” that “shed[s] light” on the interpretation of the statute (one of the questions posed by Judge Lauck). The defendants also argue that FERC’s prior brief directly addresses whether FERC has authority to inject “additional agency procedures” between issuance of a notice and issuance of an order assessing civil penalties. Finally, the rebuttal argues that FERC cannot use its extra-statutory show cause process as a basis for curtailing the defendants’ statutory right to de novo district court review under the Federal Power Act.
FERC Staff files reply to Coaltrain and the individual respondents’ answers to FERC Order to Show Cause. On April 1, FERC Enforcement Staff filed a reply to Coaltrain and the individual respondents’ answers to FERC’s Order to Show Cause in Docket No. IN16-4.
Sidley to host enforcement roundtable on April 29 in Houston. On April 29, we will host a special enforcement roundtable event about developments in California from the recent multi-month leak at Aliso Canyon gas storage, together with Dr. Shaun Ledgerwood and Matt O’Loughlin of The Brattle Group. CAISO and California regulators are currently considering various proposals for both the electricity and natural gas markets in response to the limited operations of the Aliso Canyon facility. CAISO’s straw proposal for how to grapple with this is due tomorrow – watch this link.
We see potential compliance and enforcement issues arising from this situation, and will convene this client roundtable in Houston to review. The event will take place on Friday, April 29 from 11:30 a.m. to 1 p.m. at our Houston offices (Wells Fargo Plaza, 1000 Louisiana Street). Lunch will be provided. We plan to host a similar roundtable in New York in May. Please let us know if you are interested in joining us for this event.