Sidley Energy Enforcement Update
This Sidley Update addresses the following:
- District court judge finds that FERC may not pursue joint and several liability and disgorgement in Coaltrain case – FERC seeks interlocutory appeal.
- FERC Report on Enforcement highlights increased enforcement activity in 2021.
- FERC approves settlement between Enforcement staff and Golden Spread.
- FERC orders penalties against GreenHat Energy, LLC and individuals.
- DOJ and CFTC charge Puerto Rico resident and his firm for misappropriation of nonpublic information and fictitious trading.
District court judge finds that FERC may not pursue joint and several liability and disgorgement in Coaltrain case. On November 29, 2021, Judge Michael H. Watson of the U.S. District Court for the Southern District of Ohio issued an order ruling the district court lacked the jurisdiction to review an award issued pursuant to Section 309 of the Federal Power Act seeking disgorgement or joint and several liability in the Federal Energy Regulatory Commission (FERC)’s enforcement case against Coaltrain and five individual defendants. And on Friday, December 10, 2021, FERC moved to certify an interlocutory appeal. As you may recall, FERC issued an order assessing civil penalties and disgorgement against Coaltrain, which FERC sought to impose jointly and severally on Coaltrain’s individual owners. District Court Judge Watson ruled that FERC may not pursue those remedies in the district court action against Coaltrain and the individuals. Under the Federal Power Act, if a person violates a provision of either subchapter I or subchapter II (including FERC’s anti-manipulation authority), FERC may impose a civil penalty and trigger the enforcement procedures outlined in 16 U.S.C. § 823b. According to Judge Watson’s order, “Neither disgorgement nor joint and several liability are civil penalties. . . . Thus, this Court may not enforce a disgorgement award under its 16 U.S.C. § 823b authority. Similarly, an award seeking joint and several liability is outside this Court’s jurisdiction.” Notably, Judge Watson ruled that Congress limited the district courts’ power when reviewing FERC orders to civil liabilities, so the court declined to extend its powers to craft remedies beyond the borders Congress drew for these types of cases. Stayed tuned as FERC seeks review in the Court of Appeals. Sidley represents Coaltrain in this proceeding.
FERC Report on Enforcement highlights increased enforcement activity in 2021. On November 18, 2021, FERC’s Office of Enforcement released its 2021 Report on Enforcement. The 2021 Report on Enforcement highlighted FERC Enforcement staff’s continued focus on fraud and market manipulation, serious violations of Reliability Standards, anticompetitive conduct, threats to the nation’s energy infrastructure and associated effects on the environment and surrounding communities, and conduct that threatens the transparency of regulated markets.
As in previous years, the Report provides information regarding the nature of non-public enforcement activities, such as self-reported violations, surveillance inquiries, and investigations that were closed without public enforcement action. Reviewing the investigations closed with no action, as well as the report from Division of Analytics and Surveillance inquiries closed with no referral, provides insight to the issues that trigger review and how FERC’s Office of Enforcement perceives market conduct.
Highlights of the 2021 Report on Enforcement include:
- Division of Investigation (DOI): In FY2021, DOI staff opened 12 new investigations, as compared with six investigations opened in FY2020. In addition to cases closed through settlement, staff closed four investigations without further action in FY2021, as compared to eight investigations closed without further action in FY2020. DOI represented FERC in four litigation matters in United States district courts, one of which has now been settled. There is also one matter on appeal from FERC final order pending in the United States Court of Appeals for the Fifth Circuit. DOI staff negotiated eight settlements that resulted in approximately US$4.6 million in civil penalties and US$1.8 million in disgorgement. Six of those settlements included compliance monitoring requirements. There was also a FERC-approved settlement of one federal district court litigation matter for US$166,841.13 in disgorgement and US$1,308,158.87 in civil penalties.
- Division of Analytics and Surveillance (DAS): DAS staff worked on approximately 40 investigations and 15 other matters involving inquiries or litigation. Natural gas surveillance screens produced approximately 13,603 screen trips, which resulted in 34 natural gas surveillance inquiries and two referrals to DOI for investigation. Electric surveillance screens produced approximately 470,832 screen trips which resulted in 31 electric surveillance inquiries and two referrals to DOI for investigation. Each month, DAS staff ran and reviewed 96 electric surveillance screens; monthly, hourly, and intra-hour sub-screens, and reports for more than 41,000 hubs and pricing nodes within the organized wholesale electricity markets.
- Division of Audits and Accounting (DAA): DAA staff completed 12 audits resulting in 64 findings of noncompliance and 250 recommendations for corrective action, the majority of which were implemented within six months. They also directed US$18.5 million in refunds and other recoveries. In addition, DAA advised and acted on 432 proceedings at FERC covering various accounting matters with cost-of-service rate implications.
With the issuance of the 2021 Report on Enforcement, FERC Chairman Richard Glick stated: “When I became Chairman of the Commission last January, one of my top priorities was to ensure vigorous oversight and enforcement of the Commission-regulated markets. I cannot stress this enough. We must deter market manipulation and protect consumers through vigorous enforcement of Commission and market rules.”
FERC approves settlement between Enforcement Staff and Golden Spread. On November 18, 2021, FERC approved a settlement between FERC’s Office of Enforcement and Golden Spread Electric Cooperative, Inc. This settlement resolved the Enforcement staff’s claims that Golden Spread manipulated the market that resulted in improper extraction of make whole payments from the Southwest Power Pool (SPP). In particular, the investigation related to Golden Spread offering its Mustang Station generating unit into the SPP market in a manner that improperly targeted and increased Day-Ahead Market make whole payments received by the unit. Golden Spread neither admitted nor denied the alleged violations. Under the settlement, Golden Spread will pay a disgorgement of US$375,000, a civil penalty of US$550,000, and be subject to monitoring of its enhanced compliance program. Commissioner Danly dissented and argued that FERC is penalizing a market participant for simply maximizing its revenues under SPP’s market rules.
FERC orders penalties against GreenHat Energy, LLC and individuals. On November 5, 2021, FERC issued an order assessing civil penalties which assessed a civil penalty of US$179,600,573 against GreenHat, US$25 million against John Bartholomew, and US$25 million against Kevin Ziegenhorn, and further ordered GreenHat, Bartholomew, Ziegenhorn, and the estate of Andrew Kittell to disgorge unjust profits of US$13,072,428. FERC ruled that each of the Respondents shall be jointly and severally liable for payment of the disgorgement amount. FERC found the defendants engaged in manipulative schemes in PJM’s market for Financial Transmission Rights (FTRs). According to FERC’s allegations, GreenHat developed a strategy of purchasing FTRs with the sole objective of maximizing its purchases of FTRs while minimizing its collateral obligations to PJM, and without regard to the FTRs’ actual value, and it amassed an FTR portfolio with the intent of not paying when the obligations came due. FERC Enforcement also claimed that GreenHat made false statements to PJM in order to induce PJM to enter into a collateral agreement. In addition, FERC Enforcement alleged that GreenHat submitted inflated bids into the PJM long-term FTR auction with an intent to artificially raise the clearing price of FTRs that a third party had purchased from GreenHat and offered for sale in the auction.
Commissioner Danly dissented from FERC’s order assessing civil penalties. While Commissioner Danly remains deeply skeptical of GreenHat’s explanations, he argued that FERC Enforcement staff failed to prove its case. Specifically, Commissioner Danly asserted that two of the allegations are based on emails that are not timely nor reveal the intent of GreenHat and that PJM’s wildly inaccurate model permitted GreenHat’s FTR portfolio.
DOJ and CFTC charge Puerto Rico resident and his firm for misappropriation of nonpublic information and fictitious trading. A federal grand jury in Houston returned an indictment on December 7, 2021 charging a natural gas trader for an insider trading scheme involving natural gas futures. The Department of Justice press release and court documents explain—Peter Miller, 41, of Puerto Rico, worked as a natural gas trader for his own company, Omerta Capital LLC. Miller conspired with others to misappropriate material, nonpublic information, and to engage in fraudulent, noncompetitive trades, including prearranged trades, in natural gas futures contracts for their own personal gain. Miller and his co-conspirators caused prices to be reported, recorded, and registered on designated commodities markets that were not true, bona fide prices. The profits from these fraudulent trades were split among Miller and his co-conspirators. In four related cases, Marcus Schultz, 41, of Houston, Texas; John Ed James, 51, of Katy, Texas; Mathew Webb, 51, of Tiki Island, Texas; and Lee Tippett, 62, of Jacksonville, Florida, pleaded guilty on July 20, 2020, February 1, 2021, June 15, 2021, and August 17, 2021, respectively. Schultz pleaded guilty to a one-count information charging him with conspiracy to commit wire fraud and to violate various provisions of the Commodity Exchange Act (CEA). James pleaded guilty to a one-count information charging him with conspiracy to commit commodities fraud and wire fraud. Webb pleaded guilty to a one-count information charging him with conspiracy to commit commodities fraud and wire fraud and to violate various provisions of the CEA. Tippett pleaded guilty to a one-count information charging him with conspiracy to commit commodities fraud and honest services wire fraud. The Commodity Futures Trading Commission (CFTC) also announced its civil action against Miller and Omerta Capital. CFTC’s complaint charges the defendants for receiving tipped confidential block trade order information belonging to an energy company from a trader at that company, and in turn trading on the basis of this information, including entering into non-arm’s–length, fictitious block trades in natural gas futures on the basis of this information, in violation of the CEA and CFTC regulations.