14 February 2016

Energy Enforcement Update

With the passing of Justice Scalia, we wonder how a revamped Supreme Court will approach FERC’s anti-manipulation authority.  Scalia rendered notable dissents in Oneok, Inc. v. Learjet and FERC v. EPSA, which speak to the role of FERC.  The Commission’s anti-manipulation authority will one day come before the Supreme Court – the Court’s composition then will be interesting to see vis-à-vis FERC’s enforcement power.

This week’s enforcement update covers Lincoln Paper, and FERC’s stats on enforcement from the Commission’s annual budget request and performance report.

Lincoln Paper and FERC file Joint Status Report.  On February 9, Lincoln Paper and FERC filed a Joint Status Report in the District of Massachusetts regarding Lincoln Paper’s ongoing bankruptcy proceeding.  Lincoln Paper filed a bankruptcy petition in Maine in September 2015.  On October 27, 2015, FERC filed a proof of claim against Lincoln in the amount of $5,379,016, the amount set forth in FERC’s August 29, 2013 civil penalty order.

Whether Lincoln’s bankruptcy filing presents a bar to the FERC enforcement case moving forward was discussed during a status conference before the Bankruptcy Court on February 5.  During the conference, the Bankruptcy Court suggested that the parties agree on a briefing schedule to address the applicability of the automatic stay.  The agreed briefing schedule is contained in the Joint Status Report, and a hearing before the Bankruptcy Court will likely take place the week of March 28.  FERC and Lincoln will submit another status report to the District of Massachusetts no later than the second business day after the Bankruptcy Court rules on the stay issue.

According to our colleague David Kronenberg, “With regard to the district court proceeding in Massachusetts, this likely is not stayed by Lincoln’s bankruptcy stay because it falls under the police power exception set forth in Bankruptcy Code section 362(b)(4).  In applying this exception, courts review whether the government is acting pursuant to its police and regulatory power, in which case the exception will be applied, or whether the government is merely protecting its status as a creditor, in which case the exception will not apply.  Here, FERC assessed penalties against Lincoln for its alleged violation of FERC’s anti-manipulation rules, which is an exercise of FERC’s regulatory power.  Even though FERC is seeking in the district court civil penalties and disgorgement, rather than an injunction against Lincoln, this is probably sufficient to fall within the police power exception in 362(b)(4).”

The Joint Status Report also reflects that Lincoln Paper does not object if the district court moves forward with the related action against Richard Silkman and Competitive Energy Services (CES).

Silkman and CES proceeding continues in district court.   On February 3, Silkman and CES withdrew their motion for judgment on the pleadings, given the Supreme Court’s decision in the FERC v. EPSA demand response case.  On February 9, FERC filed a response to the Silkman/CES motion to continue the hearing in the Massachusetts district court.  FERC requests that (1) the Silkman/CES case be allowed to move forward separate and apart from the parallel Lincoln case due to the delay in that matter related to issues before the Bankruptcy Court, (2) the district court not schedule a second motions hearing related to the ripe motions currently pending, and (3) in the alternative, if the court is inclined to schedule a motions hearing in this matter, that the motions hearing be scheduled on a date as soon after February 24, 2016 as possible.

On February 10, Judge Woodlock issued an order cancelling the hearing scheduled for February 24, in light of the withdrawal of the motion for judgment on the pleadings.  Judge Woodlock will consider the outstanding motion to dismiss without further hearing at this time.

FERC submits FY 2017 Congressional Performance Budget Request and FY 2015 Annual Performance Report.  On February 9, FERC submitted its FY 2017 Congressional Performance Budget Request and FY 2015 Annual Performance Report.  In the Report, FERC states that in FY 2015, Commission staff issued four notices of alleged violations, opened 19 new investigations, and brought 22 investigations to closure.  The report notes that Commission staff continues the use of algorithmic screening methods to identify inappropriate market participant activity.  According to the report:  “Commission staff is using natural gas market modeling software to aid in uncovering market participant behavior that may be of interest from an enforcement and market efficiency standpoint and is seeking to do the same with electric market software that will also aid the Commission in understanding the interplay between the gas and electric markets. The models will help the Commission achieve the next level of providing robust market oversight and surveillance.”  The report also states that during FY 2016, Commission staff will meet with natural gas pipelines and shippers to discuss liquidity underlying price indices used in natural gas pipeline contracts.

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