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Federal Energy Regulatory Commission v. Silkman

United States District Court, D. Maine

January 26, 2017

RICHARD SILKMAN, et al., Respondents.



         On July 17, 2012, the Federal Energy Regulatory Commission (FERC or Commission) issued orders to show cause to an energy consulting firm and its managing member (Respondents), requiring them to show cause why the Commission should not (1) find them in violation of section 222 of the Federal Power Act (FPA), 16 U.S.C. § 824v, and FERC's rule against energy market manipulation (the Anti-Manipulation Rule); (2) assess civil penalties against the firm and the managing member; and (3) require the firm to disgorge unjust profits.

         Pursuant to the FPA, the Respondents, upon receiving the orders to show cause, faced a choice of procedures. First, under 16 U.S.C. § 823b(d)(2), the Respondents could proceed to a hearing before an Administrative Law Judge (ALJ) and appeal any unsatisfactory decision to the Commission and, eventually, to the United States Court of Appeals in accordance with the Administrative Procedure Act (APA). Alternatively, under 16 U.S.C. § 823b(d)(3), the Respondents could bypass a hearing with an ALJ and request the Commission to make a prompt ruling on the proposed penalties. If the Commission imposed a penalty, and the Respondents failed to pay within sixty days, the Commission could institute an action in the district court for an order affirming the Commission's penalty assessment. The FPA states that, in ruling on the Commission's penalty assessment, the district court “shall have the authority to review de novo the law and the facts involved[.]”

         In this case, the Respondents opted for an immediate ruling from the Commission under § 823b(d)(3), and on August 29, 2013, the Commission issued assessment orders imposing the proposed penalties. The Respondents failed to pay the penalties within sixty days. Accordingly, the Commission filed a petition for an order affirming its assessment orders.

         In a matter of first impression in the District of Maine, this Court must determine the applicable procedures that govern the Court's de novo review of the Commission's assessment orders. After considering the compelling arguments and authorities both parties bring to bear on the issue, the Court has resisted the temptation to make a grand pronouncement about the scope of de novo review under § 823b(d)(3) and instead concludes, based on the specific circumstances of this case, that it will treat this matter as an ordinary civil action subject to the Federal Rules of Civil Procedure.

         I. BACKGROUND

         A. Procedural History

         1. Proceedings in the District of Massachusetts

         On December 2, 2013, FERC filed a petition in the District of Massachusetts for an order affirming its assessment orders. Pet. for Order Affirming FERC's Aug. 29, 2013 Orders Assessing Civil Penalties Against Richard Silkman and Competitive Energy Services, LLC (ECF No. 1) (FERC Pet.). On December 19, 2013, the Respondents filed a motion to dismiss, Resp'ts' Mot. to Dismiss (ECF No. 8), and a motion to transfer to the District of Maine. Resp'ts' Mot. to Transfer (ECF No. 9). On January 9, 2014, FERC filed oppositions to the motion to dismiss, FERC's Opp'n to Resp'ts' Mot. to Dismiss (ECF No. 18), and the motion to transfer. FERC's Opp'n to Resp'ts' Mot. to Transfer (ECF No. 19).

         On March 3, 2014, Judge Douglas Woodlock notified the parties of an initial scheduling conference and ordered the parties to submit a joint statement regarding scheduling pursuant to Massachusetts Local Rule 16.1. Notice of Scheduling Initial Scheduling Conf., Order for Joint Statement and Certifications, and Order for Elec. Filing (ECF No. 20). The parties filed their joint statement on March 25, 2014, highlighting their disagreement about the nature and scope of the applicable procedures. Joint Rep. Pursuant to Fed.R.Civ.P. 26(f) and Loc. R. 16.1 (ECF No. 22) (Joint Rep.).

         At the scheduling conference on April 3, 2014, Judge Woodlock denied the motion to transfer without prejudice and scheduled a hearing on the motion to dismiss. Elec. Clerk's Notes (ECF No. 23). Additionally, Judge Woodlock ordered initial disclosures pursuant to Federal Rule of Civil Procedure 26(a)(1) and requested additional briefing regarding how the Court should conduct a “review de novo” under § 823b(d)(3). Id. The Respondents filed a supplemental brief on procedure on May 9, 2014. Resp'ts' Suppl. Br. on Pro. (ECF No. 28) (Resp'ts' Suppl. Br.). FERC responded on June 6, 2014. FERC's Mot. for Leave to Cross-File Contours of the Case Resp., Attach. 1, FERC's Resp. to Resp'ts' Mem. Regarding Ct.'s Auth. to Review De Novo Comm'n's Orders Assessing Civ. Penalties Against Resp'ts' (ECF No. 37) (FERC's Suppl. Resp.).[1]

         On July 18, 2014, Judge Woodlock heard arguments on the motion to dismiss and the supplemental briefs on procedure, as well as additional arguments regarding transfer to the District of Maine. Elec. Clerk's Notes (ECF No. 43); Tr. of Mot. Hr'g (ECF No. 44). Following the hearing, on April 2, 2015, the Respondents filed a second supplemental brief on the applicable procedures. Resp'ts' Second Suppl. Brief on Pro. (ECF No. 52) (Resp'ts' Suppl. Br. II).

         The case was effectively stayed pending resolution of related issues in the United States Supreme Court[2] and the United States Bankruptcy Court for the District of Maine.[3] By April 5, 2016, both matters were resolved, and the proceedings continued. On April 11, 2016, Judge Woodlock denied the Respondents' motion to dismiss, FERC v. Silkman, No. 13-13054-DPW, 2016 U.S. Dist. LEXIS 48409 (D. Mass. April 11, 2016) (ECF No. 65), and transferred the cases to the District of Maine for further proceedings. FERC v. Silkman, No. 13-13054-DPW, 2016 U.S. Dist. LEXIS 48401 (D. Mass. Apr. 11, 2016) (ECF No. 66).

         2. Proceedings in the District of Maine

         On April 21, 2016, following transfer to the District of Maine, the Respondents filed an answer to FERC's petition. Defs.' Answer (ECF No. 72). That same day, the Respondents filed a motion requesting a scheduling conference and an order assigning the case to the complex track. Defs.' Mot. for Scheduling Order and Conf. (ECF No. 73) (Resp'ts' Mot.). Along with their motion, the Respondents filed a declaration from their attorney, Peter Brann, detailing the Respondents' experiences throughout the FERC investigation. Mot. for Complex Track, Attach. 1, Peter Brann Decl. (ECF No. 73) (Brann Decl.). On April 28, 2016, FERC responded. FERC's Resp. to Resp'ts' Mot. for Scheduling Order and Conf. (ECF No. 74) (FERC's Resp.). The Respondents replied on May 4, 2016. Defs.' Reply Br. in Supp. of Mot. for Scheduling Order and Conf. (ECF No. 79) (Resp'ts' Reply).

         On June 3, 2016, the Court held a scheduling conference. Minute Entry (ECF No. 84); Tr. of Proceedings (ECF No. 85). At the scheduling conference, the parties presented arguments concerning the procedures that should govern the Court's de novo review of the Commission's assessment orders. Tr. of Proceedings at 2:24-49:18. The Court ordered additional briefing from the Respondents' regarding (1) the additional documents they wish to obtain from the agency's investigative record, and (2) any additional discovery they require to present the Court with a complete record for de novo review. Id. at 46:6-47:2. The Court requested that FERC file a responsive brief to explain (1) why the Respondents are not entitled to discovery as a matter of law, and (2) why the Court should rely solely on FERC's administrative record in reviewing de novo the Commission's assessment orders. Id. at 47:25-48:7.

         The Respondents filed their discovery brief on July 8, 2016. Defs.' Br. Concerning Disc. (ECF No. 86) (Resp'ts' Disc. Br.). On July 22, 2016, the Respondents filed a supplemental brief alerting the Court to FERC v. Maxim Power Corp. No. 15-30113-MGM, 2016 U.S. Dist. LEXIS 107770 (D. Mass. July 21, 2016). Defs.' Notice of Suppl. Auth. (ECF No. 87). On July 29, 2016, FERC filed its brief in response. FERC's Opp'n to Resp'ts' Br. Concerning Disc. (ECF No. 88) (FERC's Disc. Resp.). The Respondents replied on August 8, 2016. Defs.' Reply Br. Concerning Disc. (ECF No. 89) (Resp'ts' Disc. Reply). On August 17, 2016, the Respondents filed a second supplemental brief to alert the Court to another recently-decided case, FERC v. City Power Marketing, LLC, No. 15-1428-JDB, 2016 U.S. Dist. LEXIS 105421 (D.D.C. Aug. 10, 2016). Defs.' Second Notice of Suppl. Auth. (ECF No. 90). FERC responded to the Respondents' notices of supplemental authority on August 29, 2016. FERC's Resp. to Resp'ts' Notices of Suppl. Auth. (ECF No. 93) (FERC's Resp. to Suppl. Auth.).

         B. The Parties and Relevant Entities

         FERC is an administrative agency of the United States, organized and existing pursuant to the FPA, 16 U.S.C. § 791a et seq. FERC Pet. ¶ 13. FERC's Office of Enforcement (Enforcement) “initiates and executes investigations of possible violations of the Commission's rules, orders, and regulations relating to energy market structures, activities, and participants. Office of Enforcement (OE), FERC, (last visited January 25, 2017). Based on its investigations, Enforcement may submit reports to the Commission recommending that the Commission institute administrative proceedings. FERC's Disc. Resp. at 4. Once the Commission authorizes an administrative proceeding, Enforcement's role shifts from investigator to litigator, and a “wall” goes up between the Commission and its Enforcement arm to prevent ex parte communication. Id.

         ISO-NE is an independent, non-profit organization that works to ensure the day-to-day reliable operation of New England's bulk electric energy generation and transmission system by overseeing the fair administration of the region's wholesale energy markets. FERC Pet. ¶ 2. FERC regulates the markets that ISO-NE administers. Id.

         Respondent Competitive Energy Services (CES) is a limited liability company organized under the laws of Maine with its principal place of business in Portland, Maine. Id. ¶ 15. It provides energy consulting and other services to clients throughout North America. Id. ¶ 35. Respondent Richard Silkman resides in Maine and is an employee and managing member of CES. Id. ¶ 14.

         C. Alleged Facts

         1. The Day-Ahead Load Response Program

         According to FERC, ISO-NE administers “load response programs” that encourage large electricity users to reduce the amount of electricity they consume from the grid during periods of high or peak demand. FERC Pet. ¶ 3. This reduction in consumption helps ease stress on the electric grid and can also help lower electricity prices. Id. The specific load response program at issue here is ISO-NE's Day-Ahead Load Response Program (the DALRP). Id. ¶ 4. Under this program, a participant could offer to reduce its electricity consumption by a certain amount during the peak hours the following day in exchange for payment from ISO-NE.[4] Id. If ISO-NE accepted a participant's offer, and if the participant actually reduced its consumption the following day, then the participant would receive compensation based on the amount of electricity they conserved. Id. ¶ 4.

         In order to calculate how much a participant actually reduced its electricity consumption, ISO-NE first needed to establish a baseline to reflect the amount of electricity the participant normally demanded from the grid. Id. ¶ 29. To do so, ISO-NE calculated the participant's average electricity demand between 7:00 AM and 6:00 PM over a five-day period before the participant agreed to reduce its electricity consumption. Id. ¶¶ 29-30. Once ISO-NE calculated the baseline, it was able to determine the participant's reduced demand by subtracting the actual electrical consumption from the grid during the hours in which ISO-NE accepted the participant's offer. Id. ¶ 29.

         After establishing the participant's initial baseline, ISO-NE continued to adjust the baseline on a rolling basis in order to reflect changes in a participant's normal operations over time. Id. ¶ 30. However, ISO-NE could not adjust the baseline on days when it accepted a participant's offer to reduce consumption because the participant's consumption on those days would not reflect its normal operations. Id. ¶ 31. Consequently, if ISO-NE accepted a participant's offer every day, the participant could maintain its initial baseline indefinitely. Id.

         2. Silkman and CES's Alleged Fraud

         In its Petition, FERC makes the following allegations regarding CES's and Dr. Silkman's supposed involvement in a scheme to defraud ISO-NE. According to FERC, CES and its managing member, Dr. Silkman, regularly provided energy consulting services to Rumford Paper Company (Rumford), a paper mill in Rumford, Maine. Id. ¶ 36. As a result, CES and Dr. Silkman knew that, although Rumford was connected to the electrical grid, it typically used a large, relatively inexpensive on-site generator to meet the substantial majority of its electricity needs to operate the paper mill. Id. In the spring of 2007, Dr. Silkman approached Rumford and suggested that the paper mill enroll in the DALRP. Id. ¶ 37.

         Rumford enrolled in the DALRP with assistance from an Enrolling Participant, Constellation NewEnergy, Inc. (Constellation). Id. ¶ 46. An Enrolling Participant is a third-party that helps register participants in the DALRP and arranges for ISO-NE to receive load response and meter data from the participant. Id. Additionally, an Enrolling Participant serves as a middleman, receiving payments from ISO-NE and distributing the revenue to the participant. Id.

         Dr. Silkman and another CES partner advised Rumford to reduce the amount of electricity the mill created with its generator during the initial five-day baseline calculation period and purchase unusually large amounts of more expensive replacement electricity from the grid. Id. ¶ 42. Dr. Silkman understood that this otherwise uneconomic short-term purchase of grid electricity would artificially inflate Rumford's baseline. Id. Dr. Silkman also understood that by designing daily offers to ISO-NE that were almost guaranteed to be accepted, Rumford could maintain its inflated baseline indefinitely. Id. ¶ 44. Dr. Silkman told Rumford personnel that if those bids were accepted, Rumford would receive substantial payments under the DALRP by simply resuming routine operation of its generator without reducing its electricity consumption from the grid. Id.

         Although Rumford managers expressed concern about the scheme to Dr. Silkman and CES, noting that it appeared that they would be paid for doing nothing, Rumford nevertheless authorized CES to register Rumford in the DALRP and facilitate the scheme. Id. ¶ 45. CES, including Dr. Silkman, then communicated daily with ISO-NE regarding Rumford's availability to provide approximately 20 MW of electricity reduction. Id. This phantom reduction was roughly equal to the amount by which Rumford curtailed its electricity generation during the baseline period. Id. CES continued the scheme by making offers at a price that effectively guaranteed acceptance, thereby assuring that Rumford's baseline would remain unchanged. Id.

         The scheme continued from late July 2007 through early February 2008. Id. ¶ 47. During this time, Rumford did not actually reduce electricity consumption below its normal levels. Id. Dr. Silkman and CES actively participated in the scheme and continually concealed Rumford's lack of demand reduction from ISO-NE and from Constellation, Rumford's Enrolling Participant. Id.

         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 from intentionally establishing and then maintaining an inflated baseline. Id. ¶ 48. The presentation clearly described the scheme that Dr. Silkman and CES designed and executed in conjunction with Rumford. Id. Dr. Silkman was aware of the presentation and forwarded it to Rumford managers, but neither he nor anyone else at CES recommended that Rumford cease its involvement in the scheme. Id.

         Also in January 2008, Dr. Silkman received a phone call and a letter from Constellation explaining its concern that certain program participants had artificially increased their electricity usage during their baseline periods and warned that an enrollee could be subject to sanctions if ISO-NE determined that the enrollee committed fraud to extract load response program payments. Id. ¶49. Despite these communications, Dr. Silkman, CES, and Rumford continued their involvement with the scheme. Id.

         During Rumford's participation in the DLARP, ISO-NE paid $3, 336, 964.43 for load response that it contends did not occur. Id. ¶ 51. Rumford, Constellation, and CES shared the ISO-NE payments. CES-and Dr. Silkman as a result of his employment and ownership-received $166, 841.13, or five percent of the total payments. Id.

         3. Enforcement's Investigation of Dr. Silkman and CES

         On February 8, 2008, ISO-NE altered the DALRP program to guard against baseline inflation. Id. ¶50. After analysis of electricity usage data, ISO-NE suspected that Rumford had committed fraud and referred the behavior to FERC for possible enforcement action. Id.

         Enforcement commenced an investigation of Dr. Silkman and CES in February 2008. Id. ¶ 52. During the investigation, Enforcement obtained and reviewed thousands of pages of documents, including emails, internal memoranda, and electricity consumption and load response offer data. Id. Enforcement also deposed Dr. Silkman and several third-party witnesses, including Rumford and Constellation employees. Id. Enforcement determined from its investigation that Dr. Silkman and CES devised and implemented a scheme to inflate Rumford's DALRP baseline in violation of section 222 of the FPA and the Commission's Anti-Manipulation Rule. Id. ¶ 53.

         Enforcement was unable to reach a settlement with either Dr. Silkman or CES and therefore issued letters notifying them of Enforcement's intent to seek action by the Commission. Id. ¶ 54. Dr. Silkman and CES submitted a joint 83-page response to these letters. Id. Enforcement provided this response to the Commission, along with a report detailing Enforcement's findings, and recommended that the Commission issue orders to show cause to CES and Dr. Silkman. Id.

         4. FERC Issues Orders to Show Cause

         On July 17, 2012, the Commission unanimously agreed to issue the orders to show cause to Dr. Silkman and CES. Id. ¶ 55. The orders required Dr. Silkman and CES to show cause why the Commission should not: (1) find them in violation of section 222 of the FPA, 16 U.S.C. 824v, and the Commission's Anti-Manipulation Rule; (2) assess a $1, 250, 000 civil penalty against Dr. Silkman; (3) assess a $7, 500, 000 civil penalty against CES; and (4) require CES to disgorge $166, 841.13 in unjust profits. Id. ¶ 55.

         The orders also explained that Dr. Silkman and CES were required to elect either an administrative hearing before an ALJ pursuant to 16 U.S.C. § 823b(d)(2) or an immediate ruling by the Commission under 16 U.S.C. § 823b(d)(3). Id. ¶ 56. As FERC explained to Dr. Silkman and CES in the orders to show cause:

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 affirming the penalty, in which the district court may review the assessment of the civil penalty de novo.

FERC Pet., Attach. 5, Order to Show Cause and Notice of Proposed Penalty at 3-4 (ECF No. 1); FERC Pet., Attach. 6, Order to Show Cause and Notice of Proposed Penalty at 3-4 (ECF No. 1). On July 27, 2012, CES and Dr. Silkman requested an immediate penalty assessment by the Commission under § 823b(d)(3). FERC Pet. ¶ 56.

         On September 14, 2012, Dr. Silkman and CES submitted a joint answer to the orders to show cause. Id. ¶ 58. On November 13, 2012, Enforcement filed a reply. Id.

         5. FERC Assesses Civil Penalties

         On August 29, 2013, after reviewing the briefs and the evidence that Enforcement provided, the Commission issued orders assessing civil penalties against CES and Dr. Silkman. Id. ¶ 60. The Commission unanimously found:

1) Dr. Silkman and CES violated FPA section 222 and the Commission's Anti-Manipulation Rule from July 2007 to February 2008 by engaging in a scheme to inflate and then maintain a fraudulent baseline in order to receive payments for load response that they never intended to provide or actually provided. Id. ¶¶ 60, 66-69.
2) Dr. Silkman and CES acted with scienter in executing their manipulative scheme. Dr. Silkman and CES acknowledged that Dr. Silkman, as an employee of CES, intentionally proposed to Rumford that the mill reduce on-site generation of electricity during the baseline period and then later submit daily offers to reduce load to ISO-NE. Id. ¶¶ 71-73.
3) The Commission had enforcement jurisdiction over both CES and Dr. Silkman for their involvement with the scheme. Id. ¶¶ 74- 76.

         The Commission issued assessment orders in accordance with Enforcement's recommendations. Id. ¶ 62. Dr. Silkman and CES both failed to pay their penalties within sixty days; therefore, pursuant to § 823b(d)(3)(B), the Commission filed a petition with this Court for an order affirming the assessment of the civil penalties. Id. ¶ 12.


         The question before the Court is what procedures should govern the Court's de novo review of the Commission's assessment orders. As the procedural history of this case demonstrates, the parties have thoroughly briefed and argued their positions. In general, the Respondents argue that the FPA requires this Court to treat the matter as an ordinary civil action governed by the Federal Rules of Civil Procedure. As such, the Respondents assert that they are entitled to discovery, including information relating to ...

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