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Federal Energy Regulatory Commission v. Silkman

United States District Court, D. Maine

December 26, 2017

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,
v.
RICHARD SILKMAN, et al., Respondents.

          ORDER ON OBJECTION TO ORDER RE: DISCOVERY DISPUTES

          JOHN A. WOODCOCK, JR. UNITED STATES DISTRICT JUDGE.

         Respondents, an energy consulting firm and its managing member, object to a portion of the Magistrate Judge's September 8, 2017 Order on Discovery Issues. Defs.' Partial Obj. to Disc. Order (ECF No. 119) (Resp'ts' Mot.); Order on Disc. Issues (ECF No. 117) (Order). Specifically, the Respondents object to the denial of their request for documents related to Petitioner Federal Energy Regulatory Commission's (FERC) decision not to pursue enforcement action against certain other individuals or entities. Resp'ts' Mot. at 1; Order at ¶ 2. The Court concludes that the Respondents failed to demonstrate that the Magistrate Judge's discovery ruling denying discovery is either clearly erroneous or contrary to law.

         I. BACKGROUND

         A. Concise Factual Background[1]

         1. The Parties

         FERC is an administrative agency of the United States, organized and existing pursuant to the Federal Power Act, 16 U.S.C. § 791a et seq. (FPA). 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, FERC, https://www.ferc.gov/about/offices/oe.asp (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 (Dr. Silkman) resides in Maine and is an employee and managing member of CES. Id. ¶ 14.

         2. The Day-Ahead Load Response Program

         The Day-Ahead Load Response Program (DALRP) is a program administered by ISO-NE that encourages large electricity users to reduce the amount of electricity they consume from the grid during periods of high or peak demand. FERC Pet. ¶ 3. It provides this encouragement in the form of payments to participants who reduce their energy consumption during peaks hours. The payments are arranged in advance between the participants and ISO-NE, with the participants submitting bids that ISO-NE may accept. Id. ¶ 4.

         3. Dr. Silkman and CES' Alleged Fraud

         FERC alleges that CES and Dr. Silkman defrauded ISO-NE through the consulting services it provided to Rumford Paper Company (Rumford). Id. ¶ 36. Specifically, 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. 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 to 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. CES, including Dr. Silkman, then communicated daily with ISO-NE regarding Rumford's availability to provide approximately twenty megawatts of electricity reduction. Id. ¶ 45. 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.

         From July 2007 through February 2008, 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 NewEnergy, Inc. (Constellation), Rumford's Enrolling Participant. Id.

         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.

         4. Investigation and Enforcement Action

         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 § 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 eighty-three-page response to these letters. Id. Enforcement provided Dr. Silkman and CES's 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.

         In July 2012, the Commission agreed to issue orders to show cause to Dr. Silkman and CES, and the Respondents submitted a joint answer in September 2012. Id. ¶ 55. In August 2013, the Commission issued orders assessing civil penalties against CES and Dr. Silkman, finding that the Respondents violated FPA § 222 and the Commission's Anti-Manipulation Rule by engaging in a scheme to inflate, and then by maintaining, a fraudulent baseline in order to receive payments for load response they never intended to provide or actually provided. Id. ¶¶ 60, 66-69. The Commission issued assessment orders in accordance with Enforcement's recommendations. Id. ¶ 62. Dr. Silkman and CES 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.

         B. Recent ...


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