On March 8, the U.S. District Court for the Eastern District of California issued an order holding that Etracom LLC and its owner (the “Respondents”) are entitled to a trial pursuant to the Federal Rules of Civil Procedure (“FRCP”), including discovery rights, in an action brought by the Federal Energy Regulatory Commission (“FERC” or the “Commission”) seeking to enforce an order assessing civil penalties against the Respondents for alleged manipulation of the California energy market (“March 8 Order”). The primary issue at stake was the meaning of the Federal Power Act’s (“FPA”) reference to “de novo review” in a civil action brought by FERC seeking enforcement of a civil penalty in federal district court. FERC argued that courts reviewing a FERC penalty assessment de novo need only review the administrative record developed by the agency. The Respondents, in contrast, argued that the reference to de novo review entitled them to a trial on the merits in accordance with the FRCP, including full discovery rights, and without deference to the agency’s findings or the administrative record.
FERC originally charged Etracom and its founder, Michael Rosenburg for allegedly manipulating the California Independent System Operator wholesale energy market. Etracom was ordered to pay a $2.4 million fine and disgorge about $314,000 in profits as a result of its alleged schemes, according to reports. FERC filed the case in late 2015 and Etracom challenged it last year.
In the March 8 Order, the court agreed with the Respondents and held that the FRCP apply to FERC’s action seeking enforcement of its prior civil penalty assessment. The court explained that the FRCP apply to all civil actions before U.S. District Courts except where there is “a clear expression of congressional intent to exempt actions from the FRCP.” Parsing the language of the FPA, the court explained that the reference to an “action” in district court is generally interpreted to require the full procedural protections typically afforded in a court of law. The court also explained that the legislative history of other federal statutes providing for de novo review supported a finding that congress intended the FRCP to apply to actions brought by FERC to enforce its civil penalty assessments. Finally, the court noted that the federal district courts in Massachusetts, Maine, and the District of Columbia that have considered the same issue have reached the same conclusion. See FERC v. Maxim Power Corp., 196 F. Supp. 3d 181 (D. Mass. 2016); FERC v. Silkman, 2017 WL 374697, 2017 U.S. Dist. LEXIS 10902 (D. Me. 2017); FERC v. City Power Marketing, LLC, 199 F. Supp. 3d 218 (D.D.C. 2016).
The March 8 Order represents a significant victory for subjects of FERC enforcement actions wishing to challenge the Commission’s allegations in a court of law. As noted in the March 8 Order, at this point, federal district courts have consistently rejected FERC’s arguments respecting the meaning of de novo review and have found that respondents are entitled to a fresh review of the facts at issue, including the opportunity to seek discovery. While it remains to be seen the extent of discovery federal district courts will permit the parties in an action seeking enforcement of FERC’s civil penalty assessments, it appears increasingly well established that such matters should proceed as ordinary civil actions with full due process rights for the respondents.
Notwithstanding these orders, recent statements by FERC staff suggest that FERC plans to continue to challenge the scope of discovery afforded to defendants in such actions. Notably, on March 15, 2017, Larry Parkinson, Director of FERC’s Office of Enforcement, stated that, while the district court decisions to date allow some degree of discovery, the scope of that discovery remains to be determined. Parkinson also said that FERC was “far from [the] point” of “reassess[ing] [its] process” in light of the decisions to date.
Nevertheless, the parties in the Etracom civil action have submitted a stipulated discovery schedule that contemplates up to a year of fact discovery, followed by an additional period of expert discovery. Following the completion of discovery, the schedule contemplates a range of pre-trial activities, including hearings on substantive and procedural motions and pre-trial conferences.
Notably, the trend acknowledged by the March 8 Order was recently strengthened when, on March 30, 2017, Judge Nunley, who also sits in the Eastern District of California, issued an order denying, without prejudice, FERC’s Motion to Affirm Civil Penalties against Barclays Bank PLC and four individuals. In that order, the court agreed with its ruling in Etracom that defendants in an action brought by FERC seeking to enforce a civil penalty assessment are entitled to discovery under the FRCP. For those keeping tally, the Barclays order was yet another win for respondents’ rights.
As the issue of the scope of de novo review and other threshold procedural issues become increasingly settled, it is possible that we will see FERC civil penalty enforcement cases moving apace with other civil actions. If the stipulated discovery schedule set forth in Etracom is a good example, however, it could still be some time before we actually see these cases moving past discovery and towards the substantive merits of the disputes and providing guidance as to the bounds of FERC’s anti-manipulation authority.
About the authors: Michael Brooks, Bob Pease, Stephen Hug, Serena Rwejuna and Sara Rafie are members of Bracewell LLP’s Energy Regulations practice in Washington, D.C.