A U.S. federal district court judge in Ohio ruled Nov. 29 that the court lacks authority to enforce two key mechanisms used by the Federal Energy Regulatory Commission to punish power market participants for market manipulation.
"This poses more questions for practitioners than it resolves," Todd Mullins, a former branch chief in FERC's Division of Investigations, said in an interview. "I suspect that lawyers on both sides of the caption are scratching their heads a little bit this week."
Under the Federal Power Act, the commission must file lawsuits in U.S. district court when parties facing a FERC enforcement action decline to comply with orders imposing civil penalties. In those cases, FERC is required by the statute to seek orders from district courts affirming the agency's underlying enforcement action.
However, Judge Michael Watson for the U.S. District Court for the Southern District of Ohio concluded in a Nov. 29 opinion that disgorgement and joint and severable liability are not civil penalties and therefore must be pursued before federal appeals courts.
In doing so, the judge partially terminated a case dating back to 2016 — FERC v. Coaltrain Energy LP (No. 2:16-cv-00732) — in which FERC sought more than $42 million in penalties, including the disgorgement of $4.12 million in unjust profits, for alleged price manipulation in the PJM Interconnection LLC's wholesale power markets. Disgorgement requires parties to forfeit unjust profits, and severability determinations allow FERC to recoup penalties if another party is unable to pay in full or in part.
The contested civil penalties in the Coaltrain case remain live before the court, but Watson terminated pieces of the litigation dealing with disgorgement and joint-and-several liability.
"Neither disgorgement nor joint and severable liability are civil penalties," Watson said, noting that other courts have previously found that disgorgement is a remedy for restitution but a more limited form of relief than a civil penalty.
Watson's ruling is significant because legal challenges at the district court level involve a robust discovery period. Parties seeking review before appeals courts need to rely on the public record developed by FERC.
Uncertain path forward
The Nov. 29 ruling could affect several other cases pending before district courts, said Mullins, now a managing partner at McGuireWoods and chair of the law firm's energy enforcement practice.
In its latest annual enforcement report, FERC said it is still litigating three actions in federal district court with a combined assessment of more than $80 million in penalties and disgorgement.
Parties in the pending court cases could cite Watson's ruling, injecting further uncertainty into legal proceedings that often take years to resolve, Mullins said.
One key issue to watch will be how FERC charts a course forward in obtaining judicial review for civil penalties as well as disgorgement and severability claims, he said.
"The question now is if the disgorgement is supposed to be reviewed by a court of appeals at the same time that you go file a case in district court for review of the civil penalty, even though they're related," Mullins said. "The whole thing poses a bit of a conundrum."
GreenHat could provide clues
FERC also issued an order on Nov. 5 hitting the trading firm GreenHat Energy LLC with $179 million in civil penalties for wreaking havoc in PJM's financial transmission trading rights markets. The order also directed GreenHat and two of the firm's founders, as well as the estate of one deceased founder, to disgorge a little more than $13 million in unjust profits and interest. All of the parties were found to be jointly and severally liable for payment of the disgorgement amount, but the matter has yet to be decided by a federal court.
"I would also keep a close eye on whether FERC does anything in the GreenHat case with respect to perhaps amending the order," said Michael Yuffee, a partner at Baker Botts who represents clients before FERC.
If Watson's Nov. 29 order is left to stand, FERC could even stop seeking disgorgement altogether given that the alternative would be to make the same arguments before a district court and an appeals court, Yuffee said in an interview.
"From a practical perspective it seems more likely that FERC, in the absence of having Congress amend the Federal Power Act, will likely stop seeking disgorgement and instead, whatever they would otherwise disgorge, they'll just try to get in additional civil penalties, is my guess," Yuffee said.
The other three pending district-level court cases dealing with disgorgement are FERC v. Silkman (No. 1:16cv00205) in the U.S. District Court for the District of Maine; FERC v. Powhatan Energy Fund LLC (No. 3:15-cv-00452) in the U.S. District Court for the Eastern District of Virginia; and FERC v. Vitol Inc. and Federico Corteggiano (No. 2:20-CV-00040-KJM-AC) in the U.S. District Court for the Eastern District of California.
