Fed. Energy Regulatory Comm'n v. Silkman

177 F.Supp.3d 683

Federal Energy Regulatory Commission, Petitioner,

v.Richard Silkman, and Competitive Energy Services, LLC, Respondents.

Federal Energy Regulatory Commission, Petitioner,

v.Lincoln Paper and Tissue, LLC, Respondent.

CIVIL ACTION NO. 13-13054-DPW

CIVIL ACTION NO. 13-13056-DPW

United States District Court, D. Massachusetts.

Signed April 11, 2016

Nicole L. Brisker, Demetra E. Anas, Elizabeth K. Canizares, Gabriel S. Sterling, III, Michael Raibman, Susan M. Beall, Federal Energy Regulatory Commission, Washington, DC, for Petitioner.

Brandon C. Johnson, Janine L. Durand, William S. Scherman, Jason J. Fleischer, Kara B. Coen, Gibson, Dunn & Crutcher LLP, Washington, DC, David J. Kerstein, Gibson, Dunn & Crutcher LLP, New York, NY, for Respondents.

MEMORANDUM AND ORDER REGARDING MOTIONS TO DISMISS

DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE

Two petitions by the Federal Energy Commission (“FERC”) seeking affirmance of two of its orders assessing civil penalties have been pending before me. One petition (Case No. 13–cv–13056) seeks affirmance of a civil penalty against Lincoln Paper and Tissue Company (“Lincoln”). The second (Case No. 13–cv–13054) seeks affirmance of a civil penalty against Richard Silkman and Competitive Energy Services, LLC (“CES”). Both penalties relate to participation by the respondents in the “Day–Ahead Load Response Program” (“DALRP”), a program administered by ISO New England (“ISO–NE”), a delegate of FERC, which is designed to provide energy users with an incentive to reduce their electrical usage during times of increased demand and higher prices.

The respondents seek to have the cases dismissed in motion practice turning on the pleadings. I have kept the motions under advisement pending a Supreme Court decision that would be dispositive of the jurisdictional issue in this case. Meanwhile, the respondent Lincoln filed for bankruptcy. Now that the Supreme Court has provided guidance and the Maine Bankruptcy Court has stated that the enforcement dimension to the Lincoln case is not subject to the automatic stay, I act through this Memorandum to deny the respondents' motions. In a separate Memorandum and Order issued today, I will transfer the cases to the United States District Court for the District of Maine for further proceedings.

I. BACKGROUND

A. Relevant Entities

Petitioner FERC is an administrative agency of the United States, organized pursuant to the Federal Power Act, 16 U.S.C. § 791a et seq. Lincoln Compl. ¶ 13.¹

Respondent Lincoln is a limited liability company organized under the laws of Maine with a principal place of business in Maine. Lincoln Compl. ¶ 13.

Respondent CES is a limited liability company organized under the laws of Maine with a principal place of business in Maine. Silkman Compl. ¶ 15. Respondent Silkman is an employee and managing member of CES. Silkman Compl. ¶ 14.

ISO–NE is an independent, non–profit, Regional Transmission Organization (“RTO”) tasked with ensuring the day–to–day reliable operation of New England's bulk electric energy generation and transmission system. Lincoln Compl. ¶ 2.

B. The Day–Ahead Load Response Program

As part of its operations, ISO–NE administers load response programs that encourage large electric energy users to reduce their consumption or electric “load” during periods when the bulk electric system is experiencing peak demand. The reduction in peak demand reduces stress on the electric grid and can also serve to reduce electricity prices. Lincoln Compl. ¶ 3. The specific program at issue in this matter is the Day–Ahead Load Response Program (“DALRP”). As FERC describes the DALRP, participants bid to reduce their energy consumption below their normal usage rate. If their bid was accepted, the participant would be compensated for the reduction in their electricity consumption below normal levels. Lincoln Compl. ¶¶ 26, 30. See also FERC v. Elec. Power Supply Ass'n , ––– U.S. ––––, 136 S.Ct. 760, 193 L.Ed.2d 661 (2016)(describing demand response programs like the DALRP).

In order to calculate the reduction in a DALRP participant's electricity consumption, ISO–NE must establish a baseline level of electricity consumption. To do so, ISO–NE measures the average of the participant's use of electricity from the grid in the hours from 7:00 am through 6:00 pm during the five days following the participant's approval for participation in DALRP, but before the entity begins reducing its demand under DALRP. The demand reduction is calculated from this baseline by subtracting the actual electrical consumption from the grid during the hours in which ISO–NE has accepted the participant's bid. Lincoln Compl. ¶¶ 27–28.²

After the initial baseline consumption level is established, it is not left static. Rather, it is updated on a rolling basis to reflect a participant's actual load data on days when the participant either did not bid to participate in DALRP or its bid was not accepted by ISO–NE. Lincoln Compl. ¶ 29. According to FERC, this adjustment is intended to reflect any changes in a participant's normal operations to ensure that a participant is not compensated for reductions in electrical consumption that would have occurred absent the incentives provided by DALRP. Lincoln Compl. ¶ 28. Because the rolling baseline is intended to measure the participant's electricity consumption absent participation in DALRP, the rolling average baseline consumption calculation excludes days in which a participant's bid into DALRP was accepted. Lincoln Compl. ¶ 29. Because of this exclusion, if a participant bid into DALRP every day, and its bid was accepted on each day, its baseline load figure would remain unchanged. Lincoln Compl. ¶ 30. A participant bids into DALRP by evaluating whether it could reduce its load on the next day and, if so, offering to reduce its consumption by a certain number of kilowatts or megawatts (“MWh”) per hour during the peak period at a certain price–between $50/MWh and $1,000/MWh. Id.

C. Lincoln's Participation in DALRP

Lincoln is a paper mill in Lincoln, Maine with approximately 400 employees. In 2007, when fully operational, Lincoln consumed approximately 20 MW of electricity without appreciable fluctuation from day to night. Lincoln obtained electricity from two sources: (1) its own 4 MW steam–powered turbine Westinghouse generator; and (2) purchasing approximately 16 MW of electrical energy from the grid. Lincoln Compl. ¶¶ 33, 34.

Lincoln enrolled in the DALRP in July 2007. Lincoln Compl. ¶ 35. The initial baseline for Lincoln's electricity consumption was calculated based on its electric energy purchases on July 25, 26, 27, 30, and 31, 2007 between the hours of 7:00 a.m. and 6:00 p.m. Lincoln Compl. ¶ 37.

On those days, Lincoln curtailed the use of its on–site generator, reducing output from 4 MW to 1 MW from 7:00 a.m. to 6:00 p.m. As a result, instead of purchasing 16 MW from the grid and obtaining the remaining 4 MW from its on–site generator (its typical consumption pattern), Lincoln obtained 19 MW from the grid. Lincoln Compl. ¶ 38. Thus, Lincoln's baseline electrical draw from the grid was higher than its typical electrical purchases for its ongoing operations.

As a result of curtailing its use of the on–site generator during the baseline setting period, Lincoln was required to purchase $10,000.00 of additional electrical energy from the grid, despite being able to generate electricity on–site at lower cost. Lincoln Compl. ¶ 39.

Having created an inflated baseline level of electrical consumption, Lincoln next took actions to freeze its baseline at this inflated level. Lincoln Compl. ¶ 41. To accomplish this, it consistently offered the minimum bid price for reducing its electrical consumption from the grid, thereby ensuring that its bids would almost always be accepted and the rolling baseline would not reset to reflect Lincoln's typical electrical consumption pattern. Lincoln Compl. ¶ 42. Lincoln employed a third party, Constellation NewEnergy, Inc., as its DALRP enrolling agent. In July and August of 2007, Lincoln verified with Constellation that this strategy would have the result of freezing its baseline at the inflated level. Lincoln Compl. ¶ 43.

As anticipated by Lincoln, its bids were accepted nearly every day and, as a result, Lincoln's baseline was not updated to reflect the normal use of the on–site generator. The only occasions in which Lincoln's offers failed to clear the bidding process were when Lincoln made an error such as failing to submit an offer by the daily deadline. Lincoln Compl. ¶ 44.

Lincoln obtained revenues from the DALRP for almost every day it participated between August 1, 2007 and February 7, 2008. Lincoln Compl. ¶ 45. On the days and months that Lincoln participated in the DALRP, Lincoln ran its on–site generator at normal capacity. Lincoln Compl. ¶ 46. Thus, Lincoln did not reduce its electrical consumption from the grid below its typical consumption pattern, although it reduced its consumption from the grid as compared to the baseline period.

In November and December 2007, Lincoln replaced the Westinghouse generator with a new generator with capacity of 13.5 MW and used the new generator to produce additional energy on–site. Prior to installation, Lincoln notified Constellation that it planned on adding the new generator. On November 29, 2007, Constellation advised Lincoln via email that Lincoln's baseline should be adjusted to reflect the greater on–site generation capacity and the reduction in normal energy consumption from the grid that would be necessary to support Lincoln's daily operations. Lincoln Compl. ¶ 48. On January 11, 2008, Constellation sent Lincoln a follow up email asking if the new generation unit was in operation and if Lincoln would readjust its baseline. Lincoln Compl. ¶ 49. Lincoln did not respond to either the November 29, 2007 or January 11, 2008 emails.

Instead, Lincoln brought the new generator on–line and claimed the newly generated electricity as a reduction...