One of the big Federal Energy Regulatory Commission (FERC) Enforcement litigation developments of the past two years has been the federal judiciary’s rejection of the agency’s “de novo review” position in electricity market manipulation cases. Briefly stated, FERC has argued that the Federal Power Act (FPA) should be interpreted to allow federal courts to adjudicate an enforcement action by reviewing FERC’s Order Assessing Penalties and underlying record, allowing supplementation of that record through additional discovery only as the court found necessary or useful. Courts, however, have held that there is no such FPA-mandated review action of that nature, but rather only a civil action that proceeds under the Federal Rules of Civil Procedure—including, most importantly, the civil discovery rules.1
With the law now clear on the procedure governing FERC’s federal court enforcement actions, a key question for FERC court-watchers becomes what type of discovery defendants will be allowed to take of FERC. Just last week, a federal court in the long-running DALRP matter2 ruled that one type of discovery the defendants sought (which defendants in other enforcement cases have also sought) would not be allowed: discovery into FERC’s decisions both to investigate and to decline to pursue enforcement actions against other market participants who may have engaged in similar conduct as the defendants.
Defendants’ discovery argument and FERC’s rebuttal are more involved than this brief summary provides, but, in essence, defendants claim that their participation in the demand response program was a legitimate, non-manipulative effort to comply with unclear rules created through a flawed market design. They sought discovery to show that other market participants participated in the DALRP program in similar ways, reflecting an industry understanding that suggests the legitimacy of their own conduct, and that FERC acknowledged this legitimacy by declining to proceed against those participants. FERC disputed that there was such an industry understanding or similar industry conduct, or that flawed market rules justified defendants’ behavior. In any event, FERC argued that any prosecutorial discretion with respect to other market participants was not a valid subject of discovery under well-established case law from various enforcement contexts.
The magistrate judge agreed with FERC’s argument, and the district court affirmed. Specifically, the court found that defendants’ proposed discovery failed to meet the relevance and proportionality test of Federal Rule of Civil Procedure 26. Defendants, the court found, did not need information about other market participants’ behavior—or FERC’s assessment of that behavior—to present defenses about whether their own market conduct was fraudulent. The court further agreed with the magistrate judge that, even if such documents met the Rule 26 standard, many would be protected from disclosure by the attorney-client and deliberative process privileges, as well as the work product doctrine. The court concluded that, given the weakness of the Rule 26 showing, FERC should not have to undertake the burden of sifting through these likely privileged materials in order to search for marginally relevant documents that might be discoverable.
The court’s ruling was not unexpected given existing case law holding that the government’s decision not to prosecute another potential defendant is not generally relevant to assessing the case against the actual defendant. But it is significant as one of the earlier district court discovery rulings in these FPA enforcement cases, and underscores that the scope of discovery defendants can obtain from FERC may be more limited than desired and, in any event, is still very much an open question.
1 The latest ruling on that front was in the Powhatan matter. See FERC v. Powhatan Energy Fund, LLC, No. 3:15cv452, 2017 WL 6629093 (E.D. Va. Dec. 28, 2017).
2 The Day-Ahead Load Response Program (DALRP) was a demand response program run by ISO New England until June 2012. FERC found that several market participants committed fraud in connection with this program by intentionally claiming to be providing more demand response than they were (by altering their “baseline” energy consumption during a test period preceding the program’s start). Two subjects have already settled with FERC. See Lincoln Paper and Tissue, LLC, 155 FERC ¶ 61,228 (2016); Rumford Paper Co., 142 FERC ¶ 61,218 (2013). Two other subjects (Dr. Richard Silkman, an energy consultant, in his individual capacity, and his company, Competitive Energy Services) continue to litigate and are the defendants in the district court ruling discussed here. See FERC v. Silkman, No. 1:16-cv-00205-JAW, 2017 WL 6597510 (D. Me., Dec. 26, 2017).