On Monday, August 29, 2013 FERC issued three civil penalty orders after concluding that three separate entities manipulated ISO New England, Inc.’s (“ISO-NE”) Day-Ahead Load Response Program (“DALRP”).  Specifically, FERC found that Lincoln Paper and Tissue, LLC (“Lincoln”), Competitive Energy Service, LLC (“CES”), and CES’s managing member Dr. Richard Silkman (“Silkman”) each violated FERC’s Prohibition on Market Manipulation by creating phantom load reductions in order to defraud ISO-NE of demand response payments.  Lincoln was assessed a civil penalty of $5,000,000 and disgorgement of $379,016.13, plus interest; CES was assessed a civil penalty of $7,500,000 and disgorgement of $166,841.13, plus interest; and Silkman, in his personal capacity, was assessed a civil penalty of $1,250,000.    A fourth entity also charged with the same behavior, Rumford Paper Company (“Rumford”), settled with FERC separately earlier this year (see March 25, 2013 edition of the WER).

ISO-NE’s DALRP was originally designed as a demand response program that compensated companies who reduced their electricity consumption during peak demand times.  In turn, companies were paid for their actual reduction in electricity consumption from the grid.  To determine the reduction amount, companies must establish a baseline of normal consumption.  ISO-NE would then calculate the reduction in electricity consumption taken from the grid by subtracting the company’s actual metered load during the peak demand hours from the previously established customer baseline.  Customer baselines would normally be automatically recalculated each day unless ISO-NE accepted that company’s price-based bid for demand response.  Thus, if a bid were submitted and accepted each day, a company could maintain its initial customer baseline indefinitely.

According to FERC, Rumford (through the advice of CES and Silkman) and Lincoln initially increased their electricity consumption from the grid in order to artificially inflate their customer baseline.  FERC concluded that this enabled each company to receive compensation for demand response without actually having to reduce load or make any changes to their production behavior.  FERC also determined that each company was able to maintain its inflated customer baseline by submitting daily price-based bids for demand response at the lowest offer price available, bids that were nearly always accepted by ISO-NE.  As a result, FERC stated that Lincoln and Rumford were able to maintain their initial, artificial customer baselines, and defraud ISO-NE of demand response payments.

Lincoln, CES and Silkman each argued that no explicit rules of the DALRP were violated, and that the complexities of the program excused their behavior insofar as it failed to adhere to the intention of the DALRP.  FERC dismissed these arguments, explaining that “[a]n entity need not violate a tariff, rule or regulation to commit fraud.  Nor does a finding of fraud require advance notice specifically prohibiting the conduct concerned.  Fraud is a matter of fact and requires evaluation of all the facts and circumstances in each case.”

Commissioner Cheryl LaFleur partially dissented from each of the three orders, expressing concerns about the size of the penalties FERC assessed.  In her dissent, Commissioner LeFleur argued that FERC effectively considered the duration of the fraud twice in its analysis: once in an adder for the duration of the fraud and once for the adder based on the magnitude of the fraud, which in the current instance was also a function of the length of time the fraud persisted.  Even though the civil penalties were based on FERC’s Penalty Guidelines, Commissioner LaFleur stated that the Commission may use discretion to depart from those guidelines, and should have done so in these cases.

To view a copy of the orders regarding Lincoln, CES, and Silkman, click here, here and here, respectively.