On December 2, 2013, FERC filed two petitions in the United States District Court for the District of Massachusetts asking the court to affirm FERC’s assessment of civil penalties against Lincoln Paper and Tissue, LLC (“Lincoln”), Competitive Energy Services, LLC (“CES”), and Richard Silkman for allegedly manipulating the New England demand response market. Specifically, FERC has accused Lincoln, CES, and Silkman of violating FERC’s Anti-Manipulation Rule by creating phantom load reductions to defraud ISO New England, Inc. (“ISO-NE”) of demand response payments in its Day-Ahead Load Response Program (“DALRP”).
FERC assessed Lincoln a civil penalty of $5,000,000 and disgorgement of $379,016.13, plus interest, CES a civil penalty of $7,500,000 and disgorgement of $166,841.13, plus interest and Silkman a civil penalty of $1,250,000 (see September 9, 2013 edition of the WER). FERC previously charged Rumford Paper Company (“Rumford”) with the same behavior, but Rumford settled with FERC separately.
ISO-NE’s DALRP allowed participants to offer electricity demand reductions for hours in the next day when New England experienced high electricity prices. Participants who offered to reduce their electricity consumption for the following day were compensated for the electricity they actually conserved. To determine the reduction amount, companies would establish a baseline of normal consumption. ISO-NE would then calculate the reduction amount by subtracting the company’s reduced consumption during the peak demand hours from the baseline.
FERC alleges that Lincoln inflated its baseline by purchasing large amounts of electricity from the grid during the initial baseline calculation period on the advice of CES and Silkman. FERC claims that Lincoln would normally operate on a mix of electricity generated on-site and electricity from the grid, but during the initial baseline calculation period, turned off their on-site generators and obtained nearly all of their electricity from the grid. Thus, FERC concluded that Lincoln would receive compensation for demand response without having to actually reduce consumption.
After Lincoln, CES, and Silkman failed to pay their assessed penalties within 60 days, FERC filed the Petitions in the United States District Court in Massachusetts. Under Section 31(d)(3)(B) of the Federal Power Act, in order to enforce the penalty order FERC must institute an action in the United States court of appeals for the appropriate judicial circuit for judicial review. The court has jurisdiction to enter a judgment affirming, modifying or setting aside FERC’s order in whole or in part. Copies of the petitions are available here and here.