In an order issued on March 28, 2017, the United States District Court for the Eastern District of California (“District Court”) rejected arguments from FERC regarding the scope of review and applicable procedural rules governing the District Court’s review of a market manipulation enforcement proceeding.  Like every other federal court decision expressly addressing this issue—including one from a different judge in that same court earlier that month (see March 20, 2017 edition of the WER)—the District Court held that the defending parties were entitled to conduct discovery under the Federal Rules of Civil Procedure (“FRCP”).

In 2008, FERC’s Office of Enforcement staff (“Enforcement”) commenced a formal investigation into allegations of manipulative trading by Barclays and various traders (“Defendants”) in western electricity markets.  Enforcement issued preliminary findings and conclusions that the Defendants had engaged in manipulative trading activity in violation of the Federal Power Act (“FPA”) and FERC’s Anti-Manipulation Rule.  An Order to Show Cause was issued in October 2012, thereby initiating an enforcement proceeding before FERC.

As required by FPA Section 31(d), FERC offered the Defendants two options for contesting Enforcement’s findings.  First, the Defendants could proceed by a hearing—facilitated by discovery—before an Administrative Law Judge (“ALJ”) before an assessment of a penalty under section 31(d)(2).  Second, the Defendants were told they could elect an immediate penalty assessment by FERC under section 31(d)(3)(A).  As the District Court noted in its order, the Defendants were advised that if they chose the “immediate penalty assessment” route, and if the Commission assessed a penalty that Defendants failed to pay within 60 days, “the Commission will commence an action in a United States district court for an order affirming the penalty, in which the district court may review the assessment of the civil penalty de novo.”  The Defendants elected the immediate penalty assessment option, after which FERC sought the District Court’s affirmance in an action filed in October 2013.

The applicable statutory provision, FPA section 31(d), instructs the District Court to “review de novo the law and the facts involved” in a FERC assessment order, and the parties immediately disputed the meaning of that instruction at the outset of the judicial proceeding.  As it has in all previous similar judicial reviews, FERC asserted that the District Court was limited to the evidence and arguments contained in the administrative record compiled in the proceeding under review.  Defendants countered that the FPA itself allows for a “de novo trial” and that furthermore, due process and basic fairness required that they be allowed to conduct discovery, call witnesses, and otherwise test the evidence submitted in the record to defend themselves.

The District Court agreed with the Defendants.  Among other findings in its order, the District Court found it “incongruous” for FERC to essentially assert that the FPA would allow parties electing the ALJ route to conduct full discovery—without being “saddled with an ‘administrative record’ compiled by FERC”—yet “silently deny” such a procedural tool if the Defendants chose to go to court.  The District Court agreed with the Defendants that a “much more sensible interpretation of the statute” is one that considers FERC’s administrative investigation to be “a prelude to adjudication of FERC’s claims either in an administrative or federal court proceeding, at Defendants’ option.”

Going forward, the District Court ordered the parties to meet and confer as set out in requirements of FRCP Rule 26(f).  The case now moves forward in the litigation process toward a resolution on the merits.

The March 28, 2017 order can be found in Federal Energy Regulatory Commission v. Barclays Bank PLC et al., case number 2:13-cv-02093, in the U.S. District Court for the Eastern District of California.