FERC Issues Orders Proposing Substantial Civil Penalties For Alleged Market Manipulation In New England's Load Response Program

Yesterday the Federal Energy Regulatory Commission ("FERC") issued four orders, each of which directs a participant in New England's prior Day-Ahead Load Response Program ("DALR Program") to show cause why it should not be found to have violated Federal Power Act and FERC prohibitions against energy market manipulation and, as a result, to disgorge payments received and be assessed substantial civil penalties (totaling nearly $26.5 million in the aggregate). The four participants include two end-users, Rumford Paper Company ("Rumford") and Lincoln Paper and Tissue ("Lincoln"); a consulting firm, Competitive Energy Services ("CES"); and an individual, Richard Silkman, a principal of CES (collectively, "DR Participants"). The orders are based on allegations, contained in reports by the FERC's Office of Enforcement ("OE"), that DR Participants fraudulently inflated the day-to-day energy consumption values used to set a baseline from which payments for load reductions would be measured. OE alleges that the conduct of the participants named resulted in unjustified payments by all New England rate payers that should be disgorged, in addition to the proposed penalties for the DR Participants' conduct. The orders present compelling reminders and valuable lessons for all participants in FERC-regulated energy markets, and particularly the demand response markets, to ensure they have in place programs and controls carefully designed to ensure effective compliance with both the letter and the spirit of FERC rules and regulations. Failure to do so puts participants, both companies and individuals, at risk of substantial liability.

Background

During the period covered by the orders (July 2007 to February 2008), ISO New England Inc. ("ISO-NE") administered a demand response program designed to reduce demand (and prices) for electricity in New England during the hours of the day when demand for electricity was heaviest (and electricity prices highest). These demand times were defined to be between 7 a.m. and 6 p.m. on business days, and Rumford and Lincoln were to be paid for reducing demand (and thereby energy prices) in New England during those peak hours. Payments under the DALR Program were based on the amount of reduction bid and accepted into the day-ahead energy market and actually reduced during the peak periods. "Actual" reduction was measured as the difference between the amount of energy Rumford and Lincoln would have used absent participation...