This post recently appeared in Law360, available for subscribers here.
Anyone practicing in the Federal Energy Regulatory Commission enforcement arena should sit up and take notice of the recent developments in the Footprint case at FERC. The most public step in an enforcement procedure before FERC is the issuance of an order to show cause, or OSC, by the commission. An OSC is FERC’s formal announcement that its Office of Enforcement, or OE, staff has found the respondent to have committed statutory or regulatory violations. The OSC includes a report from OE reciting the facts that support such a conclusion, as well as any recommended civil penalty and disgorgement amount.
The OSC invites the respondent to “show cause” why it should not be penalized. This OSC is usually followed by an answer filed by the respondent, which is typically followed by a reply brief from OE. From the inception of the OSC process in 2007, FERC has never found cause for not imposing a penalty to have been shown, giving OE a perfect track record in OSC proceedings of obtaining a final FERC order that adopted OE’s position.
That streak may end in light of an unusual filing by OE staff on Sept. 19, 2018, when OE recommended that FERC drop its case against Footprint Power LLC. Footprint operates the Salem Harbor Station in Salem, Massachusetts, which provides generation to the ISO-New England electricity market.
Briefly stated, OE alleged that Footprint had not maintained sufficient fuel reserves to run its oil-fueled generation unit at the output level at which it had offered into the day-ahead market. OE claimed that these offers were therefore false and misleading, in violation of several commission rules, because, according to OE, the plant could not run at the levels at which it had offered.
In its answer, Footprint raised several arguments related to the methods by which OE calculated the amount of available fuel, including an argument that OE had not taken into account the start-up time required for the unit to reach full generating capacity. Footprint argued that during this start-up period, the unit burned less fuel, and thus the unit did have sufficient fuel to meet its obligations during the period under review — and that ISO-NE knew this.
In its reply brief, OE accepted this “new” argument regarding the start-up period, reconsidered the fuel volume and concluded that Footprint had not violated the applicable rules for all but a few days during the period under review.
We note that in its answer, Footprint characterized the start-up argument as having been made in prior nonpublic submissions and having been discussed in a deposition. Yet in its reply, OE characterized this argument as being made for the first time in Footprint’s answer. Upon reconsidering the evidence and arguments presented, OE recommended vacatur — essentially the complete withdrawal — of the entire OSC, having determined that further pursuit of the case would not be a “prudent use of Staff’s resources.”
Notably, OE made a point of only accepting Footprint’s argument regarding the start-up time and related fuel use — explicitly rejecting Footprint’s other arguments related to emissions limits, the statute of limitations and whether ISO-NE was actually misled by the offers.
At this time, the commission has not yet issued a final order, so it is possible that it will decide to issue an order assessing civil penalties against Footprint for the one week in which the start-up argument did not apply. However, we believe it is more likely that the commission will follow OE’s recommendation and drop the case.
While it is tempting to so conclude, we do not think this is a signal of any general enforcement retrenchment on the part of OE, nor of any influence on the part of the new members of the commission prodding OE to be more industry-friendly.
For starters, unless someone violated commission ex parte communications and separation of functions rules (which we doubt), the OE change in position could not have originated from direct commission intervention. This is because the staff making the recommendation should not have been in contact with any commissioners about the matter. Instead, we think the change in direction in Footprint came from the so-called “non-decisional” staff within OE, who are “walled off” from the commissioners and who would have had to further litigate the case if Footprint did not pay any penalty assessed.
On some level, OE’s reconsideration of the facts and merits of Footprint’s arguments is necessarily specific to this case, and not readily transferable to other fact patterns. OE’s reply puts great emphasis on the compelling — and “new” — factual argument made by Footprint. Faced with this new presentation of the compelling facts in Footprint’s answer, OE staff may have simply reconsidered issues of prosecutorial discretion and concluded that if they were to have proceeded to litigate in federal court, they would likely lose.
But there may be more in play than just a reconsideration of the facts and the merits. This recommendation may also be an effort by OE to appear fair and reasonable in the face of criticism that the OSC process has become a guaranteed win for OE and the commission. By accepting a compelling fact-based argument here, OE may be seeking to bolster the importance and appearance of fairness of the OSC process, pushing back against calls from some to skip a heretofore seemingly “rubber stamp” OSC process altogether and move straight to litigation of such cases in federal district court.
Furthermore, this result may be an effort to beat back arguments in the federal courts that the OSC process is not meaningful — which matters when courts are confronted with defense arguments relating to statutes of limitations, the nature of de novo review under the Federal Power Act and other matters that could affect the scope of FERC’s authority.
One lesson for respondents is to make every argument you can at every stage, and to never stop making arguments in which you believe. An argument may be initially dismissed by OE, or simply buried within a lengthy brief filed early in the investigation. OE’s position suggests that, in its view, had Footprint put greater emphasis on the start-up argument from the outset of the investigation, it may have been able to avoid the order to show cause stage. But because it apparently did not, at least from OE’s perspective, it is now clear that once these new or forgotten arguments are aired in a different forum, such as with the commission, or in a public way, they can take on more significance.
A second lesson stems from prior claims in other cases by OE, and even the commission, that have dismissed arguments in OSC proceedings or in court cases because they were supposedly not advanced during the investigation phase and therefore, in their view, were after-the-fact inventions. After Footprint, OE will be hard-pressed to ignore or discount an argument or evidence simply because it was truly made for the first time in a respondent’s answer to order to show cause or at another stage.
A final lesson relates to the possibility that in the past, parties responding to an OSC who desired to move quickly on to a de novo proceeding in federal court may have considered de-emphasizing certain arguments in order to focus their presentation or just save on litigation costs. They may also have considered not submitting additional evidence at the commission level that was not sought or submitted in the investigation phase, thus “saving” it for the federal court.
This might be based on the belief that the material would be “wasted” in the seemingly fait accompli OSC process, and would merely educate the OE staff on the respondent’s litigation strategy. Setting aside whether this approach may risk a “waiver” argument by OE (later, in court), OE’s reply in Footprint challenges the wisdom of this approach on the merits. The reply suggests that OE may — and in some cases will — change its mind when presented with the right argument (or at least fears that the commission may do so on its own).
 Reply of Enforcement Litigation Staff to the Answer of Footprint Power LLC and Footprint Salem Harbor Operations LLC and Recommendation to Vacate Order to Show Cause, Footprint Power LLC, FERC Docket No. IN18-7-000 (Sep. 19, 2018).