On September 24, 2018, the U.S. District Court for the Eastern District of Virginia (“District Court”) concluded that FERC’s assessment of a civil penalty against Powhatan Energy Fund, LLC and certain of its traders and affiliates (“Powhatan”) for market manipulation allegations was not barred by the statute of limitations because FERC’s claim accrued when Powhatan failed to pay the civil penalty rather than when the alleged violations actually occurred. However, the District Court noted that it was particularly difficult to apply the statute of limitations to enforcement actions brought under the Federal Power Act’s (“FPA”) de novo review procedures and thus stayed the issue to allow Powhatan to file an interlocutory appeal.
In December 2014, FERC issued an Order to Show Cause directing Powhatan to demonstrate why they should not be penalized for manipulating the PJM Interconnection, L.L.C. (“PJM”) markets between June 1, 2010 and August 3, 2010 (see January 8, 2018 edition of the WER). Specifically, FERC staff alleged that Powhatan manipulated PJM’s energy markets by creating a scheme to receive excess Marginal Loss Surplus Allocation (“MLSA”) payments from PJM by artificially creating round-trip Up-To Congestion transactions solely to reserve transmission service and collect the corresponding MLSA payments. In accordance with the FPA’s requirements, the Order to Show Cause directed Powhatan to elect either (1) a formal hearing before an Administrative Law Judge prior to the assessment of a penalty or (2) to have FERC assess penalties upon finding a violation had occurred. Under the second option, if the defendant fails to pay the penalty within 60 days, FERC must institute an action in district court to affirm the penalties, and the district court reviews the facts and law de novo. After Powhatan elected the second option, FERC issued in order in May 2015 requiring Powhatan to pay more than $34 million in civil penalties and disgorgement to PJM within 60 days of the order. Powhatan failed to pay the sum, and FERC filed its action in the District Court in July 2015. Powhatan moved to dismiss the action, arguing that many of FERC’s claims were barred by the statute of limitations because the alleged manipulative activity occurred over five years before FERC filed its action, that FERC lacks authority to order disgorgement under the FPA, and that FERC’s disgorgement was also time-barred.
In its opinion, the District Court first noted that enforcement actions under the FPA are subject to the statute of limitations in 28 U.S.C. § 2462, which require government agencies such as FERC to bring a claim “within five years from the date when the claim first accrued.” While Powhatan argued that much of FERC’s claim was barred because it “accrued” more than five years from when the alleged manipulation occurred, the District Court ultimately determined that the claims did not accrue until Powhatan failed to pay the penalty within 60 days of FERC’s order, when FERC could seek a judgment in district court under the FPA. However, even though the District Court found that its holding corresponded with the plain meaning of “accrue,” the District Court cautioned that Powhatan’s interpretation also could be correct because a de novo adjudication “flows directly from the alleged violations, making it commonsensical that the claim would accrue at the time of the violation.” The District Court also noted that its holding arguably could violate the purpose of the statute of limitations since “the possibility exists that the intended prompt penalty assessment might not be prompt at all” because FERC has exclusive control over the assessment of penalties. Therefore, while the District Court concluded that FERC’s actions were not time-barred because its claims did not accrue until Powhatan failed to pay the penalty within 60 days of FERC’s order, it stayed further proceedings of this issue so that Powhatan could file an interlocutory appeal.
With respect to Powhatan’s disgorgement arguments, the District Court first held that, even if FERC lacks the authority to order disgorgement, federal courts have broad power to order or enforce equitable relief such as disgorgement. However, the District Court determined that whether disgorgement is subject to the same statute of limitations turns on whether the disgorgement is punitive rather than remedial. Since the proceeding was at the motion to dismiss stage, the District Court concluded that there was not enough of a factual record to make this determination.
The District Court’s opinion can be found here.