by Dan Watkiss and William Friedman
“No showing of the respondent’s intent or mindset is necessary to show a violation of [18 CFR § 35.41(b)] has occurred,” explained a divided (4-1) Federal Energy Regulatory Commission (FERC) last week in an order suspending for six-months the authority of J.P. Morgan Ventures Energy (JPM) to sell power at market-based rates (MBR). FERC did so based on its findings that JPM had submitted inaccurate information and omitted material information in three filings with the Commission. Ironically, the section 35.41(b) violation that cost JPM its MBR authority arose in connection with JPM’s alleged resistance to discovery, and not in connection with the underlying California ISO referral to FERC enforcement staff of suspicions that JPM may have manipulated the California power markets.
This decision should serve as a cautionary tale: Liability for misrepresentations to FERC or its authorized power market operators can be strict — context doesn’t matter — and can result in forfeiture of MBR authority in addition to monetary penalties. The FERC majority justified its strict enforcement of section 35.41(b) on the ground that an accurate and complete flow of information is essential to the operation of the Commission’s MBR program.
FERC Commissioner Le Fleur’s dissent accepted JPM’s argument that an alleged violation of section 35.41(b) in discovery associated with litigation over a suspected violation of market rules should not be decided independently of a merits decision on the underlying allegation of a market rules violation. She worried that the majority decision could have the unintended consequence of discouraging targets from asserting legitimate defenses in enforcement actions.
Section 35.41 of FERC’s rules implementing the Federal Power Act directs that a seller authorized (as was respondent JPM) to sell at MBR “must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission [or] Commission-approved [market monitors] . . . , unless Seller exercises due diligence to prevent such occurrences.”
In a complicated back-and-forth, the California ISO suspected JPM of market manipulation, the ISO referred its suspicion to FERC Office of Enforcement, and FERC Enforcement, with notice to JPM, directed the ISO to continue its investigation while FERC began its own. JPM, on advice of counsel, did not cooperate fully in the investigation because it alleged that the ISO was not authorized to pursue the investigation once it had been referred to FERC. But in two emails and one letter, FERC enforcement staff told JPM that was wrong; FERC apparently had authorized the ISO’s further investigation of JPM. JPM’s subsequent filing of pleadings with FERC either denying or failing to acknowledge that it had been notified that FERC approved the ISO’s further investigation was therefore deemed to inaccurate and to withheld material information in violation of § 35.41(b).
Notably, there is a due diligence exculpation from § 35.41(b). JPM defended on the ground that it had hired experienced outside counsel to advise it in connection with the ISO and the FERC submissions found to be false and omitting material information. But FERC ruled that retaining experienced and competent lawyers is not enough; there must be proof that the respondent and its lawyers vigorously sought to ensure that all representations to the commission and its surrogates (RTOs, ISOs and other approved market operators) were accurate and did not omit material information.
Recognizing that its ruling has consequences for innocent JPM counterparties, FERC deferred the MBR suspension until April of next year. Once the suspension takes effect, JPM can schedule its transactions without a price or at a zero or price-taker price.