UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
FEDERAL ENERGY REGULATORY
COMMISSION,
Petitioner,
v.
LINCOLN PAPER AND TISSUE, LLC,
Respondent.
Case No. 1:13-CV-13056-DPW
LEAVE TO FILE REQUESTED ON
2/14/14
LINCOLN PAPER AND TISSUE, LLC’S MEMORANDUM
OF LAW IN SUPPORT OF MOTION TO DISMISS COMPLAINT
Dated: February 14, 2014
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 1 of 45
TABLE OF CONTENTS
PRELIMINARY STATEMENT ................................................................................................... 1
STATEMENT OF FACTS ............................................................................................................ 6
I. THE PARTIES AND ISO-NE ................................................................................................ 6
A. FERC ...................................................................................................................... 6
B. Lincoln ................................................................................................................... 7
C. ISO-NE ................................................................................................................... 8
II. DEMAND RESPONSE AND THE INITIAL ISO-NE DALRP RULES ............................. 8
A. Demand Response .................................................................................................. 8
B. DALRP ................................................................................................................... 9
C. The Initial DALRP Rules ..................................................................................... 10
III. LINCOLN’S PARTICIPATION IN DALRP ..................................................................... 11
IV. SUBSEQUENT CHANGES AND CLARIFICATIONS OF THE DALRP RULES ........ 12
V. FERC’S INVESTIGATION AND ALLEGATIONS ......................................................... 13
ARGUMENT ............................................................................................................................... 15
I. FERC’S CLAIM FOR CIVIL PENALTIES IS BARRED BY THE FIVE-YEAR
STATUTE OF LIMITATIONS IN SECTION 2462 .......................................................... 15
A. The Supreme Court Recently Held That Section 2462 Bars An Action To
Enforce A Civil Penalty Filed More Than Five Years After The Violation ........ 15
B. The “Additional” Limitations Period Found In Meyer Does Not Apply
Here Because There Has Not Been An “Adjudicatory Proceeding” Below ........ 16
II. FERC LACKS JURISDICTION OVER LINCOLN’S CONDUCT .................................. 19
1. FERC Has Jurisdiction Over Wholesale Sales of Electricity,
But Not Over Demand Response, Which Is a Retail Non-
Purchase ................................................................................................... 20
2. FERC Cannot Exercise Jurisdiction Over Demand Response
As a Practice “Affecting or Pertaining to” Wholesale Rates ................... 21
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 2 of 45
ii
III. FERC FAILED TO PROVIDE FAIR NOTICE OF THE CONDUCT IT NOW
CONSIDERS IMPROPER ................................................................................................. 22
A. The Fair Notice Doctrine ..................................................................................... 22
B. DALRP Rules Did Not Provide Fair Notice Because They Were Silent
Regarding How To Set A “Baseline” ................................................................... 25
C. FERC Seeks to Penalize Lincoln Based on an Interpretation First
Announced in an Administrative Proceeding ...................................................... 26
D. FERC’s Standardless Interpretation of its Rules Authorizes Arbitrary and
Discriminatory Enforcement ................................................................................ 28
IV. THE COMPLAINT FAILS TO PLEAD ITS CLAIM WITH PARTICULARITY .......... 29
A. The Heightened Pleading Standards for Fraud .................................................... 29
B. FERC Fails to Plead a Scheme to Defraud With Particularity ............................. 30
C. FERC Fails to Adequately Plead that Lincoln Acted with Scienter .................... 32
D. FERC Fails to Adequately Plead That Lincoln’s Conduct Was in
Connection With a FERC-Jurisdictional Transaction .......................................... 35
CONCLUSION ............................................................................................................................ 36
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 3 of 45
iii
TABLE OF AUTHORITIES
Pages(s)
CASES
Altamont Gas Transmission Co. v. FERC,
92 F.3d 1239 (D.C. Cir. 1996) .................................................................................................. 22
Arruda v. Sears, Roebuck & Co.,
310 F.3d 13 (1st Cir. 2002) ....................................................................................................... 30
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................. 30
Atl. City Elec. Co. v. FERC,
295 F.3d 1 (D.C. Cir. 2002) ...................................................................................................... 20
Aulson v. Blanchard,
83 F.3d 1 (1st Cir. 1996) ........................................................................................................... 30
Basic Inc. v. Levinson,
485 U.S. 224 (1988) .................................................................................................................. 34
Beaver Plant Operations v. Herman,
223 F.3d 25 (1st Cir. 2000) ....................................................................................................... 28
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) .............................................................................................................. 5, 30
Brady v. Maryland,
373 U.S. 83 (1963) ................................................................................................................... 16
CFTC v. Reisinger,
2013 WL 3791691 (N.D. Ill. July 18, 2013) ............................................................................ 16
Chicago v. Morales,
527 U.S. 41 (1999) .................................................................................................................... 29
Christopher v. SmithKline Beecham Corp.,
132 S. Ct. 2156 (2012) .............................................................................................................. 24
Coates v. Cincinatti,
402 U.S. 611 (1971) ................................................................................................................. 27
Coyne v. Metabolix, Inc.,
943 F. Supp. 2d 259 (D. Mass. 2013) ....................................................................................... 33
Dennis v. United States,
384 U.S. 855 (1966) .................................................................................................................. 29
Diamond Roofing Co. v. OSHRC,
528 F.2d 645 (5th Cir. 1976) .................................................................................................... 23
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 4 of 45
iv
Drabik v. Stanley-Bostich, Inc.,
997 F.2d 496 (8th Cir. 1993) .................................................................................................... 27
Elec. Power Supply Ass’n v. FERC,
Nos. 11-1486, et al. (D.C. Cir. Dec. 23, 2011) ..................................................................... 9, 20
Elgin Nursing & Rehabilitation Center v. HHS,
718 F.3d 488 (D.C. Cir. 2013) .............................................................................................. 5, 29
Ernst & Ernst v. Hochfelder,
425 U.S. 185 (1976) .................................................................................................................. 32
Fabi Constr. Co. v. Sec’y of Labor,
508 F.3d 1077 (D.C. Cir. 2007) ................................................................................................ 23
FCC v. Fox Television Stations, Inc.,
132 S. Ct. 2307 (2012) .......................................................................................................... 3, 22
FEC v. Nat’l Republican Senatorial Comm.,
877 F. Supp. 15 (D.D.C. 1995) ................................................................................................. 18
FPC v. Conway Corp.,
426 U.S. 271 (1976) .................................................................................................................. 21
FPC v. S. Cal. Edison Co.,
376 U.S. 205 (1964) .............................................................................................................. 3, 20
Gabelli v. SEC,
133 S. Ct. 1216 (2013) .......................................................................................... 1, 2, 15, 16, 18
Gates & Fox Co., Inc. v. OSHA,
790 F.2d 154 (D.C. Cir. 1996) .................................................................................................. 24
Gen. Elec. Co. v. EPA,
53 F.3d 1324 (D.C. Cir. 1995) ........................................................................ 3, 4, 22, 23, 24, 28
Greebel v. FTP Software, Inc.,
194 F.3d 185 (1st Cir. 1999) ..................................................................................................... 33
Greenstone v. Cambex Corp.,
975 F.2d 22 (1st Cir. 1992) ................................................................................................. 30, 33
Helwig v. Vencor, Inc.,
251 F.3d 540 (6th Cir. 2001) .................................................................................................... 33
In re First Marblehead Corp. Sec. Litig.,
639 F. Supp. 2d 145, 153 (D. Mass. 2009) ............................................................................... 30
In re Goodyear Tire & Rubber Co. Sec. Litig.,
436 F. Supp. 2d 873 (N.D. Ohio 2006) ..................................................................................... 33
New York v. FERC,
535 U.S. 1, 20 (2002) ................................................................................................................ 20
Ohio Bell Tel. Co. v. Pub. Utils. Comm’n of Ohio,
301 U.S. 292 (1937) ................................................................................................................... 3
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 5 of 45
v
Pub. Util. Dist. No. 1 of Snohomish Cnty., Washington v. FERC,
272 F.3d 607 (D.C. Cir. 2001) .................................................................................................... 7
Radio Athens, Inc. v. FCC,
401 F.2d 398 (D.C. Cir. 1968) .................................................................................................. 23
Richmond Power & Light v. FERC,
574 F.2d 610 (D.C. Cir. 1978) .................................................................................................. 22
Satellite Broadcasting Co. v. FCC,
824 F.2d 1 (D.C. Cir. 1987) .......................................................................................... 23, 24, 28
SEC v. Durgarian,
477 F. Supp. 2d 342 (D. Mass. 2007) ....................................................................................... 32
Trinity Broad. v. FCC,
211 F.3d 618, 629-30 ............................................................................................................... 27
United States v. Lachman,
278 F. Supp. 2d 68 (D. Mass. 2003) ............................................................................. 23, 27, 29
United States v. Lachman,
387 F.3d 42 (1st. Cir. 2004) ...................................................................................................... 23
United States v. Meyer,
808 F.2d 912 (1st Cir. 1987) ......................................................................................... 16, 17, 19
United States v. Midwest Generation, LLC,
720 F.3d 644 (7th Cir. 2013) .................................................................................................... 16
Upton v. SEC,
75 F.3d 92 (2d Cir. 1996) ......................................................................................................... 28
West Ohio Gas Co. v. Public Utils. Comm’n,
294 U.S. 63 (1935) ...................................................................................................................... 3
FERC ORDERS
Barclays Bank, PLC,
143 FERC ¶ 61,024 (2013) ....................................................................................................... 21
Demand Response Compensation in Organized Wholesale Energy Markets,
Order No. 745, 134 FERC ¶ 61,187 (2011), reh’g denied, 137 FERC ¶ 61,215 (2011),
reh’g denied, 138 FERC ¶ 61,148 (2012) ............................................................................. 9, 21
Energy Spectrum, Inc. v. New York Indep. Sys. Operator, Inc.,
141 FERC ¶ 61,197 (2012) ....................................................................................................... 29
EnergyConnect, Inc.,
130 FERC ¶ 61,031 (2010) ....................................................................................................... 21
EnerNOC,
134 FERC ¶ 61,158 (2011) ....................................................................................................... 29
Enforcement of Statutes, Regulations, and Orders,
129 FERC ¶ 61,248 (2009)....................................................................................................... 16
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 6 of 45
vi
ISO New England, Inc.,
138 FERC ¶ 61,042 (2012), reh'g denied, 139 FERC ¶ 61,116 (2012) ................................... 13
ISO New England, Inc.,
123 FERC ¶ 61,021 (2008) (“April 2008 Order”), reh’g denied, 124 FERC ¶ 61,235
(2008) (“September 2008 Order”) ............................................................................ 4, 12, 13, 26
Neptune Reg’l Transmission Sys. LLC,
111 FERC ¶ 61,455 (2005) ....................................................................................................... 24
New England Power Pool and ISO New England, Inc.,
100 FERC ¶ 61,287 (“September 2002 Order”), on reh’g and compliance, 101 FERC
¶ 61,344 (2002) (“December 2002 Order”) ................................................................................ 9
Nw. Pipeline Corp.,
109 FERC ¶ 61,356 (2004) ....................................................................................................... 24
Prohibition of Energy Market Manipulation,
Order No. 670, 114 FERC ¶ 61,047 (2006) .................................................................. 15, 29, 34
Regional Transmission Organizations,
Order No. 2000, 89 FERC ¶ 61,285 (1999), order on reh’g, 90 FERC ¶ 61,201 (2000) .......... 6
Submissions to the Commission upon Staff Intention to Seek an Order to Show Cause,
Order No. 711, 123 FERC ¶ 61,159 (2008) .............................................................................. 16
Tres Palacio Gas Storage LLC,
126 FERC ¶ 61,167 (2009) ....................................................................................................... 24
Wholesale Competition in Regions with Organized Electric Markets,
Order No. 719, 125 FERC ¶ 61,071 (2008), order on reh’g, 128 FERC ¶ 61,059
(2003), reh’g denied, 129 FERC ¶ 61,252 (2009) ...................................................................... 8
STATUTES
17 C.F.R. § 201.230(a)(1) ............................................................................................................. 16
17 C.F.R. § 202.5 .......................................................................................................................... 16
18 C.F.R. § 1c.2 ........................................................................................................................ 1, 30
18 C.F.R. § 35.28(b)(4) ............................................................................................................. 8, 20
Fed. R. Civ. P. 9(b) ............................................................................................................... 1, 5, 30
Federal Power Act (FPA)
16 U.S.C. § 823b(d) ........................................................................................................................ 2
16 U.S.C. § 824(a) .......................................................................................................... 3, 6, 20, 21
16 U.S.C. § 824(b)(1) ............................................................................................................... 6, 20
16 U.S.C. § 824d ....................................................................................................................... 8, 21
16 U.S.C. § 824v ....................................................................................................................... 1, 30
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 7 of 45
vii
Judiciary and Judicial Procedure
28 U.S.C. § 2462 ....................................................................................................................... 1, 15
OTHER AUTHORITIES
ISO New England Manual for Market Operations, Manual M-11 (“Energy Market”)
(Revision 47) (effective date Oct. 6, 2013), available at:
www.isonewengland.com/rules_proceds/isone_mnls/m_11_market_operations_revisio
n_47_10_06_13.doc. ................................................................................................................... 8
U.S. Dept. of Energy, Benefits of Demand Response in Electricity Markets and
Recommendations for Achieving Them: A Report to the United States Congress
Pursuant to Section 1252 of the Energy Policy Act of 2005 at 9 (Feb. 2006) (“2006
DOE Report”) ............................................................................................................................. 8
Whit Richardson, Lincoln paper mill layoffs due to contract lost to Indonesian firm, not
just boiler explosion, BANGOR DAILY NEWS, Dec. 17, 2013, available at
https://bangordailynews.com/2013/12/17/business/lincoln-paper-mill-layoffs-due-to-
contract-lost-to-indonesian-firm-not-just-boiler-explosion ........................................................ 7
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 8 of 45
PRELIMINARY STATEMENT
FERC’s December 2013 complaint (the “Complaint”) should be dismissed because it is
time barred. Under 28 U.S.C. § 2462 (“Section 2462”) and the Supreme Court’s recent decision
in Gabelli v. SEC, 133 S. Ct. 1216, 1221-22 (2013), the Federal Energy Regulatory Commission
(“FERC” or the “Commission”) must have brought this action to enforce the civil penalty it
seeks to impose on defendant Lincoln Paper and Tissue, LLC (“Lincoln”) by February 7, 2013,
i.e., within five years after the date of the last violation alleged by FERC. Even if the statute of
limitations had not run, this case must be dismissed because FERC lacks jurisdiction over the
conduct at issue, because Lincoln was not put on “fair notice” that its conduct was improper, and
because FERC’s claim sounding in fraud has not been pled with the specificity required by Rule
9(b) of the Federal Rules of Civil Procedure (“FRCP”).
FERC alleges that Lincoln, a small paper mill located in Maine and unsophisticated in the
energy markets, engaged in a manipulative “scheme” to receive “additional profit” from its
participation in a then-novel “demand response” program called the Day-Ahead Load Response
Program (“DALRP”). That nascent program was, and still is, administered by ISO New
England, Inc. (“ISO-NE”), an independent, non-profit “regional transmission organization”
(“RTO”) regulated by FERC. Demand response programs are designed to encourage retail
customers like Lincoln to reduce their consumption of electricity in response to incentives.
FERC alleges that Lincoln fraudulently participated in DALRP from July 2007 to February
2008, in violation of Section 222 (“Section 222”) of the Federal Power Act (“FPA”), 16 U.S.C.
§ 824v, and FERC’s Anti-Manipulation Rule, 18 C.F.R. § 1c.2. Compl. at ¶ 10.
FERC’s non-public investigation of Lincoln started more than six years ago and
culminated in FERC assessing a $5 million civil penalty against Lincoln in its August 29, 2013
“Order Assessing Civil Penalty.” During the investigation and proceeding before FERC, there
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 9 of 45
2
was no “adjudication” of Lincoln’s liability in an adversarial proceeding before a neutral trier of
fact: Lincoln did not have a hearing before an administrative law judge (“ALJ”), nor did it have
the right to take or receive discovery (or to even know who the witnesses against it were or what
they said) or to appeal FERC’s findings. Instead, FERC acted as prosecutor, judge, and jury, and
now seeks to prevent Lincoln from ever having the claims against it fairly adjudicated. Despite
FERC’s six-year investigation, it has not pled any facts demonstrating that Lincoln engaged in
fraudulent acts at all, and certainly not in connection with FERC-jurisdictional wholesale energy
sales. Further, FERC did not provide “fair notice” that the complained-of actions were improper.
This action is time barred. Under the recent Supreme Court ruling in Gabelli, a claim
for civil penalties is governed by the five-year statute of limitations in Section 2462 that begins
to run at the time of the alleged violation. Lincoln’s last alleged violation occurred on February
7, 2008. This required FERC to file its Complaint by February 7, 2013. Its December 2013
Complaint is therefore time barred. FERC may argue (as it recently has in another case before
this Court) that there is an additional five-year limitations period that applies. But the First
Circuit case that adopted that rule does not apply here. That case emphasized that an additional
limitations period applies only where an agency, unlike here, engages in an “adjudicatory
hearing” before an ALJ, governed by the Administrative Procedures Act (“APA”), where the
respondent has “a full panoply of discovery” rights and the right to appeal. Lincoln had none of
those things in the FERC proceeding below.1
1 FERC takes the position that the Court should rubber-stamp FERC’s determination of Lincoln’s liability, based
solely on FERC’s findings and materials discussed in FERC’s Penalty Assessment Order. Compl. at ¶ 86. In
that case, Lincoln would never have an opportunity to litigate the merits of FERC’s claim in an adversarial
proceeding, and neither Lincoln nor this Court would ever learn the full factual basis for FERC’s claim or any
exculpatory evidence FERC’s investigation uncovered. Section 31(d) of the FPA, 16 U.S.C. § 823b(d), grants
the target of a FERC enforcement action the right to have its liability adjudicated either before a FERC ALJ or
a United States District Court that is to review de novo all matters of fact and law. Yet FERC would have the
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 10 of 45
3
FERC lacks jurisdiction over Lincoln’s participation in the DALRP. The FPA grants
FERC jurisdiction over “the sale of [electric] energy at wholesale in interstate commerce,” but
forbids FERC from regulating retail sales, which are “subject to regulation by the States.” 16
U.S.C. § 824(a). The Complaint concerns Lincoln’s provision of “demand response” by
reducing its consumption, i.e., by electing to forego retail purchases, in response to incentive
payments from ISO-NE. Retail non-purchases are the opposite of FERC-jurisdictional
wholesale sales. FERC has asserted that it has jurisdiction over such retail non-purchases
because, in its view, demand response is a service that “affect[s] or pertain[s] to” FERC-
jurisdictional wholesale rates (i.e., by reducing demand, these programs reduce wholesale
prices). Compl. at ¶ 80. This argument is misguided and should be rejected. Retail rate setting
is exclusively “subject to regulation by the States.” 16 U.S.C. § 824(a). FERC’s argument
obliterates the “bright line” distinction “between federal and state jurisdiction” that Congress
made in enacting the FPA. FPC v. S. Cal. Edison Co., 376 U.S. 205, 215-16 (1964).
Lincoln did not have fair notice that FERC considered Lincoln’s actions improper.
The Due Process Clause of the Fifth Amendment “requires that parties receive fair notice before
being deprived of property,” Gen. Elec. Co. v. EPA, 53 F.3d 1324, 1328 (D.C. Cir. 1995), and
agencies must give sufficient guidance such that “a person of ordinary intelligence [has] fair
notice of what is prohibited,” and “so that those enforcing the law do not act in an arbitrary or
discriminatory way.” FCC v. Fox Television Stations, Inc., 132 S. Ct. 2307, 2317 (2012).
[Footnote continued from previous page]
Court order Lincoln to pay a $5 million civil penalty without any discovery, hearing, or trial. As the Supreme
Court has held, a reviewing court cannot simply “take the word of the Commission as to the outcome of a secret
investigation, and let it go at that. ‘A hearing is not judicial, at least in any adequate sense, unless the evidence
can be known.’” Ohio Bell Tel. Co. v. Pub. Utils. Comm’n of Ohio, 301 U.S. 292, 304 (1937) (quoting West
Ohio Gas Co. v. Pub. Utils. Comm’n, 294 U.S. 63, 69 (1935).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 11 of 45
4
Where an agency seeks to penalize a party based on a novel interpretation of its regulations that
is announced for the first time in an administrative proceeding and that was not clear from the
regulation and previous guidance, then that “party is not ‘on notice’ of the agency’s ultimate
interpretation,” and therefore “may not be punished.” Gen. Elec., 53 F.3d at 1333-34. Such is
the case here.
FERC alleges Lincoln engaged in fraud by “curtailing” its behind-the-meter generator
(“BTMG”) and thereby setting a “false baseline to create the illusion that it was reducing
consumption” in order to “extract payments for phantom load reductions.” Compl. at ¶ 10. But
the ISO-NE baseline-setting rules in effect at the time consisted of short, mechanical formulas
that were silent as to how a customer should set its baseline or operate its BTMG when doing so.
Indeed, FERC’s Commissioners recognized that those rules were vague and left “unresolved the
fundamental problem as to how an individual customer’s baseline load should be determined...”
See, e.g., ISO New England, Inc., 123 FERC ¶ 61,021 at 61,105-06 (2008) (“April 2008 Order”)
(Wellinghoff, Comm’r, dissenting in part), reh’g denied, 124 FERC ¶ 61,235 (2008)
(“September 2008 Order”). Moreover, FERC has not alleged that Lincoln violated any specific
provision of ISO-NE’s rules or pointed to any public statement or document issued by FERC or
ISO-NE that put sophisticated energy market participants, much less an unsophisticated entity
like Lincoln, on notice that such a method of baseline setting was improper. Nor could FERC
allege that it was because setting a baseline in the way Lincoln did was not prohibited at the
time. The approach Lincoln used was a reasonable reading of the rules, was consistent with
industry practice, and was in accord with its view that it was already providing demand response
before it began participating in DALRP, that DALRP was an incentive to continue to do so, and
that its BTMG was unreliable.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 12 of 45
5
FERC’s allegation that Lincoln violated FERC’s Anti-Manipulation Rule is based on a
novel interpretation that stretches the rule to cover lawful, non-fraudulent conduct like Lincoln’s.
This Court should not defer to FERC’s overbroad interpretation of this vague regulation, both
because Section 31(d)(3)(B) of the FPA provides that this Court is to review de novo all issues of
fact and law and because it would impermissibly allow FERC “to function not only as judge,
jury, and executioner but to do so while crafting new rules.” Elgin Nursing & Rehabilitation
Center v. HHS, 718 F.3d 488, 494 (D.C. Cir. 2013).
The Complaint fails to plead its Section 222 claim with the requisite specificity. The
Complaint is riddled with naked assertions and conclusory statements. Once those statements
are cast aside, the Complaint fails to allege a claim that is plausible, rather than speculative, as
required under Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), and it fails to plead its
Section 222 claim with the necessary “particularity” required by FRCP Rule 9(b). Indeed, FERC
has not (and cannot) properly plead any of the elements of a Section 222 claim.
First, FERC fails to adequately plead that Lincoln engaged in a “fraudulent or
manipulative scheme.” FERC alleges only that Lincoln curtailed its generator when setting a
baseline for participation in DALRP and simply concludes this was not permitted. This
conclusion is the basis for FERC’s declaration that Lincoln’s conduct was fraudulent. But,
FERC does not plead any facts indicating Lincoln’s baseline was actually false, nor cite to any
FERC or ISO-NE rule indicating that Lincoln’s conduct was improper. Nor could it. The rules
in effect at that time were silent as to how BTMG should be run when setting the baseline, and
did not prohibit setting the baseline in the manner in which the Complaint alleges Lincoln did.
Second, FERC fails to adequately plead that Lincoln acted with scienter. FERC merely
concludes that, because Lincoln set its baseline in a manner FERC now disapproves of, Lincoln
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 13 of 45
6
must have had scienter. But FERC fails to allege facts demonstrating that Lincoln possessed the
requisite scienter. FERC even fails to allege facts from which one could infer scienter, much
less reach a “strong inference” of scienter. Indeed, aside from conclusory allegations, FERC
fails to plead any facts from which one could infer that Lincoln was aware that its baseline was
set incorrectly, much less that it intended to defraud anyone.
Third, FERC fails to properly plead that it has jurisdiction over Lincoln. Here again,
FERC simply asserts that this element is met. But FERC has not alleged any facts demonstrating
that Lincoln’s retail non-purchases were subject to FERC’s jurisdiction over wholesale energy
sales or were otherwise in connection with a FERC-jurisdictional transaction.
STATEMENT OF FACTS
I. THE PARTIES AND ISO-NE
A. FERC
FERC is an administrative agency of the United States, organized and existing pursuant
to the FPA. Compl. at ¶ 13. The FPA grants FERC jurisdiction over “transmission of electric
energy in interstate commerce and the sale of such energy at wholesale in interstate commerce,”
16 U.S.C. § 824(a), but forbids FERC from regulating “any other sale of electric energy,” 16
U.S.C. § 824(b)(1), including transactions “subject to regulation by the States.” 16 U.S.C.
§ 824(a). Over the past 15 years, FERC has encouraged electric utilities to transfer control over
their transmission facilities to independent public utility entities that are referred to as
independent system operators (“ISOs”) and RTOs, which are responsible for operating member
utilities’ transmission systems and administering organized markets for wholesale electricity.2
2 See generally Regional Transmission Organizations, Order No. 2000, 89 FERC ¶ 61,285 (1999) (FERC order
establishing criteria for certification as an RTO), order on reh’g, Order No. 2000-A, 90 FERC ¶ 61,201 (2000),
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 14 of 45
7
B. Lincoln
Lincoln is a small limited liability company that owns and operates a paper mill in
Lincoln, Maine (the “Mill”). Compl. at ¶ 14. During the relevant period, the Mill had
approximately 400 employees. See id. at ¶ 33.3 The Mill operates a large and complex
manufacturing facility seven days a week and 24 hours a day to fill customer orders.
Lincoln is not, and the Complaint does not allege that it is, a sophisticated energy market
participant or a wholesale energy customer. See generally, Ex. 2 at 32-33 [Lincoln’s Answer in
Opposition to Order to Show Cause (Sept. 14, 2012)]. Instead, Lincoln is a retail customer that
consumes the electricity that it purchases. During the relevant period, Lincoln supplied part of
its own energy or “load” through two on-site, BTMGs: (1) an old and unreliable Westinghouse
generator with a capacity of 4 MW (the “Westinghouse”), which provided both electricity and
steam management for the plant’s manufacturing process; and (2) a TG3 Fincantieri generator
(the “TG3”) with a nameplate capacity of 13.5 MW, which was intended to replace the
Westinghouse, began operational testing in November 2007, and commenced commercial
operations in January 2008 (i.e., after Lincoln began participating in the DALRP). Compl., Ex. 1
[Penalty Assessment Order] at P 15.4 Lincoln purchased the remainder (and most) of its
[Footnote continued from previous page]
aff’d sub nom. Pub. Util. Dist. No. 1 of Snohomish Cnty., Washington v. FERC, 272 F.3d 607 (D.C. Cir. 2001).
3 In November 2013, shortly before FERC filed its Complaint, Lincoln was forced to lay off approximately 200
millworkers, nearly half of its work force, following an explosion on November 2, 2013 that destroyed a
recovery boiler at the mill and the subsequent (though unrelated) loss of a major customer. See Ex. 1 [Whit
Richardson, Lincoln paper mill layoffs due to contract lost to Indonesian firm, not just boiler explosion,
BANGOR DAILY NEWS, Dec. 17, 2013, available at https://bangordailynews.com/2013/12/17/business/lincoln-
paper-mill-layoffs-due-to-contract-lost-to-indonesian-firm-not-just-boiler-explosion].
References to “Ex. __” are to exhibits to the concurrently filed Declaration of William S. Scherman, Esq. in
Support of Lincoln Paper and Tissue, LLC’s Memorandum of Law in Support of Motion to Dismiss Complaint,
dated February 14, 2014.
4 Standard FERC practice is to cite to paragraphs (denoted with a “P”) rather than page numbers of FERC orders.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 15 of 45
8
electricity at retail from Constellation NewEnergy, Inc. (“Constellation”). Id. at P 14.
C. ISO-NE
ISO-NE is an independent, non-profit RTO created by FERC in 1997. ISO-NE operates
the FERC-jurisdictional transmission system and administers the FERC-jurisdictional wholesale
power markets in the New England area, Compl. at ¶ 2, in which power is sold at the rates, terms
and conditions reviewed and authorized by FERC. 16 U.S.C. § 824d. In these markets, ISO-NE
accepts offers to sell energy in ascending price order until the full demand for energy has been
met at a “market-clearing price” that is determined for each pricing zone on the ISO-NE
transmission system, and that is referred to as the “locational marginal price” (or “LMP”).5
II. DEMAND RESPONSE AND THE INITIAL ISO-NE DALRP RULES
A. Demand Response
FERC’s regulations define “demand response” as “a reduction in the consumption of
electric energy by customers from their expected consumption in response to an increase in the
price of electric energy or to incentive payments designed to induce lower consumption of
electric energy.” 18 C.F.R. § 35.28(b)(4).6 In plain English, “demand response” refers to the
basic economic principle that, when electricity prices go up, customers demand less of it, and
this reduction in demand should in turn lower prices. Due to the division between FERC and
5 See generally ISO New England Manual for Market Operations, Manual M-11, Section 2 (“Energy Market”)
(Revision 47) (effective date Oct. 6, 2013), available at:
www.isonewengland.com/rules_proceds/isone_mnls/m_11_market_operations_revision_47_10_06_13.doc.
6 FERC adopted the definition of “demand response” in an order issued in October 2008 (i.e., after the relevant
time period addressed in the Complaint). See Wholesale Competition in Regions with Organized Electric
Markets, Order No. 719, 125 FERC ¶ 61,071 (2008), order on reh’g, Order No. 719-A, 128 FERC ¶ 61,059
(2003), reh’g denied, Order No. 719-B, 129 FERC ¶ 61,252 (2009). In the Complaint, however, FERC does
not cite any definition in FERC’s regulations or ISO-NE’s DALRP rules, and instead relies on a definition in a
2006 Department of Energy (“DOE”) report. See Compl. at ¶ 24 (citing U.S. Dept. of Energy, Benefits of
Demand Response in Electricity Markets and Recommendations for Achieving Them: A Report to the United
States Congress Pursuant to Section 1252 of the Energy Policy Act of 2005 at 9 (Feb. 2006) (“2006 DOE
Report”)).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 16 of 45
9
state jurisdiction over wholesale and retail transactions, however, there is a disconnect between
wholesale rates, which vary greatly in real time, and retail rates, which generally do not vary in
response to changes in wholesale prices.7 As a result, State-jurisdictional retail consumers do not
“see” FERC-jurisdictional wholesale prices, and thus do not receive clear price signals as to
when it would be beneficial for them to reduce consumption. To address this disconnect,
demand response programs have been implemented to incentivize retail customers to reduce
consumption. See, e.g., Order No. 745 at P 13.
B. DALRP
FERC authorized DALRP in 2002 as part of an ISO-NE proposal to establish various
demand response programs.8 ISO-NE did not provide any definition of the term “demand
response,” but it explained that the purpose of such programs is to reduce energy prices (i.e., the
LMP). See Ex. 5 at 6 [ISO-NE Changes to DALRP FERC Filing (Feb. 5, 2008)]. DALRP
worked as follows: retail customers participating in the program would “submit price bids that
7 See Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, 134 FERC
¶ 61,187 at P 57 (2011) (“Order No. 745”) (codified in 18 C.F.R. § 35.28), reh’g denied, Order No. 745-A, 137
FERC ¶ 61,215 (2011), reh’g denied, Order No. 745-B, 138 FERC ¶ 61,148 (2012), appeal docketed sub nom.,
Elec. Power Supply Ass’n v. FERC, Nos. 11-1486, et al. (D.C. Cir. Dec. 23, 2011).
8 See generally New England Power Pool and ISO New England, Inc., 100 FERC ¶ 61,287 at PP 117-26
(“September 2002 Order”), on reh’g and compliance, 101 FERC ¶ 61,344 at PP 37-49 (2002) (“December 2002
Order”). The DALRP, along with other load response programs, is described in and governed by the rules set
forth in the ISO-New England Load Response Manual (the “DALRP Manual”) and in ISO-NE’s FERC Electric
Tariff No. 3 (“Tariff”), as they were revised from time to time. During the period of the alleged violations. the
portion of the Tariff that governed DALRP, Section III, Market Rule 1, Appendix E (“Appendix E”) did not
provide any details whatsoever as to how the Customer Baseline should be set. See Ex. 3 [Tariff, Appendix E
(effective as of December 1, 2006)], generally. (Exhibit 3 contains a copy of the version of Appendix E that
was in effect as of December 1, 2006. All of the substantive DALRP provisions in the December 1, 2006
version remained in effect throughout the relevant period, until amended effective February 7, 2008. Certain
non-substantive revisions were made during this period, for example, on June 15, 2007 to extend the term of
ISO-NE’s demand response programs (Section III.E.1.3) and on July 31, 2007 to revise ISO-NE’s internet
communications protocols (Section III.E.7).). The only description of baseline-setting methodology was in the
DALRP Manual. The DALRP Manual provisions governing the Customer Baseline and the “performance”
measurement (i.e., the quantity of a demand response provider’s reduction in consumption) in the version that
Lincoln reviewed were in effect as of April 7, 2006 and did not change until the DALRP Manual was
discontinued and replaced in 2010. See Ex. 4 [DALRP Manual, Rev. 9 (effective date Apr. 7, 2006)].
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 17 of 45
10
indicate that the maximum price they are willing to pay for energy,” and “[w]hen the energy
price exceed[ed] a customer’s price bid,” the customer would curtail its consumption from the
ISO-NE grid and would thereby “avoid paying the day-ahead energy price” (i.e., the LMP) for
the increment of reduced consumption. See December 2002 Order at P 37. In addition to
receiving a financial benefit equal to the avoided cost of the energy not consumed, customers
would also receive “an additional financial benefit,” i.e., a second “payment for the amount of
reduced load” equal to the applicable LMP. Id. at P 38.
C. The Initial DALRP Rules
To participate in DALRP, a customer first had to establish a baseline for the purpose of
measuring the amount of load reductions. See Ex. 4 at § 4.2. But the DALRP Manual and the
Tariff provided no guidance on the crucial issue of how a retail customer with BTMG like
Lincoln should set its baseline or operate its equipment, and specifically its BTMG, when the
initial baseline measurements are obtained. See generally, Ex. 3 and Ex. 4. Nor did any other
FERC or ISO-NE rules, regulations, or pronouncements at this time provide such guidance.9
The DALRP Manual did go into considerable detail regarding the technical aspects of
measuring a customer’s initial baseline. See Ex. 4 at § 4.2.1. The DALRP Manual also provided
that a customer’s initial DALRP baseline would be self-correcting in some circumstances, i.e., it
would automatically adjust based on actual operating data if a bid was not made or accepted into
the program (but would otherwise stay the same). See id. None of this detail, however, spoke to
how the customer baseline was to be set.
9 In the Tariff, the term “Customer Baseline” was defined, for the purposes of the DALRP, as “the average
aggregate hourly load, rounded to the nearest kWh, for each of the 24 hours in a day for each Individual
Customer.” Ex. 6 [Tariff (effective date Feb. 16, 2007)] at § III.1.3.2, Original Sheet No. 7018A. The
Customer Baseline definition did not change during the relevant time period.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 18 of 45
11
III. LINCOLN’S PARTICIPATION IN DALRP
In the Spring of 2007, Lincoln was approached by multiple companies seeking to recruit
Lincoln to participate in DALRP. See Ex. 2 at 9. In April 2007, representatives of Constellation
visited Lincoln’s headquarters and solicited Lincoln to participate in DALRP and use
Constellation as Lincoln’s “Enrolling Participant.” Compl., Ex. 2, Appendix A [Enforcement
Staff Report and Recommendation] at 7. Constellation proposed to collect 15 percent of all
program revenues that Lincoln received in return for Constellation providing various services as
Lincoln’s Enrolling Participant.10 Constellation only mentioned the customer baseline once
during this presentation in a slide that depicted “dancing dollars” between the customer baseline
and actual consumption, illustrating the incentives that DALRP created for companies like
Lincoln. Ex. 7 at 3 [Constellation PowerPoint (dated Apr. 6, 2007)]. In July 2007, Lincoln
enrolled in DALRP with Constellation as its Enrolling Participant. Compl. at ¶ 35.
Lincoln received no meaningful guidance from any entity or document on how to treat its
BTMG when setting its baseline. See Compl., Ex. 1 at P 23. Lincoln set its initial baseline from
July 25 to July 31, 2007 at 19.39 MW. Id. at PP 16, 18. When setting its baseline, Lincoln ran
the Westinghouse at approximately one MW. See Compl. at ¶ 38. Between July 25, 2007 and
February 7, 2008, Lincoln’s baseline changed nine times, moving both up and down. See Ex. 2
at 4. Specifically, Lincoln’s initial baseline on July 31, 2007 was 19.39 MW, and it ultimately
decreased to 17.73 MW in February 2008, or a difference of 1.66 MW. Id.11 Lincoln set its
10 These services included “sign[ing] up, set[ting] up, and train[ing] customers at cost to
[Constellation]…[a]ssist[ing] the customers in the development of Load Curtailment strategies, and
determin[ing the] amount of curtailment possible at different price levels… [and] provid[ing] self-certification
of the customer’s Load response capability…” . See Ex. 4 at § 2.7.
11 FERC alleges Lincoln overstated its baseline by three MW. Compl. at ¶ 38. In fact, over half of this alleged
three MW overstatement (i.e., 1.66 MW) disappeared by the end of the relevant period.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 19 of 45
12
baseline consistent with its view that it was already providing demand response before its
participation in DALRP, that DALRP payments were an “additional financial benefit” or
incentive for its reduction of load, and that the Westinghouse was unreliable. See id. at 23.
IV. SUBSEQUENT CHANGES AND CLARIFICATIONS OF THE DALRP RULES
On February 5, 2008, ISO-NE proposed significant tariff revisions designed to reduce
payments to DALRP participants by changing the minimum price, or “offer floor,” for demand
response resources. See Ex. 5, generally.12 ISO-NE did not propose any changes to its pre-
existing baseline-setting rules, nor did it offer any other guidance on how baselines should be set.
ISO-NE did, however, for the first time, assert that the baseline was intended to represent
“normal daily consumption patterns.” Id. at 16.
On April 4, 2008, FERC accepted ISO-NE’s revisions, effective February 7, 2008.13 In
the April 2008 Order, FERC noted ISO-NE’s assertion “that Customer Baseline methodologies
for demand response programs are complex, and that changes that could address the instant
problem are by no means intuitive,” and did not require ISO-NE to refine or change its existing
rules. April 2008 Order at P 29. Then-Commissioner (and former Chairman) Jon Wellinghoff
dissented from these orders because, in his view, ISO-NE’s proposal left “unresolved the
12 According to ISO-NE, the revised Tariff provisions were intended to address “strategic behavior” by the
majority of DALRP participants, namely, 26 out of 46 participants representing 75 percent of the amount of
demand response cleared in DALRP. See Ex. 5 at 11. ISO-NE did not describe this baseline-setting conduct as
a violation of the Tariff or other rules, nor did it assert that this conduct was fraudulent or deceptive. Instead,
ISO-NE stated that this “strategic behavior” by most DALRP participants, in combination with the more than
five-year old offer floor of $50/MWh, had produced an “unintended result” of causing participants’ offers into
DALRP to clear too often. Id. at 9. ISO-NE proposed to fix the design flaw by replacing the $50/MWh
minimum offer floor with a new floating minimum based on fuel costs.
13 See April 2008 Order. In the April 2008 Order, FERC, echoing ISO-NE’s assertion, stated, again for the first
time, that the Customer Baseline “is intended to represent an asset’s normal operating conditions.” April 2008
Order at P 5. But FERC did not offer any further guidance on this issue. Instead, in a related June 2008 order,
FERC directed ISO-NE to file a report that “include[d] a review of the current Customer Baseline methodology
and a timetable for implementing any changes necessary for demand resources to participate in its markets...”
ISO New England Inc., 123 FERC ¶ 61,266 at P 31 (2008).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 20 of 45
13
fundamental problem as to how a customer’s baseline load should be determined,” and that this
problem needed to be addressed.14 Then-Commissioner Suedeen Kelly wrote a separate
concurrence expressing similar concerns.15
In 2011, and in compliance with FERC’s Order No. 745, ISO-NE proposed to adopt an
entirely new market design for demand response that provided more clarity on how to set a
baseline,16 and for the first time, prohibited the baseline-setting methodology that Lincoln used.17
On January 19, 2012, FERC accepted ISO-NE’s proposed changes to its demand response rules.
See ISO New England, Inc., 138 FERC ¶ 61,042 (2012) (“January 2012 Order”), reh’g denied,
139 FERC ¶ 61,116 (2012).
V. FERC’S INVESTIGATION AND ALLEGATIONS
FERC commenced its investigation in February 2008 (Compl. at ¶ 57), at approximately
the same time that ISO-NE submitted the February 2008 Filing. In the course of the
investigation, FERC Enforcement staff engaged in extensive discovery, obtained thousands of
documents from Lincoln and third parties, and it deposed a total of nine witnesses, including two
Lincoln employees. See id. & Compl., Ex. 2, Appendix A at 2.
14 April 2008 Order at 61,105-06 (Wellinghoff, Comm’r, dissenting in part); see also September 2008 Order at
62,220 (Wellinghoff, Comm’r, dissenting in part) (“I continue to believe that issues related to accurate customer
baselines are important and need to be addressed.”).
15 See April 2008 Order at 61,105 (Kelly, Comm’r, concurring) (acknowledging that developing an accurate
baseline methodology “may be a complex undertaking that requires significant time and resources,” and
“encourage[ing]” ISO-NE to work with its stakeholders to develop an appropriate methodology”).
16 See Ex. 8 [ISO-NE August 2011 Filing], generally. To implement the new market design, ISO-NE cancelled its
existing Tariff provisions and replaced them with an entirely new Tariff section which provided detail on how
BTMG could participate in ISO-NE’s demand response programs and how customers with BTMG were to set
their baselines. See Ex. 9 [Tariff, Market Rule 1 Section III.8 and Appendix E (effective June 1, 2012)],
generally. Although this filing was made in compliance with Order No. 745, Order No. 745 did not require
ISOs/RTOs to revise their baseline-setting rules, to adopt a standardized methodology, or provide any guidance
on how BTMG should be run when setting the baseline. Compl., Ex. 1 at P 39.
17 ISO-NE’s new rules provided that the “Demand Response Baseline” should be set based on “expected
electricity consumption … absent demand reduction payments.” See Ex. 9 at § III.E.7.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 21 of 45
14
Lincoln was not permitted to conduct any discovery. It had no right to obtain any
documents or testimony from FERC or the ISO-NE, or to subpoena third party witnesses or
documents. Lincoln never had access to the documents or testimony FERC obtained from third
parties (with the exception of the portions of the documents cited or quoted in FERC’s public
orders). Indeed, Lincoln still does not even know the identities of the seven third-party witnesses
deposed by FERC. As a result, Lincoln has not been able to depose or confront any of the
witnesses that may have relevant or exculpatory evidence.
On November 3, 2009, FERC informed Lincoln that it had preliminarily concluded that
Lincoln had violated its Anti-Manipulation Rule.18 On July 17, 2012, FERC issued its “Order to
Show Cause and Notice of Proposed Penalty” in which it directed Lincoln to show cause why it
had not violated Section 222 and FERC’s Anti-Manipulation Rule in connection with its
participation in DALRP. See Compl., Ex. 2.19 On August 29, 2013, FERC issued its Penalty
Assessment Order in which it found that Lincoln had engaged in market manipulation, assessed
against Lincoln a civil penalty of $5 million dollars, and directed Lincoln to pay the penalty and
disgorge $379,016.03, plus interest, to ISO-NE within 60 days. See Compl., Ex. 1 at P 79.
Lincoln rejects FERC’s findings, and therefore did not pay the civil penalty.
18 On January 25, 2011, FERC issued the first public document in the FERC proceeding, entitled “Staff Notice of
Alleged Violations,” in which it alleged that Lincoln violated the Anti-Manipulation Rule. See Ex. 10 [Staff
Notice of Alleged Violations]. On May 5, 2011 and again on August 4, 2011, Lincoln submitted non-public
responses to FERC Enforcement staff, denying FERC’s allegations. See Compl., Ex. 2, Appendix A at 2.
19 FERC also provided notice, as required by FPA Section 31(d)(1), that Lincoln may elect either (1) an
administrative hearing before an Administrative Law Judge, pursuant to Section 31(d)(2) of the FPA, or (2) an
immediate assessment of civil penalties by FERC that will be subject to de novo review of the facts and the law
by the appropriate U.S. district court. See Compl., Ex. 2 at P 3. On August 14, 2012, Lincoln elected the option
for de novo review in U.S. district court. See Ex. 11 [Lincoln Notice of Election]. On September 14, 2012,
Lincoln submitted its answer to the Show Cause Order. See Ex. 2, generally.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 22 of 45
15
ARGUMENT
I. FERC’S CLAIM FOR CIVIL PENALTIES IS BARRED BY THE FIVE-YEAR
STATUTE OF LIMITATIONS IN SECTION 2462
As FERC itself admits, a claim for civil penalties is governed by the general, five-year
statute of limitations in Section 2462 that applies to statutes that, like the FPA, do not specify a
limitation period for such claims.20 The Complaint alleges that Lincoln’s violations of Section
222 occurred from July 25, 2007 through February 7, 2008. Compl. at ¶¶ 37, 45, and 83. Thus,
FERC was required to file its Complaint no later than February 7, 2013, and FERC’s December
2, 2013 Complaint is time-barred.
A. The Supreme Court Recently Held That Section 2462 Bars An Action To
Enforce A Civil Penalty Filed More Than Five Years After The Violation
Just this past year, the Supreme Court interpreted Section 2462 as barring any action to
enforce a civil penalty in a district court that, like FERC’s Complaint, was filed more than five
years after the date of the alleged violation(s). In Gabelli, the Court unanimously held as time-
barred an SEC enforcement action seeking civil penalties for alleged violations of the very SEC
rule and statutory provision on which FERC’s Anti-Manipulation Rule and Section 222,
respectively, are modeled (namely, SEC Rule 10b-5 and Section 10(b) of the Securities
Exchange Act of 1934) where the violations ended in 2002 and the SEC did not file its complaint
in district court until 2008. The Court held that, under the plain language of Section 2462, the
claim accrues, and the five-year period begins to run, on the date the violations occurred.21
20 See, e.g., Prohibition of Energy Market Manipulation, Order No. 670, 114 FERC ¶ 61,047 at P 62 (2006)
(stating that 28 U.S.C. § 2462 applies to civil penalty claims for violation of Section 222). Section 2462
provides, in relevant part, that “an action, suit or proceeding for the enforcement of any civil fine, penalty, of
forfeiture, … shall not be entertained unless commenced within five years from the date when the claim first
accrued …” 28 U.S.C. § 2462.
21 The Court emphasized that allowing the government to bring suit more than five years after the date of the
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 23 of 45
16
The Court’s holding in Gabelli was not limited to enforcement actions by the SEC, and is
not dependent on the peculiarities of the SEC’s regulations or enforcement procedures. Indeed,
courts have subsequently applied Gabelli to bar enforcement actions brought more than five
years after the date of the alleged violation by other federal agencies that have their own specific
enforcement procedures.22 In any event, FERC’s pre-complaint administrative procedures are
very similar to, and in part modeled upon, the SEC’s procedures.23
B. The “Additional” Limitations Period Found In Meyer Does Not Apply Here
Because There Has Not Been An “Adjudicatory Proceeding” Below
Recognizing that the five-year limitations period has expired, FERC may try to salvage
its claim, as it has attempted in another action pending before this Court, by pointing to United
States v. Meyer, 808 F.2d 912 (1st Cir. 1987). In Meyer, the First Circuit held that, in certain
circumstances not present here, an agency may have an additional five-year period from the date
of the final administrative adjudication of a civil penalty before an ALJ to bring suit to enforce
the penalty. The Meyer court held such an additional period applies where a statutory scheme
[Footnote continued from previous page]
alleged violations would frustrate the equitable and due process goals that statutes of limitations are intended to
serve, as it “would leave defendants exposed to Government enforcement action not only for five years after
their misdeeds, but for an additional uncertain period into the future.” Gabelli, 133 S.Ct. at 1223.
22 See, e.g., CFTC v. Reisinger, 2013 WL 3791691 (N.D. Ill. July 18, 2013) (dismissing Commodity Futures
Trading Commission enforcement action for civil penalties); United States v. Midwest Generation, LLC, 720
F.3d 644 (7th Cir. 2013) (holding that violations of Clean Air Act permitting requirements administered by the
Environmental Protection Agency were time barred).
23 See generally 17 C.F.R. § 202.5; SEC, Office of Chief Counsel, SEC Enforcement Manual (dated Oct. 9, 2013),
available at: http://www.sec.gov/divisions/enforce/enforcementmanual.pdf; compared to Submissions to the
Commission upon Staff Intention to Seek an Order to Show Cause, Order No. 711, 123 FERC ¶ 61,159 at P 4
(2008). Unlike FERC, however, the SEC’s regulations give subjects the right to request to inspect and copy the
non-privileged documents, testimony, and analyses in staff’s investigative file, which subjects may then use to
prepare their response. See 17 C.F.R. § 201.230(a)(1). Here, FERC has not provided Lincoln with access to
FERC’s investigatory file (save for the specific portions of individual documents or deposition transcripts that
are cited or quoted in the show cause order or penalty assessment order) or any exculpatory evidence pursuant
to Brady v. Maryland, 373 U.S. 83 (1963), and FERC’s implementation of the Brady disclosure requirement.
See generally Enforcement of Statutes, Regulations, and Orders, 129 FERC ¶ 61,248 (2009).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 24 of 45
17
provides for judicial enforcement of a civil penalty, and the required “precondition to suit” is an
“adjudicatory administrative proceeding” – rather than a mere “administrative determination[ ]”
– the latter of which the Meyer court described as more akin to a “prosecutorial
determination[ ].” Meyer, 808 F.2d at 914, 920.
The “adjudicatory administrative proceeding” described in Meyer, is a specific type of
proceeding (far different from what FERC engaged in here) where there is “notice, discovery and
hearing” before an ALJ and governed by the APA, its “adjudicatory rules” and implementing
regulations. See id. at 919-20. The Meyer court further emphasized that:
the APA’s adjudicatory rules [are] designed to ensure procedural fairness, afford
the private litigant a wide range of protections during the administrative
processing of his case. By way of illustration, these rules provide a full panoply
of discovery devices. See 15 C.F.R. § 388.9(b) (interrogatories, requests for
admission, and production of documents), § 388.9(c) (depositions), § 388.10
(subpoenas), § 388.11 (protective orders) . . . . [and where] the respondent enjoys
a right of appeal.
See id. at 919 (emphasis added). The Meyer court held that Section 2462 provided an additional
five-year period in such proceedings because where there is an adjudicatory proceeding before
an ALJ under the rules of the APA “the timing of the case is largely beyond the [agency’s]
control.” Id. And, application of a single five-year period would mean that “the statute of
limitations would have expired before the right to sue arose.” Id. By contrast, where the
“precondition to suit” is more akin to a prosecutor’s determination of the penalty and “decision
to bring suit,” rather than an adjudicatory administrative proceeding, then the “determinations
fall entirely within the suzerainty of the government;” if an agency fails to bring an enforcement
action within the five-year period, it “would have only its own indecision to blame.” Id.24
24 Post-Gabelli, Meyer may no longer be good law. Meyer creates exactly the type of uncertainty the Supreme
Court cautioned against in Gabelli when it emphasized “the importance of time limits on penalty actions,”
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 25 of 45
18
FERC did not assess civil penalties against Lincoln in an adjudicatory proceeding. There
was no administrative hearing overseen by an ALJ and governed by the APA. Nor was Lincoln
provided any opportunity to conduct discovery, let alone provided the “full panoply of discovery
devices” provided for under the APA, as the Show Cause Order did not set any matters for
hearing. Indeed, Lincoln has not been given access to the full testimony or all documents
provided to FERC by third party witnesses or experts; Lincoln has not been allowed to depose or
cross examine those witnesses or experts (or to even know who they are); and Lincoln had no
right to appeal FERC’s decision to impose a penalty. Instead, FERC assessed a penalty based
solely on the limited materials provided to the Commission by FERC Enforcement staff and
Lincoln’s response (which reflected only the information in Lincoln’s possession).25 Where an
administrative process “lacks the basic elements common to adversarial adjudication” such as
“the right to a hearing” and the “opportunity to question witnesses” it is not an “adjudication”
within the meaning of Meyer, and the five-year limitations period in “Section 2462 is not
affected.” FEC v. Nat’l Republican Senatorial Comm., 877 F. Supp. 15, 19 (D.D.C. 1995).26
[Footnote continued from previous page]
explaining that adding exceptions to the five-year rule “would leave defendants exposed to Government
enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the
future.” Gabelli, 133 S. Ct. at 1223. Meyer holds that the statute of limitations in Section 2462 is satisfied at
the initiation of an agency adjudicative proceeding and adds an additional five-year limitation period at the
conclusion of an agency adjudicative proceeding. But the period in between the initiation and the conclusion of
that agency adjudication is undefined and not subject to any limitations period. Agency adjudications can easily
last as long as five or ten years or more. As a result, Meyer potentially extends the statute of limitations under
Section 2462 to 15 or 20 years—a period likely impermissible under Gabelli.
25 Moreover, during the four and a half years from the commencement of the investigation until the issuance of the
Show Cause Order in July 2012, Enforcement staff was free to engage in written and oral ex parte
communications with the ultimate decision-makers, FERC’s Commissioners, whereas Lincoln and its counsel
have never been permitted to speak directly to FERC’s Commissioners.
26 The issue of whether FERC’s investigation and administrative process was an “adjudication” is significant
because FERC takes the position that the Court should “affirm [FERC’s] penalty assessment without
modification” and based solely on a review of the Penalty Assessment Order. Compl. at ¶ 86. Thus, FERC
would have this Court order Lincoln to pay a $5 million penalty without, as the FPA requires, any discovery, a
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 26 of 45
19
Unlike the administrative adjudication in Meyer, the timing of FERC’s determination of
Lincoln’s civil penalty here has been entirely under FERC’s control.27 FERC chose to wait until
August 29, 2013 to make its determination of the civil penalty.28 As the Meyer court put it,
FERC has “only its own indecision to blame” for missing the five-year limitations window.29
II. FERC LACKS JURISDICTION OVER LINCOLN’S CONDUCT
The conduct at issue in the Complaint – Lincoln’s participation in DALRP – involved
[Footnote continued from previous page]
trial, or de novo determinations of fact and law by a court. Lincoln’s right to de novo review is a critical point
on which, if this action continues, the parties should be given the opportunity to fully brief and be heard.
27 FERC could have issued an order to show cause and notice of proposed penalty at any point after it concluded
its investigation on January 25, 2011 (the date FERC issued its public notice of alleged violations). See Ex. 10.
But FERC chose to wait eighteen months, until July 2012, to issue its Show Cause Order. Compl., Ex. 2. One
month later, Lincoln exercised its right, under Section 31(d) of the FPA, to request that FERC “promptly
assess” a civil penalty, and one month after that (in September 2012) Lincoln filed its answer. See Ex. 11.
FERC should have issued its Penalty Assessment Order “promptly” after Lincoln provided its notice of election
under Section 31(d)(3)(a) of the FPA, and if Lincoln decided not to pay the penalty, FERC should have filed its
complaint to enforce the penalty before February 7, 2013. Instead, FERC waited more than a year from
Lincoln’s election of de novo review to assess the proposed penalty and allowed the limitations period to expire.
28 This action should also be dismissed because FERC violated the FPA’s requirement that the Assessment Order
be issued “promptly” after Lincoln’s Notice of Election. Rather than abide by the plain language of the FPA,
FERC waited more than a year after Lincoln’s Notice of Election to issue the Assessment Order. FPA Section
31(d)(3)(a) requires that the Commission “shall promptly assess such penalty, by order, after the date of the
receipt of the notice [of election]. . . .” FERC has previously acknowledged, in this case, that “promptly” after
the notice of election means “an immediate penalty assessment.” Compl., Ex. 2 at P 3.
As Acting-Chairman LaFleur explained in her dissent in Barclays Bank, PLC, 143 FERC ¶ 61,024 (2013):
[I]f an entity elects the procedures under Section 31(d)(3)(A)], the Commission is required by
section 31(d)(3)(A) to “promptly assess” a civil penalty. If the entity does not pay the penalty
within 60 days, the Commission must institute an action in federal district court to affirm the
penalty. In such a case, the court is to review the facts and law underlying the penalty de
novo. . . . An action that is done “promptly” is done “at once or without delay.” . . . While
reasonable people can disagree over how immediate a prompt assessment must be, there can
be no disagreement that a prompt assessment is an assessment of an immediate nature.
29 Even if the FERC proceeding could somehow be considered an “adjudication,” this action is still time barred
because FERC did not “commence” its adjudicatory proceeding before the “first” five-year limitations period
under Meyer ran out. FERC issued its Penalty Assessment Order against Lincoln on August 29, 2013, but the
five-year period in which FERC was required to “commence” its “proceeding for the enforcement” of a civil
penalty expired on February 7, 2013. Although FERC issued a Show Cause Order against Lincoln on July 17,
2012, this order did not “assess” a penalty and thus there was nothing to “enforce” at that time. The first
instance in which there was anything to “enforce” was after FERC issued its August 2013 Penalty Assessment
Order. But this order came too late; the limitations period had already expired.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 27 of 45
20
Lincoln’s decision to reduce its consumption, i.e., to forego retail purchases of energy.
However, the Supreme Court has held that FERC’s jurisdiction is limited to wholesale sales of
electric energy. New York v. FERC, 535 U.S. 1, 20 (2002). Thus, FERC’s jurisdiction does not
extend to the retail non-purchases that constituted Lincoln’s participation in DALRP.30
1. FERC Has Jurisdiction Over Wholesale Sales of Electricity, But Not
Over Demand Response, Which Is a Retail Non-Purchase
In New York, the Supreme Court declared that FERC’s “jurisdiction over the sale of
power has been specifically confined to the wholesale market.” 535 U.S. at 20. As a “creature
of statute,” FERC possesses only the authority that Congress has conferred upon it; “if there is
no statute conferring authority, FERC has none.” Atl. City Elec. Co. v. FERC, 295 F.3d 1, 8
(D.C. Cir. 2002) (internal citation omitted). The FPA grants FERC jurisdiction over
“transmission of electric energy in interstate commerce and the sale of such energy at wholesale
in interstate commerce,” but forbids it from regulating “any other sale of electric energy,”
including transactions “subject to regulation by the States.” 16 U.S.C. §§ 824(a) and (b)(1). In
enacting the FPA, Congress drew a “bright line” distinction “between federal and state
jurisdiction” in the electric industry. So. Cal. Edison, 376 U.S. at 215-216.
Under FERC precedent and regulations, demand response is not considered to be either a
wholesale sale or transmission service. FERC’s regulations define “demand response” as a
“reduction in consumption of electric energy by customers.” 18 C.F.R. § 35.28(b)(4).
Moreover, FERC has confirmed that it “does not view demand response as a resale of energy
30 In Order No. 745, FERC adopted its current policy on demand response compensation and the treatment of
BTMG. Parties representing a cross-section of the energy industry (including merchant generators, municipal
utilities, consumer groups, ISOs/RTOs, and state commissions) have challenged this order, arguing, among
other things, that it exceeds FERC’s jurisdiction because it impermissibly regulates retail transactions and
intrudes on areas of exclusive State jurisdiction. The issue, argued this past September, is sub judice before the
D.C. Circuit. See Elec. Power Supply Ass’n v. FERC, Nos. 11-1486, et al. (D.C. Cir. Dec. 23, 2011).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 28 of 45
21
back into the [wholesale] energy market.” See Order No. 745 at 64; see also EnergyConnect,
Inc., 130 FERC ¶ 61,031 at P 30 (2010).
2. FERC Cannot Exercise Jurisdiction Over Demand Response As a
Practice “Affecting or Pertaining to” Wholesale Rates
Section 205 of the FPA grants FERC jurisdiction over (1) “[a]ll rates and charges made,
demanded, or received by any public utility for or in connection with the transmission or sale of
electric energy subject to the jurisdiction of the Commission,” and (2) “all rules and regulations
affecting or pertaining to such rates or charges.” 16 U.S.C. § 824d(a). Although FERC does not
have jurisdiction over retail sales, FERC has determined that it could regulate demand response
by redefining such retail non-purchases as a wholesale service, “rule[] and regulation[] affecting
or pertaining to” FERC-jurisdictional wholesale rates. See Order No. 745 at P 112 (citing 16
U.S.C. § 824d); Compl. at ¶ 81. FERC has thus concluded that a retail customer’s decision not
to make a retail purchase in response to the incentive payments for demand response is
equivalent to generating energy and making it available for sale at wholesale.
This argument is without merit. The stated purpose of DALRP is to “encourage retail
customers to reduce consumption during peak demand periods,” see September 2002 Order at
P 117, by providing an “additional financial benefit” in the form of an additional “payment for
the amount of the reduced load.” See December 2002 Order at P 38. DALRP sets retail rates
insofar as it pays retail customers for reducing their retail purchases of electricity that are
“subject to regulation by the States.” 16 U.S.C.§ 824(a). And the FPA prohibits FERC from
regulating retail transactions. See FPC v. Conway Corp., 426 U.S. 271, 276-77 (1976) (the FPA
was structured to “foreclose the possibility that” FERC’s predecessor, “would . . . regulat[e] the
nonjurisdictional, retail price”).
FERC is thus foreclosed from indirectly regulating non-jurisdictional retail rates through
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 29 of 45
22
the exercise of its authority over public utilities’ FERC-jurisdictional rates. See Richmond
Power & Light v. FERC, 574 F.2d 610, 620 (D.C. Cir. 1978) (holding that what the FPC “is
prohibited from doing directly it may not achieve by indirection.”). Because demand response is
not a service subject to FERC’s jurisdiction, however, the Complaint represents an impermissible
“attempt[] to do indirectly what it [may] not do directly.” Altamont Gas Transmission Co. v.
FERC, 92 F.3d 1239, 1248 (D.C. Cir. 1996).
III. FERC FAILED TO PROVIDE FAIR NOTICE OF THE CONDUCT IT NOW
CONSIDERS IMPROPER
A. The Fair Notice Doctrine
As the Supreme Court recently explained in Fox, “[a] fundamental principle in our legal
system is that laws which regulate persons or entities must give fair notice of conduct that is
forbidden or required.” Fox, 132 S. Ct. at 2317 (citations omitted).
This requirement of clarity in regulation is essential to the protections provided by
the Due Process Clause of the Fifth Amendment. It requires the invalidation of
laws that are impermissibly vague. A conviction or punishment fails to comply
with due process if the statute or regulation under which it is obtained fails to
provide a person of ordinary intelligence fair notice of what is prohibited, or is so
standardless that it authorizes or encourages seriously discriminatory
enforcement.
Id. (internal citations and quotation marks omitted). Thus, “where the regulation is not
sufficiently clear to warn a party about what is expected of it – an agency may not deprive a
party of property by imposing civil or criminal liability.” Gen. Elec., 53 F.3d at 1328-29.
Known as the “void for vagueness” doctrine, it addresses two discrete due process
concerns: “first, that regulated parties should know what is required of them so they may act
accordingly; second, precision and guidance are necessary so that those enforcing the law do not
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 30 of 45
23
act in an arbitrary or discriminatory way.”31 Id. This Court has described these concerns as “fair
notice” and “fair enforcement,” either of which is sufficient to invalidate a law or regulation for
vagueness. United States v. Lachman, 278 F. Supp. 2d 68, 91-97 (D. Mass. 2003) (Woodlock,
J.).32
The Due Process Clause imposes on an agency seeking to enforce its regulations the
“responsibility to state with ascertainable certainty what is meant by the standards [it] has
promulgated,” Diamond Roofing Co. v. OSHRC, 528 F.2d 645, 649 (5th Cir. 1976), and to do so
“before depriving a party of property.” Fabi Constr. Co. v. Sec’y of Labor, 508 F.3d 1077, 1088
(D.C. Cir. 2007) (emphasis added) (citation omitted). In General Electric, the D.C. Circuit
declared that “‘elementary fairness compels clarity’ in the statements and regulations setting
forth the actions with which the agency expects the public to comply,” Gen. Elec., 53 F.3d at
1329 (quoting Radio Athens, 401 F.2d at 404), and explained that, where there is no “pre-
enforcement warning” of an agency’s interpretation, a regulated party has fair notice:
[i]f by reviewing the regulations and other public statements issued by the agency,
a regulated party acting in good faith would be able to identify, with
“ascertainable certainty,” the standards with which the agency expects parties to
conform...
Gen. Elec., 53 F.3d at 1329 (quoting Diamond Roofing, 528 F.2d at 649). Conversely, where an
31 While the “void for vagueness” doctrine was initially developed in the context of criminal statutes, courts have
long recognized the requirement to provide fair notice “in the civil administrative context.” Gen. Elec., 53 F.3d
at 1329 (citing Radio Athens, Inc. v. FCC, 401 F.2d 398, 404 (D.C. Cir. 1968)). “This requirement has now
been thoroughly ‘incorporated into administrative law.’” Gen. Elec., 53 F.3d at 1329 (quoting Satellite
Broadcasting Co. v. FCC, 824 F.2d 1, 3 (D.C. Cir. 1987)).
32 The First Circuit reversed, on factual grounds, the Court’s finding that the regulation in question in Lachman
did not provide fair notice due, among other things, to the conflicts between the agency’s public statements and
non-public interpretation of the regulation because the First Circuit concluded that the defendants did not have
access to the non-public interpretation that gave rise to the conflict. See United States v. Lachman, 387 F.3d 42
(1st Cir. 2004). The First Circuit did not, however, question the Court’s description or analysis of the legal
doctrine at issue.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 31 of 45
24
agency first announces its interpretation of a vague regulation in an administrative proceeding,
the regulations and other policy statements are unclear, the [regulated party]’s
interpretation is reasonable, and where the agency itself struggles to provide a
definitive reading of the regulatory requirements, a regulated party is not ‘on
notice’ of the agency’s ultimate interpretation of the regulations, and may not be
punished.
Gen. Elec., 53 F.3d at 1333-34 (emphasis added); see also Satellite, 824 F.2d at 3-4.
The Supreme Court has expressed concerns that giving deference to agencies’
interpretations of their “own ambiguous regulations”:
[C]reates a risk that agencies will promulgate vague and open-ended regulations
that they can later interpret as they see fit, thereby frustrat[ing] the notice and
predictability purposes of rulemaking.
Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2168 (2012) (citation and quotation
marks omitted).33 In Christopher, the Supreme Court found that deference was not appropriate
where vague regulations “require regulated parties to divine the agency’s interpretation in
advance or else be held liable when the agency announces its interpretation for the first time in
an enforcement proceeding, and demands deference.” Id.
FERC has repeatedly found that tariff provisions that are vague and ambiguous are
unenforceable.34 FERC’s then-Chairman declared in 2007 that FERC “should not impose a civil
penalty for violating a regulatory requirement that is ambiguous.” Ex. 12 [Kelliher Enforcement
33 Courts have consistently distinguished between the deferential standard for review of an agency’s
interpretations of its own regulations, and the more searching inquiry into fair notice that applies where the
agency seeks to impose a civil penalty based on its interpretation of its regulations. For example, in Gates &
Fox Co., Inc. v. OSHA, 790 F.2d 154 (D.C. Cir. 1996), then-D.C. Circuit Judge Scalia noted that “Courts must
give deference to an agency’s interpretation of its own regulations,” but then emphasized that “[w]here the
imposition of penal sanctions is at issue, however, the due process clause prevents that deference from
validating the application of a regulation that fails to give fair notice of the conduct it prohibits or requires.” Id.
at 156-57 (citations omitted).
34 Nw. Pipeline Corp., 109 FERC ¶ 61,356 at PP 7, 9 (2004); Tres Palacio Gas Storage LLC, 126 FERC ¶ 61,167
at P 11 (2009); Neptune Reg’l Transmission Sys. LLC, 111 FERC ¶ 61,455 at P 21 (2005).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 32 of 45
25
Conference Policy Statement] at 5 (emphasis added). Chairman Kelliher added that:
If in the course of its action on an investigation the Commission clarifies our
regulatory requirement for the first time, we should give the regulated community
an opportunity to come into compliance with our newly clarified regulatory
requirement.
Id. The Complaint should be dismissed because FERC’s regulations and ISO-NE’s rules were
silent as to how it should set its baseline and FERC’s attempt to retroactively apply its new
interpretation of a vague regulation for the first time in an administrative proceeding has
deprived Lincoln of fair notice.
B. DALRP Rules Did Not Provide Fair Notice Because They Were Silent
Regarding How To Set A “Baseline”
FERC has never defined the term “baseline” in its demand response regulations, nor has
it required ISOs/RTOs to adopt a standardized baseline-setting methodology. See, e.g., Compl.,
Ex. 1 at P 39. The DALRP rules in effect from July 2007 to February 2008 provided only
mechanical, mathematical formulas for calculating the Customer Baseline (i.e., as a simple
hourly average) and the “performance” of DALRP participants (i.e., the amount of load
reduction).35 FERC’s regulations and ISO-NE’s Tariff and manuals were completely silent as to
how an entity like Lincoln should set its baseline or how it should operate its BTMG when doing
so, and thus failed to provide the constitutionally required fair notice of the interpretation that
FERC has now adopted; if any FERC or ISO-NE rule had spoken to this issue, FERC would
have cited to it in its Complaint or orders, which it has not. In particular, neither the ISO-NE
Tariff nor the DALRP Manual stated that, as FERC appears to contend, the baseline for a BTMG
35 ISO-NE first defined the term Customer Baseline in January 2006 as “the average aggregate hourly load,
rounded to the nearest kWh, for each of the 24 hours in a day for each Individual Customer.” See Ex 6. Section
4.2 of the DALRP Manual provided some additional detail on how this average should be calculated, see Ex. 4
at § 4.2, but it provided no indication that Lincoln’s conduct was improper.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 33 of 45
26
should be set to some undefined standard for “normal” energy consumption or operations or that
a customer should not, or could not, curtail the output of its BTMG in setting its baseline. See,
e.g., Compl. at ¶¶ 6, 24-27. In fact, neither the word “normal” (or any of its common synonyms)
nor the concept of “normal operations” appears anywhere in the Tariff or the DALRP Manual in
effect at that time. See Exs. 3 and 5, generally. It is telling that FERC had to rely on the
demand response definition adopted by another agency (namely, the DOE), rather than a FERC
or ISO-NE rule, to support its assertion that the provision of demand response requires a change
from “normal” consumption patterns. Compl. at ¶ 24 (quoting 2006 DOE Report at 9).
Indeed, FERC Commissioners even after the period in question acknowledged and
expressed concern about this vagueness, but did not provide any relevant guidance or direct ISO-
NE to change its rules to provide more clarity. In the April 2008 Order, for example, FERC
acknowledged “that Customer Baseline methodologies for demand response programs are
complex,” and “by no means intuitive.” April 2008 Order at P 29. Further, FERC’s former
Chairman Jon Wellinghoff dissented, emphasizing that:
ISO-NE’s proposal leaves unresolved the fundamental problem as to how a
customer’s baseline load should be determined.36
FERC has thus admitted that the baseline setting rules in effect at the time (and for years
thereafter) were vague and lacked clarity.
C. FERC Seeks to Penalize Lincoln Based on an Interpretation First
Announced in an Administrative Proceeding
The Complaint fails to meet the basic constitutional requirement of due process. FERC
36 April 2008 Order at 61,105-06; see also September 2008 Order at 62,220 (Wellinghoff, Comm’r, dissenting in
part) (“I continue to believe that issues related to accurate customer baselines are important and need to be
addressed.”); April 2008 Order at 61,105 (Kelly, Comm’r, concurring) (acknowledging that developing an
accurate baseline methodology “may be a complex undertaking that requires significant time and resources, and
“encourage[ing]” ISO-NE to work with its stakeholder to develop an appropriate methodology).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 34 of 45
27
does not even allege that Lincoln violated any specific provision of the Tariff or DALRP Manual
in effect at the time of the alleged violations. Nor could it, given that FERC itself recognized
that its baseline setting rules at the time were vague and lacked clarity.37 Instead, FERC seeks to
penalize Lincoln for an interpretation of its baseline setting rules that it first “announced,” in a
sense, in the course of its investigation of Lincoln. This, of course, was after the conduct in
question occurred.
With no guidance from FERC or ISO-NE, Lincoln set its baseline based on its good faith
reading of ISO-NE’s rules, and there are no specific allegations in the Complaint to the contrary.
Specifically, Lincoln set its baseline by curtailing its BTMG in accord with its view that it was
already providing demand response before it began participating in DALRP, that DALRP was an
incentive to continue to do so, and that the Westinghouse was unreliable. This was a reasonable
interpretation in the absence of any contrary guidance. Lincoln’s BTMG reduced its
consumption of energy from the grid, and thereby furthered the purpose of DALRP.38 Moreover,
Lincoln’s conduct was “objectively reasonable,” not only in light of the existing ISO-NE rules
and FERC’s prior orders and guidance (or, the lack thereof), but because it was consistent with
the customs and practice of this nascent industry.39
37 The baseline setting rules were vague, not in the sense that they required demand response providers “to
conform [their] conduct to an imprecise but comprehensible normative standard, but rather in the sense that no
standard of conduct is specified at all.” Lachman, 278 F. Supp. 2d at 94 (quoting Coates v. Cincinatti, 402 U.S.
611, 614 (1971)) (emphasis added); see also Trinity Broad. v. FCC, 211 F.3d 618, 629-30 (overturning
agency’s finding of violation and sanction on fair notice grounds where the agency had “failed to provide a
relevant definition for the key regulatory term” in the regulation that it alleged had been violated).
38 ISO-NE, the entity that drafted and administered both the initial DALRP rules and the February 2008
amendments, did not describe Lincoln’s conduct as a violation of its rules in any public document. See Ex. 5,
generally.
39 Courts have held that “[c]ompliance with industry standard and custom serves to negate conscious disregard
and to show that the defendant acted with a nonculpable state of mind.” Drabik v. Stanley-Bostich, Inc., 997
F.2d 496, 510 (8th Cir. 1993). According to ISO-NE, the majority of DALRP participants – namely, 26 out of
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 35 of 45
28
It was not until August 2011 that ISO-NE proposed clarifications to its rules that arguably
prohibited Lincoln’s baseline-setting methodology.40 ISO-NE’s decision in 2011 to “clarify” its
previous rules in a manner that, for the first time, prohibited Lincoln’s behavior provides further
evidence that Lincoln’s conduct was not prohibited in 2007-2008 and that, even if FERC
believed it was at that time, Lincoln did not have fair notice of FERC’s view.41
Where, as here, an agency announces its interpretation of its regulations for the first time
in an administrative proceeding and seeks to impose retroactive liability for past violations
preceding that announcement, “a regulated party is not ‘on notice’ … and may not be punished”
if the agency’s “regulations and other policy statements are unclear, the [regulated party]’s
interpretation is reasonable, and where the agency itself struggles to provide a definitive reading
of the regulatory requirements.” Gen. Elec., 53 F.3d at 1333-34. The Complaint must therefore
be dismissed because it would force regulated parties like Lincoln to play the type of regulatory
“Russian Roulette” that violates due process. Satellite, 824 F.3d at 4.
D. FERC’s Standardless Interpretation of its Rules Authorizes Arbitrary and
Discriminatory Enforcement
FERC’s post hoc expansion of its Anti-Manipulation Rule to cover Lincoln’s conduct
[Footnote continued from previous page]
46, representing approximately 75 percent of the capacity in the program – set their baselines in a manner
similar to Lincoln’s at this time. See Ex. 5 at 11.
40 In the August 2011 Order No. 745 compliance filing, ISO-NE adopted an entirely new market design and rules
for demand response which provided that the “Demand Response Baseline” should be set based on “expected
electricity consumption … absent demand reduction payments.” See Ex. 8 at § III.E.7.
41 See, e.g., Gen Elec., 53 F.3d at 1332 (holding that amendments to regulation made after the date of the alleged
violations “clarifying” that the conduct in question violated the amended regulation supported the “argument
that, prior to the amendments, [the regulation] fully authorized” the conduct “and that the company could not
therefore have been on notice of the agency’s contrary interpretation”); see also Beaver Plant Operations, Inc.
v. Herman, 223 F.3d 25, 31 (1st Cir. 2000) (holding that fair notice doctrine prohibited agency from sanctioning
employer for violating agency guidelines set forth in non-public interpretive letters that were not made public
until after the date of the alleged violations); Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996) (same).
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 36 of 45
29
must also be rejected because, if accepted here, it would “authorize and even encourage arbitrary
and discriminatory enforcement.” Lachman, 278 F. Supp. 2d at 91 (quoting Chicago v. Morales,
527 U.S. 41, 56 (1999)). FERC seeks to extend the scope of its Anti-Manipulation Rule to cover
non-fraudulent conduct based on an overly broad and unsupported definition of fraud.42 The
Court should not grant deference to FERC’s broad interpretation of its own regulation as it
would allow FERC “to function not only as judge, jury, and executioner but to do so while
crafting new rules.” Elgin, 718 F.3d at 494. FERC is prohibited from playing all of these roles
both under general principles of administrative law and under the specific requirements of
Section 31(d)(3)(B) of the FPA. That section provides that this Court – rather than FERC – is to
review de novo all issues of fact and law, without deference to FERC’s findings of fact or legal
conclusions. The Complaint should be dismissed because it represents the kind of arbitrary and
discriminatory enforcement that due process and the fair notice doctrine prohibits.43
IV. THE COMPLAINT FAILS TO PLEAD ITS CLAIM WITH PARTICULARITY
A. The Heightened Pleading Standards for Fraud
To state a claim under Section 222 and FERC’s Anti-Manipulation Rule, FERC must
42 FERC states that, for the purposes of the Anti-Manipulation Rule, it “defines fraud generally, that is to include
any action, transaction, or conspiracy for the purpose of impairing, obstructing, or defeating a well-functioning
market.” Compl. at ¶ 20 (quoting Order No. 670 at P 50). Order No. 670 in turn cites Dennis v. United States,
384 U.S. 855 (1966), which involved charges of conspiracy to defraud the federal government brought under a
general conspiracy statute against individuals alleged to have filed false affidavits. But the Supreme Court in
Dennis based its finding of a violation on the defendants’ submission of fraudulent documents; the Court did not
suggest that a violation of that statute occurs in the absence of actual or attempted fraud. Id. at 862.
43 In addition to being arbitrary, FERC’s application of its Anti-Manipulation Rule is also discriminatory. In two
recent cases – EnerNOC, 134 FERC ¶ 61,158, at PP 18-20 (2011) and Energy Spectrum, Inc. v. New York
Indep. Sys. Operator, Inc., 141 FERC ¶ 61,197, at P 51 (2012) – FERC addressed ambiguous tariff provisions
governing demand response programs administered by other RTOs. In those cases, FERC held that RTOs were
not permitted to change their rules without filing, for FERC review and approval, amendments to their tariffs to
implement the new rules, and that market participants would not be sanctioned for failure to comply with the
RTOs’ new, unfiled rules. Here, by contrast, FERC seeks to impose $5 million in penalties for actions that are
consistent with, and not prohibited by, an at least as ambiguous provision.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 37 of 45
30
plead that Lincoln did (1) “use or employ . . . any manipulative or deceptive device or
contrivance (as those terms are used in section 10(b) of the Securities Exchange Act of 1934,”
(2) with scienter; and (3) “in connection with the purchase or sale of electric energy . . . subject
to the jurisdiction of the Commission.” See 16 U.S.C. § 824v; 18 C.F.R. § 1c.2. In addition to
the requirement that it plead facts supporting all three elements that are sufficient to make its
claim “plausible,” rather than speculative, Twombly, 550 U.S. at 570, for the first two elements
FERC must meet the heightened pleading requirements of FRCP Rule 9(b), which requires that
“a party must state with particularity the circumstances constituting fraud…” FRCP Rule 9(b).
“Particularity” requires that the Complaint include “‘the time, place, and content of the
alleged false or fraudulent representations.’” Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 19
(1st Cir. 2002) (internal quotations omitted), and “set[] forth specific facts that make it
reasonable to believe that defendant knew that a statement was materially false or misleading.”
Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992). Although a court must accept “all
well-pleaded facts [alleged in the complaint] as true,” In re First Marblehead Corp. Sec. Litig.,
639 F. Supp. 2d 145, 153 (D. Mass. 2009), the court need not “swallow the plaintiff’s invective
hook, line, and sinker.” Id. (citing Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996)). Further,
“[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). The
Complaint, once its bald assertions and conclusory statements are stripped away, does not allege
facts sufficient to state a claim under Section 222 or the Anti-Manipulation Rule that is plausible,
much less one that satisfies the heightened pleading standards of FRCP Rule 9(b).
B. FERC Fails to Plead a Scheme to Defraud With Particularity
The Complaint fails to plead the first element of a claim under Section 222 of the FPA
with particularity and should be dismissed. FERC’s claim that Lincoln’s baseline was false rests
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 38 of 45
31
on the theory that baselines were meant to reflect “normal” electricity usage, and that Lincoln’s
curtailment of its BTMG during the baseline period was not “normal.” See Compl ¶¶ 38-40. But
the word “normal” and its common synonyms (such as customary, typical, usual, regular,
established, standard, ordinary, and common) do not appear in the Tariff or DALRP Manual in
effect during the relevant period. Indeed, the Complaint fails to cite, quote, or otherwise state
with particularity how DALRP participants were required to set their baseline. The Complaint
does not allege that entities in Lincoln’s position received any guidance whatsoever from
FEFRC, ISO-NE or Constellation on how to set their baselines. Thus, FERC’s description of the
DALRP rules represents only its conclusions on how a baseline should have been established.
Once FERC’s theoretical conclusions are stripped away, the Complaint does not allege
facts that would make FERC’s post hoc contention that Lincoln’s baseline was false plausible.
And, in fact, FERC’s own admissions make its claims less plausible. For FERC’s allegations to
be plausible, one would have to assume that DALRP rules required entities in Lincoln’s position
to run their BTMG at the highest possible level when setting their baseline. But, that assumption
cannot be squared with FERC’s assertions elsewhere in its Complaint. Specifically, the
Complaint states that BTMG is an “appropriate” means of providing demand response, id. at ¶
26 (emphasis added), and it acknowledges that to provide demand response, one can run BTMG
at “a higher level.” Id. Hence, FERC acknowledges that, when setting the baseline, BTMG does
not have to be run at maximum capacity, contradicting the fundamental assumption on which its
case rests. FERC’s conclusion that Lincoln’s baseline was false is also undermined by FERC’s
admission that Lincoln’s initial 19 MW baseline was less than the mill’s “normal” 20MW energy
usage. Id. at ¶ 33 (“the Mill’s electricity consumption was approximately 20 MW”).
FERC’s allegation that Lincoln sought to “freeze” its baseline and never had any
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 39 of 45
32
intention of providing demand response is similarly implausible. The Complaint does not allege
that Lincoln ever failed to provide the load reduction for which it contracted with ISO-NE. And,
in actuality, Lincoln’s baseline changed at least nine times, moving both up and down, during the
relevant period. See Ex. 2 [Lincoln’s Show Cause Answer] at 4.
C. FERC Fails to Adequately Plead that Lincoln Acted with Scienter
FERC fails to allege any facts, either alone or in conjunction, that create a “strong
inference” that Lincoln acted with the scienter required to state a claim under Section 222. The
Supreme Court has concluded that to plead scienter a plaintiff must allege facts that a defendant
acted with “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). And the First Circuit requires a plaintiff to “set forth
facts giving rise to a ‘strong inference’ that the defendant[] acted with the required state of
mind.” SEC v. Durgarian, 477 F. Supp. 2d 342, 353 (D. Mass. 2007) (citations omitted)
(emphasis added).
The Complaint does not meet this high hurdle. While FERC asserts that Lincoln “knew,”
“realized,” “expected” and “intended to commit fraud,” (Compl. at ¶¶ 40, 42, 44, and 48), FERC
alleges no facts connecting these bare assertions to Lincoln’s state of mind. The Complaint does
not cite to internal communications, memoranda or other documents, nor to any statements made
during depositions to support its conclusions. Nor does FERC plead that Lincoln concealed any
relevant facts from anyone. Instead, FERC claims that “Lincoln demonstrated scienter by
intentionally curtailing its generator during the initial baseline-setting period and submitting
demand response bids almost every hour of every day during its participation in the DALRP.”
Compl. at ¶ 76. Thus, FERC attempts to bootstrap scienter off its own conclusion that Lincoln’s
baseline was set incorrectly. FERC’s argument can be distilled down to the claim that because it
was obvious (in FERC’s view) that DALRP did not permit the curtailment of BTMG when
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 40 of 45
33
setting a baseline, and because Lincoln knowingly curtailed its BTMG, Lincoln must have had
the intent to defraud. But this tautological strict liability cannot hold up to scrutiny (especially,
where, as here, FERC cannot cite to a single rule or statement showing that DALRP in fact
prohibited such curtailment) and does not meet the pleading requirements for scienter.44
The few other unsupported and disjointed allegations that FERC does offer do not imply,
let alone demonstrate, scienter. In the First Circuit, “inferences of scienter survive a motion to
dismiss only if they are both reasonable and ‘strong’ inferences.” Greebel v. FTP Software, Inc.,
194 F.3d 185, 195-96 (1st Cir. 1999) (emphasis in original). FERC’s scattershot allegations do
neither. For example, FERC asserts that it cost Lincoln $10,000 to curtail the Westinghouse and
buy energy from the grid instead, and that this was somehow economically irrational. See
Compl. at ¶¶ 39-40, 76. But FERC’s bare assertion does not explain why Lincoln’s actions were
irrational, or even suggest why it would have been improper for Lincoln to (rationally) treat this
expenditure as a cost of doing business that would be recouped from future DALRP revenues.
And, in any event, FERC does not allege any facts showing that Lincoln knew at the time it set
its baseline that curtailing the Westinghouse was improper or would cost $10,000.45
FERC also highlights Lincoln’s “use of the TG3” and argues in conclusory fashion that
44 In Coyne v. Metabolix, Inc., 943 F. Supp. 2d 259 (D. Mass. 2013) (Woodlock, J.), this Court explained that “[a]
plaintiff must allege specific facts supporting the inference that Defendants knew that a statement was false or
misleading,” id. at 272 (citing Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)), and concluded
that the plaintiff did not “support any inference that Defendants had some consciousness that any public
statement was materially false or misleading.” Id. See also In re Goodyear Tire & Rubber Co. Sec. Litig., 436
F. Supp. 2d 873, 892 (N.D. Ohio 2006) (citing Helwig v. Vencor, Inc., 251 F.3d 540, 551 (6th Cir. 2001)).
45 In any event, the $10,000 figure was de minimis in the context of Lincoln’s electricity purchases at the time
(which amounted to more than $1 million per month) and thus the decision to incur that cost, even if it were
known, should not be seen in hindsight as economically irrational. The Day-Ahead LMP in New England
during 2007 and 2008 ranged between the low-$50s up to around $100/MWh. See Ex. 13 [ISO-NE, Monthly
Summary of Historical Hourly Data by Load Zone, available at http://www.iso-
ne.com/markets/hstdata/znl_info/monthly/index.html]. Using an average midpoint cost of $75/MWh,
multiplying by an hourly load of 19 MW, by 24 hours a day, and by 30 days in a month, results in an average
monthly total of $1,026,000 for Lincoln’s electricity consumption.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 41 of 45
34
this “reaffirms the conclusion that Lincoln intended to commit fraud.” Id. at ¶ 48 (emphasis
added). But FERC does not explain how it reaches this conclusion, and FERC does not allege
any facts indicating that Lincoln had anything other than a legitimate business purpose for
installing the new TG3. Indeed, FERC acknowledges that Lincoln “notified Constellation that it
planned on adding the TG3 generator to produce additional energy on-site,” id., and, admits that,
at the least, “running an on-site generator at higher levels (and thereby taking less electricity off
the grid)” was an “acceptable way” to participate in DALRP. Id. at ¶¶ 25-26 (emphasis added).
Thus, FERC admits Lincoln did not seek to conceal its use of the TG3, and that it was not
improper for Lincoln to use the TG3 to provide demand response.
FERC describes part of the alleged scheme as Lincoln’s attempt to “freeze” its baseline
by offering to reduce demand at the minimum offer price of $50/MWh “knowing” that its offers
would be accepted. Id. at ¶ 42. FERC adds that Lincoln “verified” with Constellation how its
baseline would change as a result. Id. at ¶ 43. But, contrary to any inference of scienter,
Lincoln’s practice here was similar to those of the majority of DALRP participants. See Ex. 5 at
11. Did all those entities engage in fraud? Of course not. This instead demonstrates only that
Lincoln interpreted ISO-NE’s rules in a manner similar to the majority of the other DALRP
participants. The fact that Lincoln “verified” the effect its offers had on its baseline, was also
proper and does not imply scienter because Lincoln needed to track such changes in order to
know where its baseline was set to determine how much demand response it could offer.46
46 FERC also alleges that Lincoln did not respond to emails and calls from Constellation about the new TG3
(Compl. at ¶¶ 48-50), or to a form letter dated January 23, 2008 from Constellation expressing concerns that
“some of its customers” might be violating the DALRP rules. Id. at ¶¶ 53-54. See also Ex. 14 [January 23,
2008 Letter from Peter Kelly-Detwiler (Constellation] to Mike Brennan (Lincoln)]. But Lincoln had no duty to
respond to Constellation and thus, no inference can be drawn from its alleged “silence.” See, e.g., Basic Inc. v.
Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading”); Order No. 670
at 35 (the Anti-Manipulation Rule does not “create an affirmative duty to disclose,” and failure to disclose
[Footnote continued on next page]
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 42 of 45
35
D. FERC Fails to Adequately Plead That Lincoln’s Conduct Was in Connection
With a FERC-Jurisdictional Transaction
FERC has also failed to adequately plead that Lincoln’s alleged violations were “in
connection with” a FERC-jurisdictional transaction. Instead, FERC’s Complaint merely
concludes that FERC “found that Lincoln’s fraudulent scheme was in connection with a [FERC-
]jurisdictional transaction,” and that ISO-NE’s markets and “ISO-NE’s [FERC]-approved
DALRP” are “within [FERC’s] jurisdiction.” Compl. at ¶¶ 80, 81. But FERC has not alleged
any facts supporting its conclusions, nor identified any FERC-jurisdictional transactions that
Lincoln’s conduct may have affected. Nor could it, given that the Complaint addresses retail
non-purchases by Lincoln that are not within FERC’s jurisdiction. See supra Section II.
[Footnote continued from previous page]
information is not a violation of the rule “[a]bsent a tariff requirement or [FERC] directive mandating
disclosure.”). And FERC has not pled who made the alleged calls, who they were made to, or when the alleged
calls were made. Scienter cannot be inferred from a failure to respond to unidentified phone calls. Finally, the
January 23, 2008 letter appears to be a form letter that contains no information specific to Lincoln (it refers only
to “some customers” without more). See Ex. 14. The failure to respond to a form letter, where there is no duty
to respond, obviously cannot create a “strong inference” of scienter.
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 43 of 45
36
CONCLUSION
For the reasons stated herein, Lincoln respectfully requests that the Court dismiss the
Complaint with prejudice, and grant such other and further relief as it deems just and proper.
/s/ William S. Scherman
William S. Scherman (admitted pro hac vice)
Brandon C. Johnson (admitted pro hac vice)
Jason J. Fleischer (admitted pro hac vice)
Janine L. Durand (admitted pro hac vice)
Kara B. Coen (BBO # 676731)
Gibson Dunn & Crutcher LLP
1050 Connecticut Ave, N.W.
Washington, DC 20036-5306
(202) 955-8500
(202) 467-0539 (facsimile)
WScherman@gibsondunn.com
BCJohnson@gibsondunn.com
JFleischer@gibsondunn.com
JDurand@gibsondunn.com
KCoen@gibsondunn.com
David J. Kerstein (admitted pro hac vice)
Gibson Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
(212) 351-4000
(212) 351-4035 (facsimile)
DKerstein@gibsondunn.com
Dated: February 14, 2014
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 44 of 45
CERTIFICATE OF SERVICE
I, Jason J. Fleischer, certify that on February 14, 2014, I caused a copy of the foregoing
document to be filed through the CM/ECF system, and that a copy of the document will be sent
electronically to the registered participants as identified on the Notice of Electronic Filing (NEF).
/s/ Jason J. Fleischer
Jason J. Fleischer
Case 1:13-cv-13056-DPW Document 20 Filed 02/14/14 Page 45 of 45
