Do Not Pass Go: FERC Administrative Proceedings Remain First Stop for Market Manipulation Claims under the Natural Gas Act

Fraud and energy market manipulation have remained priorities of the Federal Energy Regulatory Commission’s Office of Enforcement (OE) over the past several years. The agency has ramped up its investigative efforts, reporting that fourteen out of the nineteen investigations opened last year involved market manipulation and the OE had never had as many litigation proceedings in one year or issued more than three orders to show cause in one year before (with one exception) since its enforcement authority was expanded in 2005. As an increasing number of companies find themselves the subject of OE investigations and enforcement proceedings, the scope of FERC’s authority to determine violations of the Natural Gas Act (NGA) and assess penalties has been challenged. To the disappointment of companies and individuals seeking to have a federal trial court determine their fate instead of FERC, a recent Texas federal district court ruling leaves intact FERC’s administrative enforcement procedures.

Total Gas & Power Challenge. In Total Gas & Power North America, Inc. et al. v. FERC, et al., No. 16-1250 (S.D.TX July 15 2016), the company and individual plaintiffs were accused of market manipulation and sought a declaration that FERC lacked the authority to issue a final order assessing penalties for violations of the NGA and FERC’s anti-manipulation rule. Plaintiffs initially argued that any alleged violation of the NGA or related rules must be heard in federal district court instead of through FERC’s administrative proceedings, but they backed off of that extreme position as the litigation progressed. The district court dismissed the plaintiffs’ complaint for declaratory judgment, holding that the issue was presented prematurely and that the court lacks jurisdiction to decide it. The court also held that, even if it did have jurisdiction, it would exercise its discretion to decline to address the matter.

A Premature Request for Advisory Opinion. Plaintiffs attempted to thwart the FERC administrative process after being issued an order to show cause and notice of proposed penalty and prior to any penalty actually being assessed by the agency. The Total Gas court found that the request for declaratory judgment was in essence a request for an advisory opinion regarding an order that may never be issued, and the plaintiffs’ claims were “defenses to acts that FERC has not yet taken and depend on a factual record that has not yet been developed.” Even more, the advisory opinion plaintiffs sought was “not on their dispute, but on the validity of an entire administrative structure based on non-specific allegations.” As such, the dispute was not ripe. The court also found the matter non-justiciable for additional reasons.

Discernible Intent of the NGA. The Total Gas court found that it lacked the jurisdiction to hear the plaintiffs’ challenges to FERC’s administrative process, given the Congressional intent reflected by the NGA. The court found a “fairly discernible intent” in the NGA to have FERC’s administrative process include the determination of violations and assessment of civil penalties. Further court analysis suggested that the challenges plaintiffs raised regarding the agency’s administrative process were not meant to be excluded from the adjudication/judicial review system established by the NGA. Those who ultimately are assessed a penalty by FERC have an opportunity for rehearing before the agency Commission and then judicial review in a federal court of appeals. And FERC has the opportunity to have its assessed penalties enforced by a federal district court if penalties are not paid.

Discretion to Decline Review. Even if the court could hear the plaintiffs’ claims, the court determined through analyzing relevant factors that it would decline to do so. Giving due deference to agency proceedings, the court reasoned that it should not interfere, especially in the initial stages of the agency administrative process.

The Challenge Continues. Following the court’s decision, Plaintiffs filed a Motion to Alter or Amend Judgment or Leave to File Second Amended Complaint, which FERC opposed in briefing that was completed early this month. On September 14, 2016, the District Court denied the Plaintiffs’ motion in a 28-page opinion reiterating its position regarding justiciability, lack of jurisdiction, and it decision to decline review:

It is inappropriate for the Court to insert itself prematurely into the dispute between FERC and Plaintiffs. If, as Plaintiffs contend, FERC’s case is so weak that no one but FERC itself would believe it, the “substantial evidence” review in a court of appeals should be protection from overreach by the agency.

Plaintiffs’ attempt to cure justiciability defects by amending the complaint to add a request for declaratory judgment that they did not violate the NGA, was disregarded by the court as futile considering its other grounds for dismissing Plaintiffs’ case.

For other recent cases challenging and exploring the nuances of FERC’s jurisdiction, read our previous posts here, here, and here.