Conn. loses federal energy complaint despite paying lawyers $4.6 million, begins appeal process

Connecticut’s Attorney General and utility regulators paid lawyers – who “failed in the extreme” according to one federal judge – almost $4.6 million to challenge payments to three New York energy companies.

The state began the appeal process last year despite the wholesale rejection of their legal arguments by the judge and the Federal Energy Regulatory Commission.

Through their electric bills, customers already paid the $4.6 million in legal fees, plus about $17 million of the $65 million in payments questioned by Connecticut officials.

An administrative law judge filed an initial ruling Sept. 29, 2010, and FERC affirmed that ruling May 6, 2011. The state filed a request for rehearing – a necessary procedural step before an appeal can be filed – on June 6, 2011, which the commission denied Jan. 9.

“We’re reviewing the decision and will make a determination about whether to take further action after we have completed our review,” a spokesman for Attorney General George Jepsen said.

The state has until March 9 to file an appeal with the D.C. Circuit Court of Appeals.

The state paid for more than the equivalent of 6.5 years of full-time work by attorneys and paralegals at an average cost of $336 an hour.

Connecticut – and, in turn, electricity customers in the state – also paid for 244,266 copies at 10 cents apiece and $120,117.33 for consultants and experts costing as much as $325 an hour.

The billable hours from the law firm Kaye Scholer make up the bulk of the costs, $4.4 million of nearly $4.6 million spent. Partners at the firm, including Randall Speck and Jeffery Tomasevich, cost as much as $550 an hour.

In 2010, Kaye Scholer billed the state for 7,747.1 hours totaling $2.6 million.

Eight attorneys billed for more than $100,000 that year: David Cousineau ($488,372.50), Joshua Holt ($378,140), Alexa Hahn ($328,930), Kimberly Frank ($293,984), Amanda Butler ($292,285), Rebecca Grunfeld ($288,637), Speck ($206,072) and Karen Robinson ($134,867.50).

In May 2010, the state paid Kaye Scholer for the equivalent of 12 full-time employees working on the case. In that month, five attorneys billed more than the 160 hours most people work in a month. Cousineau averaged about 14 billable hours per day that month, while Frank and Grunfeld averaged 12 hours a day. Butler and Hahn averaged 11 hours a day in May.

These costs do not account for work done by lawyers and experts who work for the State, including the Office of the Attorney General, the Office of Consumer Counsel and the Department of Public Utility Control or its successor, the Public Utility Regulatory Authority.

The state signed a contract with Spiegel & McDiarmid to provide lower-cost outside counsel for future FERC proceedings in October 2010. The contract specifies rates of up to $410 per hour, with several attorneys making less.

A new contract with Kaye Scholer, entered into on the same day, sets Speck’s rate at $495 per hour, with first-year associates making $205 an hour and paralegals $110.

Spiegel & McDiarmid’s rates specify $165 to $195 for junior level associates and between $90 and $140 for paralegals.

According to Jepsen’s spokesman, it is possible that the state could recoup its legal costs if the complaint is successful.

“We continue to pursue this appeal because we believe that FERC got it seriously wrong, to the detriment of Connecticut ratepayers, and we want this wrong corrected,” said a spokesman for Jepsen. “In this case, several out-of-state entities accepted $65 million in ratepayer funds to provide capacity services they admit they never intended to honor.”

“The request for rehearing in this matter was prepared entirely by staff attorneys in this office without any outside counsel, and we expect that any further challenge will be pursued on the same basis,” the spokesman said. “There are therefore no incremental legal costs being expended to pursue this.”

The Complaint

Former Attorney General Richard Blumenthal, the Office of Consumer Counsel and the Department of Public Utility Control filed the complaint, which resembles a lawsuit, with the Federal Energy Regulatory Commission in 2009.

Blumenthal, now a U.S. Senator, did not respond to a request for comment through his office.

According to Jepsen’s office, three New York energy companies received $65 million in payments without providing anything of value.

The three companies are Brookfield Energy Marketing Inc. (BEMI), Constellation Energy Commodities Group and Shell Energy North America.

BEMI declined to comment. Constellation and Shell did not respond to requests for comment.

Between December 2006 and June 2010, utilities throughout New England made about $5.5 billion in payments to generators in the forward capacity market, which pays power plants for being available regardless of whether they are needed to generate electricity.

The goal of the capacity market is to ensure utilities will have enough electricity when demand is above average, like hot summer days when many turn on their air conditioning.

Independent System Operator New England, the nonprofit that runs New England’s electrical grid, explains capacity markets this way: “In wholesale electricity markets, the capacity market acts as an insurance policy, making certain that the region will have the resources needed to meet future electricity demand.”

In return for capacity payments, generators promise to provide the energy when called on by ISO New England.

If a generator receiving capacity payments fails to sell energy when called upon by ISO New England, FERC would investigate and could issue fines.

The $65 million in payments questioned by the Connecticut complaint represent about 1.2 percent of the total capacity market.

If the payments were illegitimate, all New England states could be entitled to a refund. Connecticut utilities pay about 26 percent of capacity costs, according to ISO New England, so its share of a refund would be about $16.9 million.

How it began

Connecticut’s complaint originated from a March 2009 ISO New England report that certain capacity importers had violated market rules by failing to provide energy when called upon.

ISO New England amended its filings with FERC to reflect that it based those allegations on incomplete and preliminary data. Actual transaction histories show ISO New England never called on the companies.

“We sincerely regret this error and are working to change our internal review process to reduce the likelihood of a reoccurrence,” said Gordon van Welie, ISO-NE president and CEO. “Fulfilling New England’s electricity needs and maintaining reliability were never at issue.”

In response to Connecticut’s complaint to FERC, ISO New England announced on April 21, 2009, it would file an explanation of how market rules were not broken.

“Data concerning energy delivery from these transactions was not fully understood by the ISO and led to unintentionally misleading statements in ISO’s earlier filing that suppliers had received $85 million and never delivered energy during 108 hours,” an ISO New England spokesman said.

According to the ISO New England statement, one software tool showed there was a possibility of needing to import energy from New York during these 108 hours. This software showed a forecast of electricity needs, rather than actual requests.

When it came time to call on electricity for those 108 hours, “less expensive energy was available within New England to meet the region’s needs.”

In March 2009, ISO New England began seeking a rule change through FERC that would require capacity importers to offer their electricity at competitive prices “based on historical and current market prices.” The new rules became effective July 1, 2009.

“The Commission’s approval of the market rule changes proposed by the ISO and stakeholders underscores the merits of these revisions,” said Raymond Hepper, vice president and general counsel of ISO New England. “With these market rule changes, New England can now derive more value from these capacity resources.”

Under the new rules, capacity importers will lose part of their monthly capacity payment if their offer to sell electricity rises above a price benchmark. Capacity importers that fail to deliver when called would also face increased financial penalties.

The judgment

Administrative law judge H. Peter Young, who presided over the complaint and issued an initial decision in October 2010, said Connecticut’s lawyers “failed in the extreme” to prove their case – a phrase he used twice in his written opinion.

The FERC commissioners unanimously approved a final decision based on Young’s initial ruling, finding Connecticut’s lawyers “failed to support their allegations of market manipulation.”

Young, one of 15 administrative law judges at FERC, incidentally has Connecticut ties. He graduated from Connecticut College (B.A., B.S., 1983), Yale University (M.S., 1984) and the University of Connecticut School of Law (J.D., 1987).

He said Connecticut failed despite the extensive leeway he and the commission granted the state and its lawyers.

Connecticut improperly filed its initial complaint with FERC, citing the wrong section of the relevant federal law. FERC reclassified the filing on its own and allowed the allegations to proceed “as if they had been properly filed.”

Young’s concessions to Kaye Scholer included “multiple extensions” and the ability to review “a massive volume of transaction data from respondents and ISO New England.”

One company, BEMI, had to pay up to 10 bilingual contract attorneys to review documents written in French.

Young gave Connecticut’s lawyers the “extraordinary accommodation” of allowing them to make lists of search terms for the three companies to use when searching their transaction data.

FERC’s own enforcement litigation staff supported the arguments made by the three companies accused by Connecticut. According to Young, the enforcement litigation staff was the only participant in the case “with no vested interest in the outcome.”

FERC staff argued that “having the motive and opportunity to limit risk and maximize profit” is not market manipulation.

The staff also argued Kaye Scholer based Connecticut’s case on “alleged violations of non-existent Tariff obligations” even though a violation of a tariff – a FERC rule – does not imply market manipulation.

Young explained in his ruling that Connecticut’s lawyers had to meet a “preponderance of the evidence” standard for him to rule in their favor.

“This standard requires the complainant’s evidence to outweigh and otherwise be more convincing than the evidence submitted in rebuttal,” Young said.

He said Connecticut’s argument wouldn’t even meet a lower standard. He found the arguments “fall so short of this measure on every material issue of fact and law that their case would not satisfy even a ‘substantial evidence’ standard of proof – i.e. they do not present evidence a reasonable mind might accept as adequate to support their market manipulation allegations.”

“Despite being afforded every possible opportunity to prove their case – by the Commission as well as the presiding judge – and despite being granted extraordinary latitude to secure the evidence they insisted would demonstrate that respondents manipulated the New England capacity markets in violation of FPA section 222(a) and section 1c.2 of the Commission’s regulations, I find and conclude Connecticut Representatives have failed in the extreme to prove their allegations against any respondent here,” Young wrote in his decision.

The argument

Connecticut made a two-part argument in the complaint. First, the state’s lawyers argued the New York companies were incapable of providing electricity in New England despite having sold capacity to the region. Second, Kaye Scholer and the state’s sole witness argued the companies had an unwritten obligation to make “reasonable” offers to sell electricity.

The first argument centered on timing.

The three companies used placeholder bids in the New York and New England energy markets. In the New York market, they set their bids to buy electricity near the lowest allowable amount – so low that the bids were sometimes negative, meaning a seller would have to pay the companies for taking electricity off their hands.

In the New England market, the companies offered to sell electricity near the $1,000 per megawatt hour cap.

Connecticut’s lawyers argued that since New York energy markets close 15 minutes before New England markets, the companies could not change their New York offers in time to meet their obligations in New England.

The companies claimed ISO New England typically provided advanced notice to generators and the New York Independent System Operator could manually intervene to change bids, if necessary.

In the request for rehearing, Connecticut’s lawyers – this time state employees, instead of expensive D.C.-based outside counsel – argued the FERC decision is inconsistent. According to the request, FERC ruled against Connecticut because its argument was based on rules not found in the tariff, but supported the argument by the three companies that they NYISO could have manually intervened – a procedure that isn’t in the tariff.

Constellation told FERC it removed the capacity it sold to New England from the New York market. According to the company, this arrangement would have allowed it to send electricity from three New York nuclear power plants to New England.

Even while the companies bid their capacity-backed energy at extreme prices, BEMI, Constellation and Shell did sell electricity – unrelated to their capacity contracts – to ISO New England during this period. The companies made these sales at prevailing market prices.

Energy-only sales have more flexibility, according to Shell.

According to the companies, these sales undermined Connecticut’s claim they would not be able sell power to New England if called upon.

“This reasoning fails on a number of grounds,” Young said. Since “none of respondents ever failed to deliver energy,” Connecticut’s claim the companies were unable to respond “has absolutely no factual support either” (emphasis in original).

“It is pure conjecture,” Young said.

Connecticut’s lawyers also argued capacity importers had to make reasonable offers to sell electricity. The companies – with agreement from ISO New England and FERC staff – claimed the only requirement was to offer electricity for less than $1,000 per megawatt hour, a cap written into the rules governing the capacity market.

In the request for rehearing, Connecticut argued capacity enhances competition, but customers lost those benefits because of the bidding practices of these companies.

BEMI, one of the companies, claims the argument Kaye Scholer made on behalf of Connecticut – that capacity sellers are required to make a “reasonable” offer – is “an after-the-fact attempt to lend continuing legitimacy to market manipulation claims which turned out to be premised on inaccurate information.”

According to BEMI, PURA chief of utility regulation Steven Cadwallader, the state’s only witness, “concocted” this argument.

Constellation argued Connecticut was “compelled to fabricate” requirements to justify “otherwise unsupportable market manipulation claims.”

According to Constellation, ISO New England only asked about buying capacity-backed electricity from the company on two dates – Sept. 8, 2007, and June 29, 2009 – but the company did not have a capacity contract with ISO New England on either date.

ISO New England did fine Constellation twice for violations unrelated to Connecticut’s complaint. In July 2006 ISO-NE fined Constellation $43,063 for scheduling violations. ISO New England fined the company again in November 2007 “for failing to properly enter certain transaction data,” this time for $340,000.

The company argued these fines show ISO New England is not timid when exercising control over energy markets.

Rule changes

“After discovering how these entities had gamed the market rules, ISO New England and FERC quickly revised the market rules to prevent such conduct going forward.  FERC incorrectly refused, however, to sanction the generators for their conduct,” a spokesman for Jepsen said.

The three companies accused in the complaint take the opposite view, that the new rules prove there was no rule to violate before it was instituted.

Young agreed with the companies. He said the new requirement – as of July 1, 2009 – that companies make a “competitive” offer undermines Connecticut’s argument that the rule existed before the change.

“It is implausible to argue by implication – as Connecticut Representatives do – that ISO New England (i) did not fully understand its own Tariff or (ii) proposed what amounted to a redundant Tariff supplement,” Young wrote.

Motive

In order to prove market manipulation, Connecticut needed to show the companies acted with “specific deceitful or fraudulent intent or recklessness.”

Young found none of the companies met this requirement. He found “there is absolutely no evidence” any of the companies misrepresented or omitted information they were required to provide. He also found none of them engaged in deception.

“I also observe the circumstances that BEMI, Constellation and Shell may have ‘consciously’ ‘intended’ to formulate and pursue offer/bid ‘schemes’ that satisfied their Tariff capacity obligations and earned them capacity payments while minimizing the attending economic risks simply constitute a pattern of rational economic behavior if the ‘scare quote’ descriptors are construed in accordance with their non-pejorative meanings,” Young said.

“BEMI, Constellation and Shell therefore in no way impaired, obstructed or defeated ISO-New England’s well-functioning markets,” he said.

Young said all market manipulation allegations made by Connecticut “shall be deemed meritless and shall be dismissed with prejudice.”

The commission ruled all three companies acted properly and did not manipulate the market.

“There is a dearth of evidence to the contrary,” the commission said.