Following a more than three-year investigation, the Federal Energy Regulatory Commission (FERC) has issued an Order to Show Cause and Notice of Proposed Penalty against American Efficient LLC, its subsidiaries, and corporate parents for market manipulation and tariff violations. FERC is seeking $722 million in civil penalties and the return of over $253 million in unjust profits to PJM and MISO.
How’s that for an attention-grabber on an otherwise mild holiday week? Do you think FERC prefers cash or check?
The case revolves around definitions of eligible energy efficiency projects that may be entitled to capacity payments. The order alleges that American Efficient, which bills itself as one of the largest energy efficiency aggregators in the United States yet has a LinkedIn page that shows up as no longer available, violated Section 222 of the Federal Power Act (FPA) and FERC regulations through a manipulative scheme in PJM and MISO capacity markets.
The proposed penalty of $722 million is more than 43 times larger than the total civil penalties of $16.68 million FERC reported this year. It follows through on a letter the agency issued this June indicating it was poised to take action against American Efficient’s PJM subsidiary, Affirmed Energy.
The alleged scheme
The alleged violations involve extracting millions of dollars in capacity payments for supposed “energy efficiency projects” that, according to the Commission, did not actually reduce energy use and failed to meet tariff requirements regarding measurements and validation for participation as an Energy Efficiency Resource (EER).
Through the capacity markets, American Efficiency allegedly monetized numerous independent customer decisions to purchase energy efficient products at retail by buying the sales data and, purportedly, “environmental attributes” from various retailers, manufacturers, and distributors including Walmart, GE-Current, and Stop and Shop, then seeking capacity payments from PJM and MISO capacity markets for the energy reductions associated with the customers’ anticipated use of those products.
According to the show cause order, American Efficient’s program receives more capacity payments than any other single generator in PJM and offers nothing in return.
The investigation
FERC’s investigation into this matter began in May 2021. Various investigative techniques were implemented, including reviewing American Efficient’s submissions to the ISOs/RTOs, analyzing capacity auction results, and examining the company’s measurement and verification (M&V) plans and post-installation M&V reports. Enforcement staff also scrutinized American Efficient’s relationships with finance partners, including an investment bank, its affiliate, and an investment company. They took a look at American Efficient’s decade-long history of EER participation in PJM and MISO related to Energy Efficiency Resources (EERs) as well as attempts to expand its program to ISO-NE and the subsequent rejection by that RTO. The investigation covered financial transactions, market participation data, and communications between American Efficient and the relevant ISOs/RTOs.
Enforcement staff claim American Efficient refused to cooperate with its investigation, declining to make witnesses available for interviews and/or sworn testimony. After converting the preliminary investigation into a formal investigation, enforcement staff took testimony from two company employees and two former company executives. Staff also allege that American Efficient provided misleading information to FERC.
Law firm Van Ness Feldman LLP believes the massive sum of the proposed penalty indicates either FERC’s views on the severity of the alleged violations or on the behavior of the company during the investigation.
American Efficient denied the allegations in a letter to FERC Commissioners, In which American Efficient subsidiary Affirmed Energy called it “unjust to target one company for punishment and loss of its business through an enforcement investigation into what (the FERC) publicly alleges is standard industry practice.”
What now?
American Efficient must respond to the allegations within the next 30 days and show cause as to why they should not be found in violation of the FPA and FERC regulations. The order also requires the respondents to choose between an immediate penalty assessment with a right to a de novo trial in court and an administrative hearing before a FERC Administrative Law Judge (ALJ).
It remains unclear whether the Supreme Court’s decision in SEC v. Jarkesy will affect these proceedings, observes Van Ness Feldman. Under the FPA, respondents can contest any penalty assessment in a de novo trial in a federal district court. The Jarkesy decision suggests that a proceeding before an ALJ would violate the Seventh Amendment if respondents were required to go before an ALJ. However, under the FPA, respondents are not “required” but have the option to pursue an administrative hearing before an ALJ. It is uncertain how a federal court, post-Jarkesy, would conduct a Seventh Amendment analysis of any ALJ rulings that the defendant opted to pursue.
Van Ness Feldman also notes that in September 2024, FERC terminated administrative hearing proceedings in a long-running market manipulation case against Total Gas & Power North America and two of its traders. The dismissal order stated that the Commission “expects to further address its approach to enforcement cases in light of Jarkesy,” raising eyebrows over this proposed penalty.
Van Ness Feldman expects the respondents will continue to aggressively defend themselves, most likely in a de novo trial given the amount of money at stake.
