This week’s enforcement update reports on FERC Enforcement’s settlement with Lincoln Paper and FERC’s civil penalty assessment against Coaltrain. We also cover developments in the TOTAL complaint case in district court, and the NERC report and new legislation in California addressing the Aliso Canyon outage in California. Plus FERC’s order today accepting CAISO’s changes to deal with Aliso Canyon.

FERC settles enforcement case against Lincoln Paper. On June 1, FERC issued an order approving a settlement between Lincoln Paper and FERC’s Office of Enforcement. Under the terms of the settlement, Lincoln Paper neither admits nor denies the allegations and has agreed to a civil penalty of $5,000,000 and disgorgement of $379,016.03. As described below, given Lincoln’s ongoing bankruptcy proceeding, these assessments will likely amount to nothing more than “headline” value for FERC. The settlement resolves FERC Enforcement’s investigation of Lincoln Paper, in which FERC Enforcement alleged that Lincoln Paper adopted and implemented a scheme to defraud ISO-NE of demand response payments by curtailing generation during the baseline period, intentionally creating a misleading baseline, in order to maximize payments for phantom load reductions.

According to the settlement, because Lincoln Paper is bankrupt, it is unlikely to be able to pay these full amounts and instead has agreed to allow FERC’s claims in two parts: (1) an allowed unsecured claim of $379,016.03 for the disgorgement; and (2) an allowed subordinated claim of $5,000,000 for the civil penalty. The settlement clarifies that the $5,000,000 civil penalty claim will only be paid after all other non-subordinated claims and interests against Lincoln are paid. Lincoln has not yet filed a chapter 11 plan or disclosure statement, which would detail the expected recoveries for each class of claims, but given the nature of the case and the fact that unsecured creditors in most bankruptcy cases do not receive full recoveries, it appears likely that FERC will not receive any recovery on account of the $5,000,000 subordinated claim. Nevertheless, FERC Enforcement agreed that in light of the bankruptcy and Lincoln Paper’s financial condition, Lincoln Paper’s allowance of these settled claims reasonably satisfies the disgorgement and civil penalty obligations. Lincoln Paper agreed to take all steps necessary to obtain permission from the Bankruptcy Court to make the settlement payment, including filing a motion for approval of the settlement agreement.

FERC issues Order Assessing Civil Penalty against Coaltrain and traders. On May 27, FERC issued a civil penalty of $26 million against Coaltrain Energy, $5 million each against co-owners Peter Jones and Shawn Sheehan, $1 million against trader Robert Jones, and $500,000 each against traders Jeff Miller and Jack Wells. FERC also directed Coaltrain, Peter Jones, and Sheehan to disgorge $4,131,894 in allegedly unjust profits. According to Ken Irvin, counsel for Coaltrain, “The order reflects the flawed process FERC uses and reiterates the need for our judicial system to impose the rigors due process provides. With ample transparency and cooperation on our part, we have shown compliance with the market rules and regulations. Our confidence remains that we have proven our case before FERC and will prove it in court too.”

Judge grants TOTAL motion to expedite and denies FERC motion to stay briefing. On May 24, Judge Nancy F. Atlas granted TOTAL Gas & Power North America, Inc.’s (TGPNA) motion to expedite resolution of the declaratory judgment action in the U.S. District Court for the Southern District of Texas. Judge Atlas also denied FERC’s cross-motion to stay summary judgment briefing. The court will hear argument on FERC’s motion to dismiss and TGPNA’s motion for summary judgment on June 24. FERC’s opposition to TGPNA’s motion for summary judgment is due by June 9.

On May 17, FERC filed motion to stay briefing and opposition to TGPNA’s motion to expedite. In the filing, FERC requested that the court stay briefing on TGPNA’s summary judgment motion pending determination of whether the court has jurisdiction over the claims, whether the claims are otherwise ripe, and whether the court should exercise its discretion to hear the declaratory judgment action. FERC thus requested that the court adjudicate FERC’s pending motion to dismiss before the parties brief summary judgment.

TGPNA filed a reply to FERC’s motion on May 23. TGPNA argued that the key issue is whether Section 24 of the Natural Gas Act gives federal district courts exclusive jurisdiction over violations, so granting FERC’s request to stay the briefing on summary judgment while FERC’s motion to dismiss is being considered makes little sense and is merely an attempt to game the court proceedings. According to TGPNA, FERC is attempting to keep the court from fully considering the express language and statutory context of Section 24, and to prolong the litigation until the agency’s process advances far enough to inflict the very harm that TGPNA’s complaint seeks to forestall.

FERC approves CAISO proposal on Aliso Canyon. On June 1, FERC approved CAISO’s proposed tariff to address limitations in the natural gas delivery system in southern California due to the Aliso Canyon outage that could adversely impact the reliability of CAISO’s electric grid and market operations during the summer of 2016. FERC accepted the proposed tariff revisions, to be effective June 2, 2016 and July 6, 2016, subject to condition and further compliance. According to FERC, “we note that our conditional acceptance of CAISO’s proposal for this interim set of measures is based on the unique set of circumstances CAISO will face this summer due to the limited operability of the Aliso Canyon natural gas storage facility in southern California. It is only under this set of unique and widely acknowledged reliability-related circumstances, in addition to CAISO’s commitment to sunset the proposed revisions by November 30, 2016, that we find CAISO’s proposal, subject to condition and further compliance, to be just and reasonable.” Recognizing that questions remain regarding Aliso Canyon’s return to full capability and that longer-term solutions to some of these fuel-related issues may be necessary, FERC directed its staff to convene a technical conference to facilitate a discussion regarding the efficacy of CAISO’s measures and the need for additional and/or longer-term measures. That order comes as FERC held a technical conference on electric grid reliability aimed at helping keep FERC abreast of potential problems, like Aliso may cause.

NERC warns of Aliso Canyon impacts on bulk power system operations. On May 24, NERC released a short-term special assessment entitled “Operational Risk Assessment with High Penetration of Natural Gas-Fired Generation.” According to the report, the recent outage of the operationally-critical Aliso Canyon natural gas storage facility demonstrates the potential risks to bulk power system reliability of increased reliance on natural gas without increased coordination between the two industries. The risk associated with Aliso Canyon, which may result in controlled load shedding, is expected to persist through the 2016 summer season, and potentially into the 2016/2017 winter and 2017 summer seasons. The report concludes that the challenges faced in California represent a series of risks that have been layered into the system over the past decade, including the following: significant dependency on a single and just-in-time delivery fuel source, specifically for ramping capability to meet load and generation variability; reduced amount of baseload and dispatchable resources; increased amounts of variable and distributed resources; increasing need of system flexibility; gas system dependency on storage to maintain operating pressure; and a lack of clear understanding of natural gas operational characteristics and potential impacts on bulk power system operations.

California Governor signs legislation regarding Aliso Canyon. On May 10, California Gov. Jerry Brown signed into law Senate Bill 380 addressing the Aliso Canyon facility outage. SB 380 continues to prohibit Southern California Gas from injecting any natural gas into the Aliso Canyon facility until a comprehensive safety review of the facility’s gas storage wells is completed, the State Oil and Gas Supervisor has made a safety determination, and the Executive Director of the CPUC has issued a concurring letter regarding the Supervisor’s safety determination.

SB 380 requires the CPUC, in consultation with various governmental agencies and other entities, to determine the range of working gas necessary in Aliso Canyon to ensure safety and reliability for the region and just and reasonable rates in California. The legislation also requires the CPUC to publish a report by June 9, 2016 that specifies this range and the number of wells and associated injection and production capacity required. In addition, SB 380 requires the CPUC to open a proceeding by July 1, 2017 to determine the feasibility of minimizing or eliminating use of the Aliso Canyon facility, while still maintaining energy and electric reliability for the region.