Last week, two U.S. Supreme Court Justices signaled that they are seeking a case to address whether courts must defer to an agency’s interpretation of a statute that contemplates both criminal and administrative enforcement. FERC enforcement proceedings against alleged energy market manipulators would fit the bill.
According to an unusual statement issued by Justices Scalia and Thomas, they will be receptive to granting certiorari to consider whether courts owe any deference to an agency’s interpretation of an ambiguous statute that carries both criminal and civil penalties. According to the Justices, the answer is no. They stated that deferring to the agency’s interpretation “collide[s] with the norm that legislatures, not executive officers, define crimes.” They also declared that deference is at odds with the rule of lenity, which requires statutory ambiguities to be resolved against the government.
Is FERC vulnerable to a claim that it is improperly using its regulatory enforcement powers to define an offense under an ambiguous energy market manipulation statute? The answer is yes. The case prompting the Justices’ statement was a prosecution under Section 10(b) of the Securities Exchange Act. Section 10(b) is worded similarly to the statute giving FERC the power to penalize energy market manipulation. In fact, 16 U.S.C. § 824v not only mirrors the language of Section 10(b), it also specifically incorporates several of Section 10(b)’s definitions and imposes similar civil and criminal penalties.
Like Section 10(b), 16 U.S.C. § 824v says that it shall be unlawful to use or employ, in connection with the purchase or sale of electric energy or transmission services, any manipulative or deceptive device or contrivance in violation of such rules and regulations as FERC may prescribe. The relevant FERC regulation, 18 CFR § 1c.2, does not shed further light on what constitutes a manipulative or deceptive device or contrivance. Echoing the language of SEC regulations, FERC’s regulation prohibits use of any device to defraud, the making of any untrue statement or material omission, or engaging in any act that operates as a fraud or deceit.
FERC’s rules or individual tariffs do not cure the ambiguity. Indeed, FERC has stated that a finding of market manipulation does not require any violation of a specific market rule or tariff. The result is that FERC necessarily defines on a case-by-case basis what is fraudulent or manipulative conduct.
FERC defends its ad hoc approach because of “the impossibility of foreseeing the myriad means of misconduct in which market participants may engage.” The agency also claims that Congress gave it “broad authority to prohibit manipulation.” At least two Supreme Court Justices have different views. And given the size of the penalties being imposed by FERC—amounting to hundreds of millions of dollars in several recent cases—the agency may soon find one of its enforcement proceedings becoming the test case for which the Justices are looking.