Civil Penalties; Excessive Fines Clause
HIKO Energy, LLC v. Pennsylvania PUC, 163 A.3d 1079 (Pa. Cmwlth. 2017), allocatur granted Dec. 13, 2017, appeal docket 39 EAP 2017
On December 13, 2017, the Pennsylvania Supreme Court granted allocatur in HIKO Energy, LLC v. Pennsylvania PUC, No. 314 EAL 2017 (Dec. 13, 2017). In HIKO Energy, LLC v. Pennsylvania PUC, No. 5 C.D. 2016, slip op. (June 8, 2017), a divided Commonwealth Court affirmed the Public Utility Commission’s (PUC) civil penalty of approximately $1.84 million against HIKO Energy, LLC (HIKO), an electric generation supplier (EGS) which, during the polar vortex effects of the winter of 2014, intentionally charged 5,700 customers a rate that exceeded their “guaranteed” introductory rate on nearly 15,000 invoices at the express direction of its management and chief executive officer (CEO). The PUC’s policy for evaluating litigated and settled proceedings involving violations of the Public Utility Code (Code), which exposes companies who are unwilling or unable to negotiate a settlement to greater penalties, resulted in a penalty far greater than those imposed on EGSs that settled complaints stemming from the 2014 polar vortex. The Court’s decision endorses both the PUC policy and its result, and underscores the importance of retaining counsel with the experience to negotiate early settlements in complaints alleging serious Code violations.
The 4-3 decision rejected HIKO’s contentions that the $1,836,125 civil penalty constituted an unconstitutionally excessive fine because it was not proportionate to fines levied against other EGSs for similar violations, impermissibly penalized HIKO for exercising its right to litigate, exceeded its statutory authority by using a “per invoice” methodology in determining the number of violations, and improperly adopted the penalty recommended by the presiding administrative law judges (ALJs) in their initial decision despite finding an absence of substantial evidence to support several factual predicates for the recommended penalty.
The majority first held that HIKO had waived its claim that the penalty violated the Excessive Fines Clauses of the U.S. and Pennsylvania Constitutions (U.S. Const. Amend VIII; Pa. Const. Art. 1, § 13) by failing to raise it before the PUC. It then affirmed the PUC’s rejection of HIKO’s assertions that the recommended penalty was unreasonably disproportionate to the much smaller fines paid by EGSs for similar violations pursuant to PUC-approved settlements. In doing so, the Court approved the PUC’s use and application of its policy statement enumerating the factors and standards used for evaluating litigated and settled proceedings involving violations of the Public Utility Code and PUC regulations. (52 Pa. Code § 1201.) In particular, the Court endorsed the policy statement’s provision that its factors and standards will not be applied in a settled proceeding as strictly as in a litigated proceeding (id. § 1201(b)), that the third penalty factor – whether the conduct at issue was intentional or negligent – may only be considered in evaluating litigated cases (id. § 1201(c)(3)), and that when conduct has been deemed intentional, the conduct may result in a higher penalty (id.).
The majority then denied HIKO’s claim that, in view of the far-lower penalties imposed on EGSs who settled similar complaints, the PUC had penalized HIKO for exercising its right to litigate. The majority found that there was no indication that the PUC had imposed the penalty based “solely” on HIKO’s decision to litigate rather than to settle the matter, and it distinguished HIKO’s case from the settled cases on the bases of the intentional nature of the conduct by top-level management that resulted in the violation, and its magnitude. Most important, the majority concluded that the difference in penalties was justified by the PUC’s policies treating settled cases alleging violations of PUC regulations more leniently than litigated cases. These provisions clearly place additional burdens on parties who exercise their due process right to litigate, and the majority’s reliance on them to rebut HIKO’s claim that it was penalized for exercising that right is ironic, if not entirely tautological.
The majority also rejected HIKO’s assertion that the PUC erred in counting each of the approximately 15,000 invoices as a separate violation, rather than the four business decisions involved (the monthly decision to overcharge over four months), or one for each of the 5,700 overcharged customers, deferring to the PUC’s interpretation of its regulations and finding the separate-violation-per-invoice interpretation to be reasonable. Finally, the Court rejected HIKO’s substantial evidence claim. While acknowledging that the PUC had rejected several of the ALJs’ factual findings, the Court held that the serious nature of the violations, their genesis in the intentional conduct of top management, and the fact that the violations occurred while HIKO’s Pennsylvania EGS license was in conditional status provided the requisite support for the PUC’s decision.
Presiding Judge Leavitt filed a dissenting opinion, which was joined by Judge Cohn Jubelirer and Judge Covey. The dissent argued that the penalty imposed on HIKO was grossly disproportionate to the penalties of $25,000 to $125,000 imposed on other EGSs for the same conduct during the same period and that the penalty, therefore, violated both the PUC’s own policy statement and the constitutional prohibition against excessive fines. The dissent asserted that the PUC’s refusal to consider the penalties imposed in the settled cases was inconsistent with the policy statement, which commits the PUC to look at its own past decisions involving similar misconduct. (See 52 Pa. Code § 1201(c)(9).) The dissent faulted the ALJs and the PUC for failing to explain why the huge fine imposed on HIKO was necessary to deter future violations after having found that the smaller fines imposed on the settling EGSs provided sufficient deterrence. The dissent also argued that the conduct of the settling EGSs was “more egregious” than that of HIKO because it involved allegations of “slamming” (switching customers’ suppliers without consent). (It did not, however, address a key factor in the decision of both the PUC and the majority: the fact that the overcharges were the result of an intentional decision by HIKO’s CEO to shift the risk of the company’s business model to its customers in violation of the terms of their supply plans.) The dissent disagreed with the majority’s conclusion that HIKO had waived its constitutional claims, on the ground that it had challenged the penalty as “disproportionate” in its pleadings and exceptions before the PUC. The dissent also took issue with the PUC’s calculation of the penalty.
The Supreme Court granted allocatur on the following issues:
(1) Whether the $1,836,125.00 penalty was so grossly disproportionate to the penalties the Commission has approved for similar or more egregious conduct as to violate the Excessive Fines Clause of the Pennsylvania and U.S. Constitutions.
(2) Whether the $1,836,125.00 penalty impermissibly punished HIKO for litigating the complaint for a civil penalty instead of settling it.
(3) Whether the Commission abused its discretion in imposing an unprecedented civil penalty, which was not supported by substantial evidence.
The Commonwealth Court’s endorsement of the PUC’s policy for evaluating litigated and settled proceedings has burdened companies who exercise their right to litigate and placed a premium on settling complaints alleging violations of the Public Utility Code. The Supreme Court’s grant of allocatur reflects the serious questions of due process raised by this policy.
About the Author:
Chris Arfaa, a partner at Hawke McKeon & Sniscak LLP, represents telecommunications carriers, electric, gas, water and wastewater utilities, large utility customers, and municipal authorities in administrative regulatory proceedings and related appeals.