The Federal Energy Regulatory Commission has fined Durham-based American Efficient $722 million and ordered the company to repay more than $410 million in “unjust profits” for alleged fraud in its energy efficiency program. 

In an April 15 ruling, FERC claims American Efficient withheld key information from electric grid operators that allowed the company to manipulate energy markets. 

An American Efficient spokesperson said the company “stands by its position that the commission’s allegations are meritless and that it did not commit any wrongdoing.”

FERC took issue with the company’s business model. Durham entrepreneur Ben Abram and his company Wylan Capital purchased American Efficient in 2013. Since then, it has been an energy efficiency aggregator that buys sales data and “environmental attributes”—the inherent characteristics of lightbulbs, appliances, and other products that make them energy efficient—from large retailers, like Lowe’s, as well as other companies. 

American Efficient then used that sales data to calculate the energy savings from the anticipated use of the lighting and appliances, entering those projected savings into “capacity auctions.” 

At capacity auctions, grid operators pay for the ability of traditional power suppliers and utilities— as well as energy-efficiency aggregators like American Efficient—to produce power when needed. Ratepayers ultimately pay for the costs of fuel through their respective utilities.

The decision was unanimous among the five commissioners, two Democrats and three Republicans.

“I don’t vote lightly for disgorgement and civil penalties this high,” said FERC Commissioner Lindsay See, a Biden appointee, at a public meeting last week. “But we’ve not been faced with a scam that robbed ratepayers of hundreds of millions of dollars in this way before.

“American Efficient has fought with every legal tool they can muster, and it’s easy to understand  why—because their entire business is at stake, their entire business is a scam.”

The other two Biden appointees, Judy Chang and David Rosen, criticized American Efficient for sullying legitimate energy efficiency programs that actually reduce demand.

FERC Commissioner David La Certe, a Trump appointee, said he will refer the case to the U.S. Department of Justice for a possible criminal investigation. La Certe said at the public meeting that he is concerned about how American Efficient spent its proceeds from the capacity auctions, which the company says in a press release included solar projects in Brazil.

“While I do not take lightly the weight of a criminal referral, the interests of justice demand it,” LeCerte wrote in a concurring opinion. “American Efficient’s conduct is not only market manipulation, but a fundamental betrayal of the environmental and reliability principles that have been used to justify energy efficiency resources in the first place.”

The investigation into American Efficient began nearly five years ago after independent market monitors alerted FERC’s enforcement staff, as Inside Climate News previously reported.  

Grid operators like PJM, which operates in many states including northeastern North Carolina, hire market monitors to ensure the wholesale energy markets are fair and to identify potential manipulation.

American Efficient pays a few cents to these entities per product sold, micropayments ostensibly meant to encourage retailers to promote  efficient products. In turn, use of more efficient products would reduce energy demand, air pollution, and greenhouse gas emissions. 

American Efficient declined an on-the-record interview and instead provided statements by an unnamed company spokesperson.

“What made this approach different is that the end user wasn’t the only party that could move the needle on energy efficiency,” a company spokesperson said. The micropayments “sent a powerful signal through the supply chain.”

FERC argued that a $0.05 payback on a single light bulb cannot influence retailer behavior. 

“But $0.05 multiplied across every qualifying product sale in every qualifying store adds up,” the company spokesman said, “and the academic literature on upstream market transformation confirms what common sense suggests: when you offer incentives at scale, supply chains respond.”

Over the past 12 years, federal records show that several grid operators, including PJM, have paid American Efficient a total of more than a half billion dollars at these auctions. Grid operators use proceeds from ratepayers’ energy bills to pay power suppliers and energy efficiency companies for the ability to produce power when needed. 

The payments were based on the theory that encouraging energy efficiency reduces the amount of power grid operators must procure, lowers the cost of energy, and saves ratepayers on their monthly bills. 

Those reductions are validated “through well-established measurement and verification protocols used by utilities and energy companies across the country,” the American Efficient spokesperson said.  

FERC strongly disagreed. Commissioners gave the example of an agreement between American Efficient and Home Depot over a $10,619 refrigerator. If a customer bought that refrigerator from the store, Home Depot would note it on a “sales data sheet” that it sent to American Efficient,” federal documents show. American Efficient would then send Home Depot a “micropayment” of $0.15 in return for the environmental attributes of the refrigerator. 

American Efficient contends that it obtained the right to bid energy savings associated with that refrigerator into the PJM capacity auction through this arrangement—and that PJM knew how it worked.  

FERC found the connection tenuous, because the American Efficient’s contract with Home Depot did not require the retailer to use the “micropayment” for any specific purpose, such as discounting or promoting the sale of the refrigerator.

American Efficient argues that its contract with PJM, in turn, did not require the company to prove that the program caused demand reductions that would not have occurred otherwise. “If there had been such a requirement, the company would obviously have designed the program and the measurement of its impact to comply with these requirements,” the American Efficiency spokesman said.

Selling environmental attributes is not new, said Ari Peskoe, the director of the Electricity Law Initiative at Harvard Law School. Peskoe was traveling and not available for an interview, but pointed to his comments about the case on Twitter for context. 

“American Efficient conjured up these attributes, which is clever, fraudulent, or a little of both,” he wrote. Initially, the company seemed to be upfront with the grid operators about what it was doing, Peskoe wrote, then later, claimed that its payments to the retailers increased sales of efficient appliances. “Its plan appeared to unravel from there.”

However, Peskoe questioned whether FERC’s case is that straightforward. The contract between PJM and American Efficient doesn’t require the company to prove a connection to the retail customer, as the commission maintains in its ruling.

“Conduct that looks bad” can still be legal, Peskoe wrote.

American Efficient still has legal options to fight the civil penalties. First, the U.S. Supreme Court is currently considering two cases that consider whether the procedures federal commissions use for assessing penalties comply with the constitutional right to a jury trial. In those cases, it’s the Federal Communications Commission in question–though the ruling could affect FERC as well. 

Second, FERC must now file a separate action in federal district court and prove its case from scratch in order to collect the funds. A trial would also give the company an opportunity to present evidence before a judge and jury. 

As for the criminal referral, the U.S. Department of Justice can choose whether to investigate FERC’s claims. 

“We are focused on defending the business,” the American Efficient spokesperson said.

“This was an American energy company— built with private capital, advancing an all-of-the-above energy strategy that treated efficiency as a resource just like any power plant. “It has been brought to the brink of financial ruin by a single federal agency acting as its own prosecutor, judge, and jury.”

American Efficient has few options to participate in capacity auctions. Of the grid operators in the eastern U.S., only one, ISO-New England, still buys energy-efficiency resources. 

Yet ISO-NE became concerned about one of American Efficient’s subsidiaries when it participated in the auctions in 2018 and partially disqualified the company from a subsequent auction, FERC documents show. 

The reason: The company couldn’t provide enough information to prove its business model worked.

Disclosure: Ben Abram’s father, Adam Abram, is the chair of The Assembly’s board.

Correction: This story has been updated to correct the political makeup of FERC’s board.