Introduction
On February 2, 2015, FERC issued an Order to Show Cause and Notice of Proposed Penalty to Maxim Power Corporation and its named subsidiaries ("Maxim"),1 jointly and severally, as well as executive, Kyle Mitton (the "Order").2 The Commission ordered Maxim and Mitton (together, the "Respondents") to show cause why they should not be assessed civil penalties of $5 million3 and $50,000, respectively. Respondents must answer the Order by Wednesday, March 4, 2015 and may elect in their answer to: (1) proceed via a hearing before an Administrative Law Judge; or (2) receive an immediate penalty assessment if FERC finds that a violation occurred, the payment of which the Commission may pursue in federal district court via a trial de novo if such penalty is not paid within 60 days. The Commission does not seek disgorgement because ISO-New England already recovered the alleged overpayments.
FERC's Allegations
Enforcement Staff alleges that Respondents violated FERC's prohibition on electricity market manipulation under Section 222 of the Federal Power Act and 18 C.F.R. Section 1c.2, as well as FERC's regulations prohibiting the submission, or omission, of false or misleading information, 18 C.F.R. Section 35.41(b).4 Principally through Mr. Mitton, Staff asserts that "Maxim engaged in a series of transactions with ISO-New England (ISO-NE) and misleading communications with the ISO-NE Internal Market Monitor (IMM) for the purpose of obtaining inflated make-whole payments at high fuel oil prices when a Maxim plant [Pittsfield] was dispatched for reliability, even though the plant was actually burning much less expensive natural gas."5 Respondents allegedly did so in order to reap the benefit of out-of-market "make-whole payments," also referred to as Net Commitment Period Compensation payments, made by ISO-NE when it calls upon generation to meet reliability needs. Under this alleged scheme, Maxim collected $2.99 million in excessive payments, all of which ISO-NE recouped after learning that Maxim charged for oil, but burned cheaper gas.
When asked by ISO-NE to justify its prices, Staff alleges that Maxim "conveyed the impression" that it was burning oil at its Pittsfield Plant because it was struggling to get gas from the Tennessee Gas Pipeline. In reality, on at least 10 of the 22 days when Maxim offered oil and burned gas, Staff alleges that Maxim "had already purchased large volumes of gas before it submitted Day Ahead offers based on oil prices."6 Specifically, Staff alleges that in an email to ISO-NE on July 16, 2010, Mr. Mitton stated the following: "Similarly [sic] to our other units we have been offering the unit in conservatively on fuel oil due to the daily gas restrictions on Tennessee Gas Pipeline. I can provide you the restriction notices for your records if you like – please let me know."7 Staff alleges that, at the time of this email, Maxim satisfied its day ahead obligations exclusively by burning gas, after offering prices based upon its use of oil. Mitton followed up the next Monday with documentation from the Tennessee Gas Pipeline regarding its restrictions for the month of July 2010. It was not until August 23, 2010 that ISO-NE learned of Maxim's gas burning, after the market monitor explicitly asked Maxim what fuel it had burned on specific days.
The Staff Report discerns additional indicia of Respondents' intent from the expiration of a particularly lucrative contract they allegedly desired to replace. Before implementation of ISO-NE's capacity market, for the period December 1, 2005 to May 31, 2010, Maxim's Pittsfield Plant had a Reliability Must Run agreement with ISO-NE. Under that agreement, Pittsfield's average annual revenues were approximately $445/MWh. Staff alleges that when that revenue stream evaporated, Maxim adopted the "burn gas, charge oil" strategy to maintain profits.
Staff seeks to hold Maxim's parent company and its subsidiaries liable because the Maxim companies together supposedly had sufficient notice of their potential liability. Staff points out that "Maxim Power Corporation employees act on behalf of Maxim's top-level U.S. subsidiary (Maxim Power (USA), Inc.) and on behalf of the subsidiaries of that entity."8 Staff asserts that because Maxim treats all of its subsidiaries as a cohesive unit, Staff may as well.
The Staff Report did not persuade Commissioner Clark, who issued a brief dissent stating only that he did not believe the record sufficiently supported the Commission moving forward with the Order to Show Cause. He withheld judgment on the merits pending further factual development.
Impact of Potential Penalty
This enforcement action is notable for several reasons. Namely, Staff: (1) does not articulate any tariff provision that required Maxim to burn the type of gas that it bid; (2) relies upon a "conveyed impression" as the central basis for manipulative intent; and (3) does not identify any actual harm suffered by ratepayers as a result of Maxim's actions.
The Staff Report does not cite a tariff provision that Maxim violated by bidding oil and instead ultimately burning gas to meet its reliability calls. Staff's description of the process surrounding bids that result in make-whole payments is vague. Instead of citing applicable tariff provisions, Staff relies on testimony regarding tariff revisions to support its allegation that Maxim violated the tariff. Staff's omission of a clear violation raises material questions about the strength of its allegations vis-à-vis the actual tariff requirements applicable to the Respondents and, critically, whether Respondents had prior notice that their conduct was prohibited.
Prior notice that an action may result in liability is a touchstone of due process. Staff claims action against Maxim and its subsidiaries meets due process standards because "[i]t requires nothing more than common sense for the owners of a power plant to realize it is wrong to mislead a market monitor to be able to charge an ISO (and ultimately ratepayers) for high-priced fuel that the plant did not burn."9 The issue may not be so straightforward, however. Indeed, Staff cites testimony to articulate the allegedly-violated tariff requirement. It does not appear that the process by which market participants fulfilled reliability requirements, met commercial demands, and adjusted for market constraints was so simple.
Questions can also be raised regarding Staff's factual support. The Staff Report focuses on Maxim's alleged misrepresentations that conveyed a false impression instead of directly false and manipulative conduct. Moreover, Staff does not address whether Maxim had other commitments that required gas, which might explain or soften its representations to ISO-NE.
Finally, because the market monitor discovered that Respondents had burned gas, but collected payments based on burning oil, ISO-NE clawed back the difference in price. Staff's report indicates that the clawback prevented ratepayers from harm: "Only a later intervention by the IMM protected New England ratepayers from being charged these additional millions of dollars."10 Undeterred, Staff continues to pursue the enforcement action.
If FERC is successful in assessing a penalty based on the facts as presented in the Order, market participants may have reason for concern about the signal it sends. Enforcement Staff believes it can prove intent based upon subjective impressions where regulatory obligations are unclear and market participants suffered no actual harm. The Order and other recent enforcement actions highlight another thought – might there be a better, middle way to avoid certain enforcement actions? For example, clear notice to market participants of their obligations with a claw back of revenues, if appropriate, instead of costly enforcement investigations that seem to raise more questions than answers for market participants.
1 The Order to Show Cause defines "Maxim" as, collectively, Maxim Power Corporation, Maxim Power (USA), Inc., Maxim Power (USA) Holding Company Inc., Pawtucket Power Holding Co., LLC, and Pittsfield Generating Company, LP.
2 The Commission attached to its Order, as Appendix A, the Enforcement Staff Report and Recommendation of the Office of Enforcement ("Staff Report").
3 Because the same conduct is alleged to have violated both the Anti-Manipulation Rule and Section 35.41(b), Staff did not recommend a separate penalty for the latter alleged violation. If it were to recommend a separate penalty, however, Staff explained it would recommend $1.3 million for the false statement or omissions.
4 The Order covers just one of three strategies under investigation according to the Notice of Alleged Violation issued to Respondents on November 3, 2014. The other two strategies, which relate to inflation of make-whole payments from ISO-NE and artificial reported outputs from Maxim's power plants, remain under investigation.
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