United States: FERC Ordered To Participate In Full Civil Trial To Affirm Prior Market Manipulation Penalty

Last Updated: July 28 2016
Article by Christopher Zentz and Daniel Archuleta

On July 21, 2016, the U.S. District Court for the District of Massachusetts ("District Court") determined that review of a FERC-issued penalty for alleged market manipulation must be treated as an "ordinary civil action" requiring de novo review and finding against FERC's arguments to the contrary. The District Court further ordered in its decision, FERC v. Maxim Power Corp., et al., that in the corresponding civil action—to determine whether to affirm FERC's prior penalty assessment against the owners and operators of a power plant in Pittsfield, Massachusetts ("Maxim") and one of their employees (together, "Respondents")—the Respondents will be entitled to the full discovery of an ordinary civil case, and the proceeding can be decided by a jury, if necessary.

In February 2015, following an investigation by enforcement staff, FERC found that Respondents committed market manipulation and issued penalties of $5 million for Maxim, and $50,000 for the chief employee responsible for the manipulation. Before issuing the penalty, FERC presented Respondents with its procedural options, as required by the Federal Power Act ("FPA"). The Respondents chose an "alternative option" that requires FERC to "promptly assess" the penalty, and for FERC to proceed in district court if the penalty is not paid within 60 days. After Respondents failed to pay the civil penalties within the statutory timeframe, FERC filed a petition in the District Court to affirm its civil penalty assessment. The Respondents responded by moving to dismiss FERC's claims of market manipulation.

The District Court described the "root of the parties' disagreement" as involving what procedures should be followed when the District Court conducts its de novo review. As the District Court noted, the relevant section of the FPA provides that the court "shall have authority to review de novo the law and facts involved," which Respondents claimed meant that the court should treat its case as an ordinary civil action governed solely by the Federal Rules of Civil Procedure ("FRCP"), including a potential jury trial. However, FERC argued that this portion of the FPA merely granted the District Court "discretion and flexibility to craft the procedures needed to take a fresh look at the law and evidence," but did not require a full trial.

The District Court concluded that FERC's alternative option for issuance of civil penalties calls for a de novo review at the district court level, subject to the FRCP applicable in any ordinary, civil action in district court. The District Court reasoned that, under the statute, FERC has discretion to grant or deny an adversarial hearing where a party elects the alternative option for issuance of a civil penalty. As a result, the District Court agreed with Respondents that, absent a full hearing at the district court level, a party might never receive a full, adversarial hearing, if it elects to use FERC's alternative civil penalty procedures. The District Court noted that, during the FERC proceeding, while, "Respondents were free to submit evidence and responsive arguments, they were unable to seek discovery, depose witnesses interviewed by FERC, gain any insight into the presentation of the case made by FERC's enforcement staff to the Commissioners during the investigative phase, or present their own witnesses." Furthermore, in support of its conclusion, the District Court highlighted similar FERC orders involving similar situations under the Natural Gas Act, as well as other court precedent and due process considerations. However, the District Court ultimately dismissed Respondents' motion to dismiss FERC's market manipulation claims as a whole.

The District Court also provided some limitations on the discovery to be conducted on review. In particular, it recognized that the parties should come up with a discovery plan that is "tailored" to account for the procedures and discovery that had already taken place as part of the enforcement investigation proceeding. The District Court emphasized, however, that the record would not be limited to the factual materials that FERC presents. Rather, the District Court noted that de novo review means that Respondents should be afforded the opportunity to seek discovery from witnesses interviewed by FERC, and could present their own witnesses during the proceeding.

The citation to the proceeding before the District Court is Federal Energy Regulatory Commission v. Maxim Power Corp., et al., Civil No. 15-30113-MGM (D. Mass.).

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