United States: FERC Civil Penalties May Be Subject To Full Judicial Review

A Federal District Court recently held that a proposed civil penalty assessed by FERC was subject to a full trial de novo where the respondent elects to forego a hearing before an Administrative Law Judge, a matter of first impression that will affect the ways parties plan and respond to FERC investigations and enforcement actions.

On July 21, 2016, a Federal District of Massachusetts judge ruled on a matter of first impression (the "Order") related to a Federal Energy Regulatory Commission ("FERC") investigation and assessment of a civil penalty against a power generator.1 After an investigation, FERC assessed a $5 million civil penalty against Maxim Power Corp. and its related affiliates ("Maxim"), and a $50,000 civil penalty against Kyle Mitton, a Maxim employee (and together with Maxim, the "Respondents").2 The Respondents elected to forego review of those penalties before a FERC Administrative Law Judge, and pursuant to the Federal Power Act ("FPA"), FERC petitioned the District Court for an order affirming and enforcing the assessment.3 The Order is significant. For the first time, a court ordered a full civil trial de novo of the facts and circumstances giving rise to FERC's imposition of civil penalties, and clarifies the procedures applicable to such a trial.


The summer of 2010 was exceptionally warm in the northeastern United States. On most days during July and August of that summer, ISO New England ("ISO-NE") dispatched Maxim's dual-fuel power plant in Pittsfield, Massachusetts.4 Dispatching involves a grid operator (here, ISO-NE), for purposes of enhancing grid reliability during peak demand, directing a generator to produce power despite the price for that power exceeding the market price in the region.5 To combat the market power of a dispatched generator, the grid operator will mitigate the price based on the cost of the generator's fuel.6 In the summer of 2010, ISO-NE paid dispatched generators the cost of fuel burned plus 10%.

Maxim's Pittsfield plant is a dual-fuel plant that is capable of burning either oil or natural gas. While the Pittsfield plant has storage tanks for oil, it received its natural gas supply through a pipeline connection with Tennessee Gas Pipeline Company ("TGP").7 In the summer of 2010, oil prices were approximately $175/MWh and natural gas prices were approximately $75/MWh.8 Due to increased demand during the peak months, TGP issued pipeline restrictions affecting the Pittsfield plant.9 On the relevant dispatch days, ISO-NE would request pricing from Maxim on the day before it was to generate power.10 For a large portion of the dispatch days, Maxim submitted day-ahead offers based on the price of oil instead of natural gas.11 FERC's investigation revealed that the Pittsfield plant actually burned the lower-priced natural gas on most of those days.12 In FERC's view, this practice amounted to market manipulation prohibited by the FPA and FERC regulations.13 Furthermore, FERC alleged that Maxim violated its candor rule and misrepresented its actions and materials delivered to ISO-NE related to its activities.14

After notice of the proposed civil penalty, Respondents elected not to proceed before a FERC Administrative Law Judge and FERC ordered the civil penalty assessed.15 After Respondents failed to pay the civil penalties, FERC petitioned the District Court pursuant to the FPA and sought to have it affirm the assessment.16 Under the FPA, the District Court has the authority to "review de novo the law and facts involved, and shall have jurisdiction to enter a judgment enforcing, modifying, and enforcing as so modified, or setting aside in whole or in [p]art" the civil penalty.17


FERC's underlying allegations relate to market manipulation and failure to use candor with ISO NE. Initially, however, the parties disagreed over the procedure to be used by the District Court in its de novo review of the civil penalties.18 FERC argued that the relevant FPA provisions "grant[] the court discretion and flexibility to craft the procedures needed to take a fresh look at the law and evidence without requiring a trial and the attendant procedures."19 The Respondents disagreed and urged the court that the relevant statutory provision simply means that FERC's petition should be treated as any ordinary civil action—one that is subject to the Federal Rules of Civil Procedure and culminating in a jury trial.20

Even when the target of a proposed penalty elects to forego a full hearing before an Administrative Law Judge, FERC asserted that a court only need to review the materials FERC itself relied on when making its penalty assessment.21 In disputing that contention, the Respondents argued that the penalty assessment failed to afford them "even the most basic due process rights," that FERC proceedings are notoriously one-sided, and that the FERC investigation and adjudication did not amount to an adversarial proceeding.22

The Order

The Order, which ultimately agrees with the Respondents' reading of the statute and applicable law, considers the relevant FPA statutory language, FERC's prior positions and interpretations, the approaches taken by other courts, and Respondents' due process rights. The court found that the FPA authorizes FERC to assess civil penalties for FPA violations after notice and an opportunity for a hearing.23 Accordingly, even when a party elects to forego an administrative hearing before an Administrative Law Judge, the court held that, while somewhat ambiguous, a fair interpretation of the statute mandates that such opportunity for a hearing is shifted to the applicable District Court in which FERC seeks an order confirming the assessment.24

In considering FERC's prior positions, interpretations, and the approaches taken by other courts, the Order balances perhaps the most ambiguous aspect of the disputed matter—whether its own orders can be used to determine procedures used in the instant case. The Order analyzed those interpretations and other courts' approaches, and determined that they weighed in favor of a full de novo trial.

The Order carefully considers the Respondents' due process rights by weighing:

'the private interest that will be affected by the official action...the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards' and 'the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.'25

The Order found that the Respondents' private interest is strong and cites the magnitude of the proposed civil penalties, and the result should the penalties be erroneously assessed.26 On the other hand, the Order acknowledges FERC's interest in the efficient administration of penalties.27 The Order considered that the Respondents' penalty was assessed by a 3–1 vote of the FERC Commissioners, with one Commissioner penning a dissent.28 On balance, the Order agrees that protection of the Respondents' due process rights weighed in favor of a full civil trial de novo.29 However, the Order recognizes that the duplicative efforts that full discovery would impose on FERC make it prudent to modify and tailor the discovery plan applicable to the dispute.30

Along with the procedural issues before the District Court, the Order denied Respondents' motion to dismiss and discussed the relevant factual and legal bases that supported such a denial.31 The Respondents' motion to dismiss, and the arguments and responses by the parties related to it, are beyond the scope of this alert.


The Order provides a precedent to parties subject to FERC civil penalties and provides an avenue to receiving full de novo judicial review of a FERC investigation. Parties subject to FERC's regulatory oversight should carefully review the Order and the remainder of the litigation, if it remains unsettled, with a view to prudently planning any response to FERC investigations.


1. Memorandum and Order Regarding Procedures Applicable to FERC's Petition and Respondents' Motion to Dismiss (FERC v. Maxim Power, et al.), No. 15-30113-MGM, Docket No. 55 (D. Mass. July 21, 2016) [hereinafter Order]. By way of disclosure, and for purposes of brevity, many of the background facts contained herein are substantiated by reference to the Order or other items in the record of the case.

2. See Order, supra note 1, at *6-*7.

3. Id. at *7.

4. Id. at *3-*4.

5. Id. at *2.

6. Id.

7. Id.

8. Id. at *3.

9. Id.

10. Id.

11. Id. at *4.

12. Id. at *3-*6.

13. Id. at *6-*7.

14. Id.

15. Id. at *7-*9. The FPA defines the procedure for such election and resulting order. See 16 U.S.C. § 823b(d)(3)(A).

16. Order at *7-*9.

17. 16 U.S.C. § 823b(d)(3)(B).

18. See Order, supra note 1, at *8.

19. Id. (emphasis added).

20. Id.

21. Id. at *10.

22. Defendants' Reply Memorandum of Law in Support of Their Motion to Dismiss the Federal Energy Regulatory Commission's Petition (FERC v. Maxim Power, et al.), No. 15-30113-MGM, Docket No. 26, at n.2 (D. Mass. Oct. 19, 2015).

23. Order, supra note 1, at *8.

24. See id. at *11-*12.

25. Id. at *18 (quoting Matthews v. Eldridge, 424 U.S. 319, 335 (1976)).

26. Id.

27. Id. at *20.

28. See id. at *18.

29. Id. at *22.

30. Id. at *20-*21.

31. See id. at *22-*29.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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