United States: FERC's Maxim Settlement Shows Continued Focus On ISO And RTO Bidding Conduct

On September 26, 2016, the Federal Energy Regulatory Commission (FERC or the "Commission") issued an order1 approving a Stipulation and Consent Agreement between its Office of Enforcement ("Enforcement") and Maxim Power Corp. (and related corporate entities) resolving allegations that Maxim violated the Commission's Anti-Manipulation Rule (Section 1c.2) and duty of candor requirement (Section 35.41(b)) through its energy market bidding conduct in ISO New England (ISO-NE) during two time periods (2010 and 2012-2013).2 To resolve the matter, Maxim agreed to pay a civil penalty of $4 million and to disgorge $4 million in unjust profits.

The settlement reflects the Commission's (and Enforcement's) expansive view of the Anti-Manipulation Rule, reaching conduct that complied with applicable market rules, but was inconsistent with their purpose and market design (the type of conduct that Enforcement has, at times, described as "gaming"). The settlement also reflects the Commission's continued emphasis on enforcing the duty of candor applicable to market-based rate sellers, particularly in Independent System Operator (ISO) and Regional Transmission Organization (RTO) markets—a violation that carries the same potential civil penalties as market manipulation, but does not require proof of intent. The settlement is also notable for its timing and its scope. The settlement resolves allegations that were already subject to a FERC penalty assessment proceeding and order that was being reviewed in federal court, as well as allegations that had not been subject to an agency enforcement proceeding. And the settlement involves only Maxim corporate entities, releasing from liability all Maxim employees, including one that was held individually liable in the prior agency enforcement proceeding.

2010 Bidding Conduct

FERC found that Maxim violated the Commission's Anti-Manipulation Rule and duty of candor in 2010 through its bidding conduct in ISO-NE's energy market. The settlement itself contains only limited information about these violations. However, FERC described these violations in detail in its May 1, 2015, order assessing penalties against Maxim and an employee (as part of an Order to Show Cause proceeding). Specifically, FERC found that, on a number of days in July and August 2010, Maxim submitted offers for its Pittsfield generation plant (a 181 MW dual-fuel unit in Pittsfield, Massachusetts) based on fuel oil prices when it actually burned less expensive natural gas and provided ISO-NE's market monitor with misleading and incomplete information about its fuel usage. When generators in ISO-NE are needed for reliability, they are eligible to receive supplemental payments above the energy market price to cover their operating costs (known as "Net Commitment Period Compensation," or NCPC). However, because plants needed for reliability have a form of market power, their offers are subject to mitigation based on their actual costs. Therefore, for a unit needed for reliability, its actual costs of generating energy (including fuel costs) are relevant to determining whether the unit's offers should be mitigated. FERC found that Maxim violated the Anti-Manipulation Rule and the candor requirement by submitting offers based on a higher-priced fuel (oil) than the plant actually burned (gas) and making misleading communications to ISO-NE's market monitor to prevent the market monitor from mitigating Maxim's offers based on the actual fuel used.

In the Order to Show Cause proceeding, the Commission assessed a $5 million civil penalty against Maxim (and related corporate entities), as well as a $50,000 civil penalty against a Maxim employee in his individual capacity for violating the Anti-Manipulation Rule. FERC's penalties concerning the 2010 conduct have been subject to ongoing review in federal district court in Massachusetts, where, in July, the court denied Maxim's motion to dismiss the case (finding that FERC pleaded a viable theory of manipulation) but held that the case had to proceed as an ordinary civil action under the Federal Rules of Civil Procedure rather than a more narrowly tailored review as FERC had advocated.3

2012-13 Bidding Conduct

Enforcement found that Maxim violated the Commission's Anti-Manipulation Rule in 2012 and 2013 by structuring its energy market offers in a way intended to evade ISO-NE's mitigation rules for reliability units in order to capture additional NCPC revenues. When generators submit their offers, they submit a "start-up" price (the price to bring the facility into full operation), a "no load" price (a fixed dollar amount per hour) and a variable "energy" offer (a dollar charge per megawatt-hour (MW/h)). Generators also specify a "minimum run time" (the shortest period for which their unit may be dispatched). For reliability units subject to mitigation, the aggregate total of the start-up, no load and energy charges is limited to 110 percent of a unit's reference costs across the minimum run time.

Enforcement found that, from July 2012 through mid-August 2013, Maxim changed its offer inputs by transferring dollars from the Pittsfield plant's start-up price (reducing it from $38,641 to $0) to its energy price (increasing it from $76.30/MW/h to $149.50/MW/h), and submitting the shortest possible minimum run time permissible under the tariff (four hours). By doing so, Maxim was able to increase its NCPC revenues when the Pittsfield plant was dispatched for longer than the four-hour minimum run time because it was paid at the higher energy offer price for each additional hour. Enforcement found that this strategy effectively allowed Maxim to receive an additional start-up payment every four hours after the minimum run time ended.

Takeaways

The Maxim settlement is notable for several reasons. First, the settlement reflects the Commission's continued use of the Anti-Manipulation Rule to target perceived "gaming" of ISO and RTO markets.4 Unlike the 2010 bidding conduct, the 2012-2013 conduct does not involve allegedly false or misleading statements. Enforcement states in the settlement that a core component of the conduct was "permitted by the ISO-NE tariff."5 However, Enforcement found that Maxim's 2012-2013 bidding conduct violated the Anti-Manipulation Rule because it was "designed to frustrate and evade ISO-NE's mitigation rules" and, separately, because it "interfered with a well-functioning market in ISO-NE that was designed to limit NCPC payments for reliability dispatches to 110% of a unit's reference levels." The settlement therefore reflects an expansive view of the Anti-Manipulation Rule, reinforcing that the Commission will pursue enforcement action against market participants perceived to be "gaming" rules or otherwise transacting in a way that is inconsistent with the purpose behind the rules (in this case, the market power mitigation rules). Ultimately, the extent to which the Anti-Manipulation Rule reaches this type of conduct will be decided by federal courts.6

Second, the Order to Show Cause proceeding and settlement show FERC's continued emphasis on enforcing the Section 35.41(b) duty of candor. Section 35.41(b) prohibits a market-based rate seller from providing false or misleading information to the Commission, ISOs or RTOs (and their market monitors), or transmission providers, unless the seller exercised due diligence to prevent such occurrences. Section 35.41(b) is a significant source of compliance risk for ISO and RTO market participants in particular, given the frequency with which they interact with ISO and RTO staff and market monitors. And importantly, it is generally easier for FERC to find a violation of Section 35.41(b) than the Anti-Manipulation Rule, since 35.41(b) does not require a finding of intent (yet, both violations carry the same potential civil penalties of up to $1 million per day, per violation).

Third, the settlement covers a broader range of conduct than the subject of the 2015 Order to Show Cause proceeding (which included the 2010 bidding conduct but not the 2012-2013 conduct), but narrower than that alleged in the Enforcement staff's November 2014 Notice of Alleged Violations (NAV) (which included the 2010 and 2012-2013 bidding conduct, as well as an allegation that Maxim artificially inflated generator performance during capacity tests for more than three years).7 The settlement also includes only Maxim corporate entities as subjects, and releases from liability all Maxim employees, including one employee named in the OSC proceeding and another named in the NAV.

Footnotes

1. Maxim Power Corp., 156 FERC ¶ 61,223 (2016).

2. 18 C.F.R. §§ 1c.2, 35.41(b) (2016).

3. Mem. and Order Regarding Procedures Applicable to FERC's Petition and Respondents' Motion to Dismiss, FERC v. Maxim Power Corp., No. 3:15-cv-30113-MGM (D. Mass. July 21, 2016). Under Section 31(d)(3) of the Federal Power Act, an investigation subject has the right to have a FERC penalty assessment reviewed de novo in federal district court.

4. Neither the settlement nor the FERC order approving it uses the term "gaming." However, the November 2014 Staff Notice of Alleged Violations (NAV) alleged that Maxim "gamed" ISO-NE's mitigation rule.

5. 156 FERC ¶ 61,223 at P 14 ("In mid-2012, Maxim shifted dollars from the one-time Startup charge to the recurring Energy charge. Such a change was permitted by the ISO-NE tariff in effect at the time.").

6. As noted above, the Federal Power Act allows an investigation subject to have a civil penalty assessed by FERC reviewed de novo in federal district court. There are several district court review proceedings ongoing at this time involving conduct that allegedly evaded or took advantage of market rules in violation of the Anti-Manipulation Rule. While no court had decided the merits of any of these cases, FERC has defeated motions to dismiss in two such cases. See Mem. and Order Regarding Motions to Dismiss, FERC v. Silkman, No. 13-13054-DPW (D. Mass. Apr. 11, 2016); Order Denying Motion to Dismiss, FERC v. City Power Mktg., LLC, No. 1:15-cv-01428 (D.D.C. Aug. 10, 2016).

7. 156 FERC ¶ 61,223 at P 23 ("Enforcement agrees to permanently close, without further action, any and all remaining investigations of the Maxim Respondents (and their respective current and former officers, directors, employees, agents or assigns) concerning conduct up to the date" of the settlement.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.