On May 1, 2015 the Federal Energy Regulatory Commission (FERC) assessed a $5 million civil penalty against Maxim Power Corporation (Maxim) and its affiliates and an additional $50,000 civil penalty against Kyle Mitton, an energy marketing analyst working for Maxim, for allegedly violating FERC’s anti-manipulation rule and a regulation against submitting false or misleading information to a market monitor. Specifically, FERC alleges that Maxim bid in its Pittsfield generating plant in the ISO-NE day ahead market on oil during certain hot summer days in 2010 when it actually ran on much cheaper natural gas. According to FERC, Maxim hoped to be paid the significantly higher oil price even though it actually ran on cheaper natural gas. FERC maintains that Maxim mislead the ISO-NE Independent Market Monitor (IMM) when its bidding was questioned, giving the IMM the impression that Maxim actually ran on oil. This misrepresentation, according to FERC, also constituted a fraud in violation of FERC’s anti-manipulation rule. Maxim, on the other hand, argued in response to FERC’s earlier Order to Show Cause that due to pipeline restrictions serving the Pittsfield plant, it bid conservatively to avoid running on a fuel costing more than it bid into the market. Maxim further states that it never provided false information to the IMM. FERC admits that Maxim did not make a false statement and that it eventually did disclose to the IMM that it ran on natural gas. In the end, Maxim was not paid the more expensive price for oil; instead the IMM mitigated the price Maxim was paid to run the Pittsfield plant, a mitigation $3 million.

Pittsfield is a duel fuel plant, meaning that it can generate electricity on either fuel oil or natural gas. The plant is often called upon to run by ISO-NE for reliability purposes, according to the FERC order, even in circumstances where its day ahead bid is not taken. In fact, prior to May of 2010, Pittsfield had a reliability must run agreement with ISO-NE. If called upon to run under the then market rules, Maxim would be paid based on the bid in fuel. After noticing that Pittsfield was bidding in on oil, the IMM questioned Maxim. Maxim informed the IMM that it was bidding on oil because the pipeline that serves the plant was experiencing flow restrictions and Maxim could not guarantee acquiring sufficient natural gas to run the plant. FERC claims that this constituted a misrepresentation to the IMM.

FERC carefully does not accuse Maxim of lying to the IMM. Instead, FERC accuses Maxim of giving the false impression that the facility ran on oil when Maxim informed the IMM that there were flow restrictions on the pipeline. FERC claims that Maxim’s goal was to be paid the higher bid oil price and that was why it tried to mislead the IMM. FERC argues that on 38 of the 45 days in question during the summer of 2010, Maxim bid in on oil and then, after receiving a reliability commitment, “burned all or nearly all natural gas at a much lower cost.” Order at 11. FERC maintains that on 11 of those days, Maxim had actually acquired natural gas before it bid in on oil.

Maxim responds that it never knew when, if or for how long it would be dispatched. Further, while admitting that it did at times procure natural gas in advance of a bid on oil, Maxim claims that it never knew how many hours it may be dispatched and whether it could acquire sufficient natural gas to run the plant during the entire dispatch period.  Maxim explains that should it be dispatched on a natural gas bid but be forced to run on oil, it could lose over $300,000 per day. It points out that the ISO-NE rules do not permit make-whole payments where a generator is forced to run on more expensive fuel than bid into the market but does provide for mitigation if the reverse occurs. Maxim maintains that it was bidding conservatively and never provided false information to the IMM. Maxim did not state to the IMM that it was running on oil when it actually ran on natural gas.

FERC issued this order after Maxim refused to settle the matter with Enforcement and instead opted for FERC to assess the penalty if FERC decided to proceed with this matter. If Maxim does not pay the assessed penalty within 60 days, FERC must go into Federal district court to enforce its penalty determination. The case will be heard de novo before the district court.

There are a number of interesting issues with this case that will make it difficult for FERC to prevail in Federal court. First, FERC Commissioner Tony Clark dissented stating that FERC Enforcement did not meet its burden of proof. Dissents are rare in Enforcement cases and the court will take notice of Commissioner Clark’s views. The Commissioner does not feel that the evidentiary record supports the charges. Instead, he agreed with Maxim that there were gas pipeline restrictions that made it difficult to acquire gas and that Maxim’s “conservative” bidding was a safe bidding strategy and “could have easily been interpreted by the Independent Market Monitor as a truthful response.” He also observed that the IMM did not initially ask Maxim what fuel it was burning and when he did, Maxim provided an accurate response. Commissioner Clark also questions penalizing just one individual because the strategy was approved by Maxim management.

The issues that Commissioner Clark highlighted will likely cause the court to pause before ordering such a significant penalty against Maxim. Maxim never provided false information to the IMM. While the rule prohibits misleading the IMM, there were no consequences even if FERC Enforcement is correct that the IMM was misled because, as explained above, due to the mitigation, the ISO-NE compensated Maxim as if the facility ran on natural gas rather than oil. The court may also question why the IMM, the entity that allegedly suffered from the misleading information, did not refer this matter to FERC Enforcement. Instead, FERC Enforcement pursued this matter after uncovering it as part of a larger investigation into Maxim’s activities. See Notice of Alleged Violations, issued November 3, 2014.

Finally, even if the court is persuaded that Maxim misled the IMM, the court will have a difficult time finding a violation of the anti-manipulation rule. The court may well find the charge a reach under the circumstances presented here. FERC could be viewed as using a relatively minor violation as a justification for a severe charge of manipulating the market, particularly where the market suffered no actual harm.