On February 2, 2015, the Federal Energy Regulatory Commission (FERC) issued an Order to Show Cause and Notice of Proposed Penalty (Show Cause Order)1 directing Calgary-based Maxim Power Corporation and certain of its subsidiaries (collectively “Maxim”)2 and Kyle Mitton, a former energy marketing analyst at Maxim during the relevant summer 2010 period (collectively “Respondents”), to show cause why they should not be found to have violated the Federal Power Act and FERC’s regulations prohibiting electric energy market manipulation by allegedly defrauding ISO New England Inc. (ISO-NE) “through a scheme to obtain payments for reliability dispatches based on the price of expensive fuel oil when Maxim in fact burned much less costly natural gas.”  FERC also directed Maxim to show cause why it should not be found to have violated FERC’s market behavior rules by making, through Mr. Mitton, “false and misleading statements and omit[ing] material information in its communications with the [Internal Market Monitor (IMM) for ISO-NE] about its oil-based offers during the relevant period.”  FERC proposed civil penalties of $5 million for Maxim and $50,000 for Mr. Mitton, and noted that it did not propose an additional disgorgement remedy because the IMM already “applied mitigation to recoup what it viewed as excessive payments to Maxim.”

In the Office of Enforcement (OE) staff report attached to the Show Cause Order, OE alleges that Maxim, through Mr. Mitton, “engaged in a series of transactions with [ISO-NE] and misleading communications with the [IMM] for the purpose of obtaining inflated make-whole payments at high fuel oil prices when a Maxim plant was dispatched for reliability, even though the plant was actually burning much less expensive natural gas.”  Specifically, OE alleges that, “[d]uring July and August 2010, Maxim regularly submitted Day Ahead offers to ISO-NE at high oil prices, but on 22 days when it got reliability commitments, burned much less expensive gas to produce all or almost all of the plant’s energy.”  The plant at issue is Maxim’s 181-MW, dual-fuel generating facility in Pittsfield, Massachusetts, which from December 2005 to May 2010 was the subject of a “reliability must-run” agreement with ISO-NE.

OE explains that, because ISO-NE was calling on Maxim’s plant to maintain reliability, rather than in economic merit order, ISO-NE’s rules “provided that Maxim could be paid make-whole payments (called Net Period Commitment Payments) based on its fuel price.”  OE alleges that “when the IMM asked Maxim about its offers, Maxim (through Mitton) responded with communications giving the impression that Maxim was unable to obtain gas and was therefore burning more expensive oil.  Maxim gave those responses to the IMM even though, on many days, Mitton had bought large quantities of gas before submitting a Day Ahead offer based on oil prices.”  OE states that Maxim received approximately $3 million in “excessive payments” from its strategy, which ISO-NE later recouped “after discovering (with no help from Maxim) what Maxim had done.”  As it did in another recent show cause order, FERC stated that its issuance of the Show Cause Order “does not indicate [FERC] adoption or endorsement of the OE Staff Report.”

FERC Commissioner Tony Clark wrote separately in dissent—which is uncommon but not unprecedented for show cause orders—to express his belief that the OE staff report and the information Maxim provided in the non-public investigation phase of the proceeding “do not . . . sufficiently support[] the Commission moving forward” with the Show Cause Order.  Commissioner Clark also noted that, “in the next phase of the proceeding, both [OE] Staff and the Respondents will have an opportunity to more fully develop the record,” and, as such, he “make[s] no prejudgment as to the final disposition of [the] case.”  Commissioner Norman C. Bay, who was the director of OE when the alleged market manipulation occurred, did not vote on the Show Cause Order.

The deadline for the Respondents to answer the Show Cause Order is March 4, 2015.  OE staff will have thirty days to reply to the answer(s) when filed.  Of note, the Show Cause Order might not be the last related to Maxim, as OE currently is investigating two other trading strategies involving the company and its personnel.