The decision will likely affect the strategies of enforcement targets in electric market manipulation cases.

For the first time, a federal district judge has held that a review of a Federal Energy Regulatory Commission’s (FERC’s) order assessing civil penalties will be treated as an ordinary civil action that requires a full trial rather than a proceeding in which a federal judge only reviews an administrative record compiled by agency investigators.[1] This is also the first federal court decision on how the de novo review standard set forth in Section 31(d)(3) of the Federal Power Act (FPA) should be applied when FERC enforcement targets elect federal court review of the facts and law at issue in an electricity market manipulation proceeding.

The court’s ruling provides important guidance to market participants in the electricity industry that can avail them of the de novo review option set forth in the FPA when targeted by FERC enforcement staff. Further, this ruling provides precedent that defendants should consider when developing their strategies for defending against FERC allegations brought under the FPA.

On July 21, a federal district judge in the US District Court for the District of Massachusetts denied a motion filed by Maxim Power Corp., Maxim Power (USA) Inc., Maxim Power (USA) Holding Company Inc., Pawtucket Power Holding Company LLC, Pittsfield Generating Company LP (Maxim), and an individual employee (together with Maxim, the Respondents) to dismiss FERC’s petition for an order that affirmed its Order Assessing Civil Penalties.[2] However, the court held that the review of the assessed civil penalty pursuant to FPA Section 31(d)(3) will be treated as an ordinary civil action requiring a trial de novo but imposed limitations on the discovery process to promote an efficient resolution of the dispute. The court also held that FERC has the authority to issue a penalty against a natural person (and not only corporate and similar entities) under FPA Section 222(a).

In its Order to Show Cause, FERC had alleged that the Respondents engaged in manipulative actions in power markets and directed the Respondents to demonstrate why they should not be assessed monetary penalties, including a $5 million civil penalty on Maxim and its subsidiaries and a $50,000 civil penalty on the individual alleged to be involved.[3] In responding to that order, the Respondents had a choice of either (1) seeking an administrative hearing before a FERC administrative law judge and subsequent review by FERC itself or (2) electing to have FERC immediately issue a penalty assessment and instituting a district court proceeding to seek recovery of that amount. Under the second option, the FPA provides that a district court would “have authority to review de novo the law and the facts involved” before enforcing, modifying, or setting aside the penalty assessed by FERC.

The Respondents elected to contest the allegations through the district court option, and FERC then issued its Order Assessing Civil Penalties, finding that the Respondents manipulated the power markets in New England and imposing the civil penalties threatened in the Order to Show Cause. FERC then instituted an action in district court to attempt to collect those penalties.

The threshold issue faced by the district court in FERC v. Maxim Power Corp. was the scope of the court’s de novo review under the FPA. FERC and the Respondents agreed that a de novo review means “a ‘fresh, independent determination’ that gives ‘no deference’ to FERC’s decision.”[4] However, FERC argued that an order affirming a penalty assessment only requires a review of the materials FERC relied on in making its assessment. Conversely, the Respondents argued that the district court should review and develop the facts in the same manner as an ordinary civil action.

The court sided with the Respondents, holding that de novo review under the FPA “means treating this case as an ordinary civil action governed by the Federal Rules of Civil Procedure that culminates, if necessary, in a jury trial.”[5]

A key factor in the court’s decision was the need to provide due process. The court found that the Respondents’ need for sufficient process is strong, given the fines they faced and the dispute over whether the actions alleged constituted market manipulation, given that one commissioner dissented and characterized the Respondents’ actions as “innocent decisions made for legitimate business reasons” and not willful market manipulation.[6] The court also raised concerns regarding the independence and neutrality of FERC’s decisionmaking in the regulatory proceeding, noting that the commissioners perform both investigatory and adjudicatory functions, which “risks an inherent bias in the decisionmaking process, even if that bias is entirely unintentional” and quoted FERC’s statement that “the [c]ommissioners and their staff need to be able to communicate freely with investigative staff on a wide range of topics” to supervise the investigative stage.[7] In addition, the court found that the underlying proceeding was not as adversarial as FERC claimed because the Respondents 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 [c]ommissioners during the investigative phase, or present their own witnesses.”[8]

Weighing the Respondents’ need for discovery with FERC’s desire to avoid repeated work performed in the investigative process, the court directed the parties to develop a discovery plan to submit to the court for approval. The court directed the parties to tailor discovery to account for the procedures that have already taken place at FERC, minimize the burdens imposed on the parties, eliminate any duplication of efforts, and resolve the dispute efficiently. The court cautioned the Respondents against imposing an undue burden on FERC’s staff or FERC’s normal processes.

Although this issue is currently pending in other cases, the court’s order in FERC v. Maxim Power Corp. could be instrumental in providing defendants in other FERC enforcement actions with an opportunity to argue the merits of their cases before a neutral arbiter in a federal court. The court in FERC v. Maxim Power Corp. noted that it “presumes FERC acted conscientiously during the penalty assessment, but FERC’s decisionmaking process must nevertheless be able to stand up to district court review.”[9] It also stated that there is a risk of an inherent bias in the decisionmaking process because the commissioners perform both an investigatory function and an adjudicatory function. This case helps lay the foundation for at least some discovery at the federal court level if defendants elect to proceed with a de novo trial before a federal district court judge.

This case could also help defendants with their decision about whether to proceed with a hearing before a FERC administrative law judge or a de novo trial before a federal district court judge. Proceeding with a de novo trial before a federal district court judge removes the inherent bias risk that the court in FERC v. Maxim Power Corp. identified and that arises whenever an agency is charged with both prosecutorial and adjudicative functions.

A de novo trial could also expedite the resolution of the case. The FERC administrative law judge’s decision would be subject to FERC’s review before it could be subject to review by a federal court, which would be highly deferential to any of FERC’s factual findings. Additionally, a de novo trial before a federal district court judge would be subject to a strict application of the Federal Rules of Civil Procedure and the Federal Rules of Evidence, which are not binding in proceedings before FERC. This will help ensure that both parties can conduct the discovery necessary to develop a complete record.