Federal Energy Regulatory Commission (FERC) anti-manipulation enforcement targets scored a significant victory at the U.S. District Court in Massachusetts last week where Judge Mark Mastroianni ruled that the “de novo” review standard covering the FERC penalty enforcement proceedings means that enforcement targets are entitled to a full adversarial civil proceeding, including full discovery and a jury trial. The decision is the first statement from the federal bench on the scope of de novo review and will likely impact the numerous ongoing proceedings in which enforcement targets are challenging FERC market manipulation allegations and penalties.
The decision comes out of a suit filed by FERC to enforce a US$5 million penalty against Maxim Power Corp. (Maxim) for alleged manipulation of the New England wholesale power market. FERC claims that Maxim overcharged the ISO-New England Inc. (ISO-NE) in excess of US$135,000 per day for over a month by representing that it was burning expensive fuel oil out of the company’s Pittsfield, Massachusetts plant, which can burn both oil and gas. Maxim was actually burning cheaper natural gas—a fact that Maxim does not deny. Maxim does deny that it made any misrepresentations to ISO-NE or omitted this fact, in violation of FERC’s anti-manipulation rule.
Under section 31(d)(3)(B) of the Federal Power Act (FPA), parties subject to a FERC civil penalty have the option to have a federal district court “review de novo the law and the facts involved” in the matter. The civil penalty proceeding will otherwise be subject to a hearing before an administrative law judge at FERC. Enforcement targets are increasingly seeking de novo review, but the FPA is not clear about what such review entails. FERC has taken the position that a de novo review merely requires a review of the administrative record at FERC. They argue that a district court judge can decide based on the parties’ briefs and the FERC record alone, which seems to ignore the very idea of de novo review.
In response to FERC’s petition to enforce the US$5 million penalty, Maxim filed a motion to dismiss. Judge Mastroianni denied the motion to dismiss, but in doing so held that “FERC’s decision-making process must nevertheless be able to stand up to district court review . . . governed by the Federal Rules of Civil Procedure that culminates, if necessary, in a jury trial.”
The decision is a welcomed victory for the numerous enforcement targets involved in ongoing disputes with FERC over market manipulation claims. In recent years, FERC has stepped up its anti-manipulation enforcement activity, extracting numerous multimillion dollar settlements, but also increasing the ire of the energy market participants who come under FERC scrutiny. One of their chief complaints is that the FERC enforcement process denies targets basic due process rights, such as the right to seek discovery, depose FERC witnesses, or present witnesses. The absence of such procedural options gives FERC considerable advantage in settlement negotiations. If other courts follow the Maxim ruling, enforcement targets will be able to use the threat of a jury trial to gain settlement leverage.