Recent positions taken by FERC’s Enforcement Staff in the Maxim Power show cause proceeding add to the uncertainty regarding what information market participants must volunteer when communicating with the Commission, ISOs/RTOs, market monitors and others. We have recently written about Maxim Power.1 As a refresher, Staff alleged in its Order to Show Cause that Maxim Power Corporation and its named subsidiaries (“Maxim”), as well as its executive, Kyle Mitton (together, the “Respondents”)2 engaged in a supposed “offer oil, burn gas” scheme “for the purpose of obtaining inflated make-whole payments at high fuel oil prices when Maxim[’s Pittsfield] plant was dispatched for reliability, even though the plant was actually burning much less expensive natural gas.”3 Importantly, Respondents purportedly engaged in “misleading” communications with ISO-NE and the market monitor in an effort to retain the make-whole payments in violation of the Market Behavior and Anti-Manipulation rules (discussed below). For these alleged violations, Staff seeks civil penalties of $5 million against Maxim and $50,000 against Mitton, but not disgorgement of profits because the overpayments were returned through ISO-NE tariff processes.
Background Update and Relevant Law
Since our last Clients and Friends Memo, Respondents answered the Commission’s Order to Show Cause and, on March 20, 2015, Staff served its reply. Respondents contended in their Answer that their communications with ISO-NE and the market monitor were truthful.
In reply, Staff argues that truth is not enough, pressing both Market Behavior and Anti-Manipulation violations against Maxim pursuant to 18 C.F.R. Sections 35.41(b) and 1c.2.4 In support of these allegations, Staff reasoned that “[h]ad Maxim complied with this duty, by responding candidly to the [market monitor’s] inquiries and not omitting material information, this proceeding would never have arisen. But Maxim took a different approach: it made a series of carefully-managed statements…and said nothing about what was actually happening at Pittsfield, namely an ever-growing windfall from offering oil and burning gas.”5 A closer look at the differences between these rules and how Maxim responded to ISO-NE and the market monitor’s questions reveal Staff’s debatable approach to the intent requirement of the Anti-Manipulation Rule and what information market participants must volunteer.
Market Behavior Rule 35.41(b) requires that “[a] Seller must provide accurate and factual information and not submit false or misleading information, or omit material information, in any communication with the Commission,” market monitors, ISOs/RTOs and others. The Anti-Manipulation Rule’s prohibitions include the making of “any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading” when “in connection with the purchase or sale of electric energy.” Making a case under the Anti-Manipulation Rule requires proving intent whereas Rule 35.41(b) has no such requirement.6 While the rules contain similar language, violations are subject to separate punishment.
No Omission, No Manipulation?
Staff’s contention—that “[h]ad Maxim complied with this duty [under Rule 35.41(b)], by responding candidly to the market monitor’s inquiries and not omitting material information, this proceeding [bringing Anti-Manipulations claims] would never have arisen,”7—seems to suggest that the omission of material information by Maxim was, without more, the evidence of intent. Some may view Staff’s position as surprising.
After all, it appears that in the communications at issue Maxim generally was truthful and responsive to the question posed, but perhaps not forthcoming. For example, Mitton told ISO-NE that they had “been offering the unit in conservatively on fuel oil.”8 Although they had been burning gas, two things are true: 1) Staff does not allege that Mitton failed to answer the question posed and 2) Mitton did not volunteer the fact that they had burned gas.9 In fact, Staff states affirmatively that Maxim’s responses were “literally accurate” but nonetheless accuses Maxim of implying false information and omitting material facts.10 Staff’s Order to Show Cause also acknowledges that Maxim answered truthfully when specifically asked whether it burned natural gas, stating “Maxim did not tell the [market monitor] it had burned gas on these 22 days until August 23, 2010, and then only after the IMM specifically asked Maxim what fuel it had burned.”11
Staff has elevated a case about material omissions under 35.41(b) into a manipulation case, using communications that were “literally accurate” and responsive to demonstrate malevolent intent. This should raise concern for anyone who communicates with the Commission, ISOs/RTOs or market monitors. What information must such persons volunteer or surmise is being asked in order to avoid allegations of manipulative omissions? The answer will depend on the facts at hand, but heightened caution is merited if the conduct being discussed is “in connection with the purchase or sale of electric energy.”