FERC Enforcement Targets Entitled To Due Process Protections In De Novo Review Of Penalty Assessments

FERC Enforcement Targets Entitled To Due Process Protections In De Novo Review Of Penalty Assessments

In a line of much-anticipated decisions, two federal district courts ruled to protect the procedural due process rights of entities targeted by FERC enforcement actions. Recent decisions in Massachusetts and the District of Columbia interpret the de novo standard of review available to litigants under the Federal Power Act (“FPA”) to include the procedural rights of an ordinary civil action governed by the Federal Rules of Civil Procedure.

Since the Energy Policy Act of 2005 granted FERC enhanced penalty authority, FERC enforcement targets are subjected to increasingly costly penalties for alleged market rules violations, oftentimes in the hundreds of millions of dollars.  In an effort to push back against these large penalties, targeted entities may exercise an option under the FPA and elect not to pay the penalties FERC assessed against them and to litigate the action in the appropriate federal district court.  Under this option, the FPA provides the district court with the “authority to review de novo the law and facts involved.”  16 U.S.C. § 823(b)(3)(B).  Unsurprisingly, FERC and its industry targets often read the statutorily required de novo review as mandating very different procedural due process protections.

In a case of first impression, Federal Energy Regulatory Commission v. Maxim Power Corp., (Civil No. 15-30113-MGM) (D. Mass., July 21, 2016), the United States District Court for the District of Massachusetts concluded that the FPA required the court to treat FERC’s petition to affirm its penalty order as any other ordinary civil action with a trial de novo, while also imposing certain limitations on discovery in order to promote an efficient resolution to the case.  In the underlying enforcement action, FERC issued more than $5 million in penalties against Maxim, its subsidiaries, and an individual employee.  FERC found that Maxim received excessive payments for reliability dispatches by basing its day-ahead offers on the price of fuel oil even though it planned to burn lower-priced natural gas at its Pittsfield power plant.  Sometimes, to ensure the reliability of the electric grid during periods of high demand, an independent system operator (“ISO”) may “dispatch” a generator and require it to operate even though its offer was above the market price.  ISO New England frequently communicated with Maxim regarding the trading at issue and saw no reason to report any market rules violations to FERC.  In fact, the ISO already retained $2.99 million in excessive payments from Maxim.  FERC nonetheless issued penalties to deter any future wrongdoing.

FERC insisted that the FPA’s de novo directive allowed the court discretion and flexibility to craft procedures necessary to take a fresh look at the evidence FERC collected without attendant procedures and trial. The court disagreed, noting that it would be unfair to penalty-facing parties if the FPA failed to provide due process rights during FERC’s original penalty assessment and did not provide for due process rights at a later review.  The court pointed out the “simple fact” that FERC Commissioners performing investigatory and adjudicatory functions in the same case risks inherent bias in the decision-making process, even if it is unintentional.  Importantly, the court noted that although Maxim was free to submit evidence and responsive arguments, it was unable to seek basic discovery.  Maxim could not present its own witnesses, depose witnesses interviewed by FERC, or “gain any insight into the presentation of the case made by FERC’s enforcement staff to the Commissioners during the investigative phase.”  Maxim’s reading of the FPA prevailed and the court concluded that the case should be treated as an ordinary civil action governed entirely by the Federal Rules of Civil Procedure culminating, if necessary, in a jury trial.

In a subsequent decision, Federal Energy Regulatory Commission v. City Power Marketing, LLC, (Civil Action No. 15-1428) (D.D.C., Aug. 10, 2016), the United Stated District Court for the District of Columbia also ruled that de novo review of FERC’s penalty assessment under the FPA required far more procedural protections than FERC believed.  Relying heavily on the Maxim decision, the court decided that it would not simply rely on the record already compiled by FERC when determining whether the Commission properly fined City Power and its owner more than $16 million for allegedly manipulating the PJM Interconnection markets.  The court did not see “why it should place special weight on the agency record or presume that City Power should not get discovery.”  FERC unsuccessfully argued that if City Power wanted discovery, it should have chosen the alternative available to targeted entities under the FPA, a formal hearing before an administrative law judge.  The court instead found that both FPA options allow defendants to fully develop their factual defenses.  Furthermore, the availability of discovery in a hearing before an administrative law judge in one option did not suggest to the court that fewer procedural protections should be available when parties chose the other option and have FERC’s penalty assessment reviewed in a federal district court.

As FERC continues to assess penalties under its enhanced penalty authority and targeted entities elect not to pay those penalties, more courts might follow the Maxim and City Power decisions, and require that defendants are afforded procedural due process protections, including necessary discovery.