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Court clarifies, for 1st time, 'de novo review' of FERC enforcement cases

In acase of first impression and a defeat for FERC, a federal district court ruledon what the Federal Power Act means when it says such a court should reviewFERC enforcement cases on a "de novo" basis.

The questionhas been a hotly debated one, and the court's decision could have strongimplications for a handful of high-profile cases winding their way throughfederal district courts involving FERC attempts to penalize market participantsfor market manipulation.

Whena target of a FERC enforcement action refuses to pay a penalty levied by thatagency and chooses to have the matter litigated de novo in federal court, thecommission has insisted that the court does not have to start its owninvestigation by engaging in discovery or taking depositions.

Instead,the agency has asserted that the court should basically just review the fullydeveloped record compiled by the commission, although it has also acknowledgedthat the court could hold hearings on a particular issue, if it believes itneeds to do so. But several market participants that have appealed their marketmanipulation cases to the courts have maintained that the court's review needsto go much further.

TheU.S. District Court for the District of Massachusetts became the first court toweigh in on the issue when late on July 21 it in a case involving a FERCenforcement case targeting MaximPower Corp., several subsidiaries and a company employee.

Thefederal agency has asked the court to enforce a more than $5 million penaltyfor the company offering power produced by a dual-fuel generating plant in away that manipulated New England power markets during July and August 2010.FERC specifically found in a May 2015 3-1 decision that Maxim received excessive payments forreliability dispatches by basing its day-ahead offers on the price of fuel oileven though it intended to burn, and in fact burned, lower-priced natural gasat its Pittsfield plant.

Underthe Federal Power Act, a target of a FERC investigation can either seek anadministrative hearing before a FERC administrative law judge or a districtcourt proceeding before a federal district court judge. If it chooses thedistrict court option, the court has the authority "to review de novo thelaw and the facts involved" in the case and the penalties FERC seeks toimpose.

AfterMaxim chose the district court review option and refused to pay FERC's penalty,Maxim and FERC disagreed about the proper procedures. Maxim argued that thestatutory language means the case should be treated as an ordinary civil actionand subject to a full trial, and that a district court should take an activerole in reviewing, and actually developing, the facts needed to make itsdetermination. FERC, on the other hand, maintained that the statute allows thecourt to review only the materials FERC relied on in making its assessment.

DistrictCourt Judge Mark Mastroianni ruled that it would be unfair if FERC failed toprovide due process rights during its proceedings. The problem, according tothe judge, is that FERC has insisted that it does not have to grant proceduralrights before a district court review.

Thus,Mastroianni said the court's de novo review will be subject to the proceduresapplicable in an ordinary civil action. "This will enable the court todevelop the facts needed to test the correctness of the penalty assessment,subject to the procedural protections and adversarial rights ordinarilyattendant to a civil action, before entering an order affirming (or modifying,or setting aside) the assessment," the judge ruled.

Mastroiannialso cited due process concerns. "The simple fact that the commissionersperform both investigatory and adjudicatory functions in the same case risks aninherent bias in the decision making process, even if that bias is entirelyunintentional," the judge wrote.

Moreover,the judge was not persuaded by FERC's arguments that the proceeding that tookplace before it assessed the penalty in the matter was an "adversarial"one that provided adequate due process. The proceeding that actually took placemay have not been as adversarial "as FERC claims," he said.

WhileMaxim could submit evidence and responsive arguments, the judge noted it couldnot "seek discovery, depose witnesses interviewed by FERC, gain anyinsight into the presentation of the case made by FERC's enforcement staff tothe commissioners during the investigative phase, or present their ownwitnesses."

Mastroianninevertheless acknowledged that during the FERC proceeding Maxim could submitany materials it wished and the relevant additional information that it couldobtain and present through additional process is limited. But he added, this issomething for the court to address "through its discretion to shape theprocedures and discovery process in any ordinary civil action, and not a reasonto preclude an ordinary civil action entirely."

Thecourt noted that in two other pending cases, FERC v. Barclays Bank and FERCv. Silkman, the courts hearing those cases have "expressed doubtsregarding parties' entitlement to all the elements of an ordinary civil action."But Mastroianni also noted that "neither court has made a final decisionon that question and each court has discussed the possibility of additionalfact finding at the district court level."

"Theremust be due process rights and factfinding at some level, but by directing FERCto promptly assess a penalty and institute an action in district court if thepenalty is not paid, the statute indicates that due process and factfindingtake place at the district court," the judge ruled.

However,Mastroianni also ruled that discovery "must be tailored in order toaccount for the procedures that have already taken place and promote anefficient resolution of the dispute."

Inparticular, the judge said any discovery plan must balance the respondents'(and the court's) need for information about FERC's investigation with the needfor efficient penalty administration "that is not bogged down at thediscovery stage" and avoids duplication of any efforts that already tookplace. But, the judge added, the respondents must be allowed to seek discoveryfrom witnesses interviewed by FERC or present their own witnesses.

Onother issues, the judge refused to dismiss FERC's allegations of fraud andmisrepresentation or omission of material facts, and rejected Maxim's argumentthat FERC has no authority to issue a penalty against an individual.

Mastroiannireasoned that "it would be incongruous to read the statute as allowingenforcement against business entities engaging in market manipulation butprecluding enforcement against the individuals who actually carry out the manipulativeschemes." Two other courts reached the same conclusion in other separatecases. FERC v. Maxim Power Corp. et al.(3:15-cv-30113-MGM)