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FERC Issues $5 Million Penalty Against Generator For Manipulating Reliability Payments

May 4, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

FERC issued an order issuing a civil penalty in the amount of $5 million against Maxim Power Corporation and affiliates.

"[W]e find that Maxim Power Corporation, Maxim Power (USA), Inc., Maxim Power (USA) Holding Company Inc., Pawtucket Power Holding Co., LLC, Pittsfield Generating Company, LP (collectively Maxim or the Maxim companies) and Kyle Mitton (Mitton), an Energy Marketing Analyst at Maxim (together, Maxim and Mitton or Respondents) violated section 1c.2 of the Commission's regulations and section 222 of the Federal Power Act (FPA), which prohibit energy market manipulation, through a scheme to obtain payments for reliability dispatches based on the price of expensive fuel oil when Maxim in fact burned much less costly natural gas," FERC said.

"We additionally find that Maxim violated 18 C.F.R. § 35.41(b) (2014) of the Commission's rules, which, in relevant part, prohibits a Seller, like Maxim, from submitting false or misleading information or omitting information to Commission-approved independent system operators or market monitors unless due diligence is exercised to prevent such an occurrence, through the same conduct," FERC said.

FERC levied a $5 million civil penalty on Maxim, and a $50,000 penalty against Mitton

"Respondents' scheme involved Maxim's Pittsfield generating plant (Pittsfield), which is a dual-fuel plant, meaning it can generate electricity using either natural gas or fuel oil. Pittsfield is in a strategic location where, even if the electricity from Pittsfield is not offered at a competitive price, the grid operator may request that Pittsfield generate electricity to keep the electric grid operating (i.e., to ensure system reliability). The market rules in effect in the New England electricity market at the time provided that generators required to run to meet New England's reliability needs were paid a price that was capped based on the fuel source used to generate power. In the summer of 2010, fuel oil was more expensive than natural gas. Thus, a dual-fuel generator would receive a higher payment for electricity produced when burning fuel oil than natural gas," FERC said.

"During some of the hottest days in 2010, Respondents made offers to sell energy from the dual-fuel Pittsfield generator to the grid operator based on high-priced oil. As a result of Pittsfield's high offer price, the grid operator often chose less expensive options and did not select Pittsfield to generate. Nevertheless, Pittsfield was often needed to ensure system reliability and so was requested to run despite its higher price," FERC said.

"While Maxim made offers based on high-priced fuel oil, in fact, Pittsfield burned cheaper natural gas to generate the power it sold to the grid operator, ISO New England Inc. (ISO-NE). According to the market rules in effect at the time, Pittsfield would receive more money if the grid operator believed that Maxim was burning fuel oil rather than natural gas. When questioned by the market monitor, Respondents repeatedly referred to natural gas pipeline restrictions, suggesting that they were unable to obtain natural gas and were thus burning oil. Instead, Respondents were able to obtain natural gas, sometimes in advance of their oil-based offers. These misrepresentations were made in an attempt to ensure that Maxim continued to receive the higher payments that were premised on Pittsfield's running on fuel oil instead of natural gas," FERC said.

Commissioner Tony Clark dissented from the order, stating, "I dissent from today's order for two primary reasons. Most important, my decision is based on my belief that Enforcement Staff failed to meet its burden of proof. A second matter relates to the nature of the Commission's decision regarding individual culpability in this case."

"While I do not discount the evidence that casts Maxim's behavior in a suspicious light, I cannot set aside the following undisputed facts in the record," Clark said

Gas pipeline restrictions were in place during the time in question. When asked by the Independent Market Monitor about Maxim's supply offers, Mr. Mitton responded that Maxim was bidding "conservatively."

"This could have easily been interpreted by the Independent Market Monitor as a truthful response acknowledging that while the Pittsfield plant was typically burning gas, Maxim was offering in on oil as a way to play it safe given pipeline restrictions. This is not, on its face, an implausible business reason for structuring a supply offer in such a way. Yet, the Independent Market Monitor did not, at that time, follow-up with the next logical question, 'What fuel are you burning in real time?' Rather, the Independent Market Monitor seemed satisfied to simply have a copy of the posted pipeline restrictions," Clark said.

Approximately one month later, when the Independent Market Monitor did ask what fuel Pittsfield actually used, Maxim provided a truthful response.

"Staff's case linking Maxim's supply offers to a willful intent to deceive the Independent Market Monitor thus rests on the notion that while Mr. Mitton's responses may have been technically correct and ultimately truthful, Mr. Mitton did not anticipate what information the Independent Market Monitor was really seeking and therefore his responses were too narrow and not as forthcoming as they should have been. To me, such a fact pattern does not a $5 million penalty make," Clark said.

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