JPMorgan’s energy trades ensnared by post-Enron enforcement

Deutsche Bank

Deutsche Bank Energy Trading LLC on Nov. 5 said it was protesting FERC’s proposed penalties of $1.6 million for alleged misconduct during early 2010, saying the agency’s legal position is “radical.” The agency is punishing JPMorgan for producing incorrect documents in a manipulation investigation.

A spokeswoman for JPMorgan, which has apologized for what it has said was an inadvertent mistakes, said it is reviewing the decision and its next steps.

“This is a novel use of FERC’s authority over market-based rates and is unsupported by FERC’s own regulations,” Jennifer Zuccarelli said in an e-mail.

While the violations during the Enron era involved traders using illegal practices to drive up prices which led to blackouts, the commission has seen a different type of manipulation violation in recent years, in which traders try to “play one market off the other,” Wellinghoff said.

Without Hedging

Traders might take a loss in the physical energy markets, where electricity is bought and sold, in order to make money on financial exchanges “without any legitimate hedging purpose,” he said. FERC alleges that this is what happened in the Barclays case. Wellinghoff said energy companies also are reporting misconduct by calling an agency telephone hotline.

“We’re getting substantial information from other market participants” who may be losing money at a competitor’s expense, he said.

Even though Wellinghoff denied FERC is targeting financial companies, the investigations are evidence that Wall Street firms have the savvy to game the system, according to Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer group.

“It appears as though Wall Street is playing a significant role in exploiting overly complex market rules,” Slocum said in an interview. Regulators should revoke energy-trading privileges for all companies accused of alleged market manipulation, he said. “That’s the most significant club that FERC can wield.”

California Market

Separately, the California Independent System Operator complained to the FERC yesterday that the JPMorgan unit, which controls electric generators in Huntington Beach, is using its stake to block changes to plants that will be needed by the state next year.

The grid operator is seeking the FERC’s permission to move ahead with the project, by removing JPMorgan’s right to object to the changes. Asked about the filing to FERC, Zuccarelli in an e-mail today said: “J.P. Morgan’s goal is to work cooperatively to help to find an economic and efficient way to make generation available in California.”

Wellinghoff said he expects market-manipulation violations to decline as traders realize that the agency’s enforcement division is operating at “full speed.”

“The message is going to transfer through the industry that if you engage in this kind of activity you’re going to get caught,” he said. “If you get caught you’re going to pay.”

Wellinghoff said the FERC plans to “go after” individual traders as well as specific companies. And he’s not concerned about whether this may spook the financial sector.

“Have you ever met any traders?” he said to reporters after the commission’s monthly meeting yesterday. “Very few of them are scared or intimidated by anything.”

Bloomberg News

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