JPMorgan Chase & Co. manipulated power markets in California and the Midwest from September 2010 to June 2011, obtaining tens of millions of dollars in overpayments from grid operators, the U.S. Federal Energy Regulatory Commission alleged today.
The agency said in a Notice of Alleged Violations that it had preliminarily determined a JPMorgan trading unit had engaged in eight manipulative bidding strategies.
The New York-based bank has agreed to sanctions including a fine of about $400 million in a settlement that may be announced as early as tomorrow, according to a person familiar with the case who asked not to be identified because the terms aren’t yet public. Other sanctions may include forfeiting profits, this person said.
Brian Marchiony, a JPMorgan spokesman, declined to comment on the FERC action.
The case marks another setback for the biggest U.S.-based bank, which sailed through the 2008 financial crisis without a single quarterly loss. Last year JPMorgan lost more than $6.2 billion from wrong-way derivatives bets placed by traders in London. The incident prompted a U.S. Senate investigation, the departure of two senior executives and a debate over whether Chief Executive Officer Jamie Dimon should keep his chairman role. In May shareholders re-elected him as chairman.
Physical Commodities
JPMorgan said July 26 it may sell or spin off its physical commodities business including energy trading, three days after a congressional hearing examined whether banks are using their ownership of raw materials to manipulate markets.
Commodities chief Blythe Masters oversees the unit, J.P. Morgan Ventures Energy Corp. The wholly owned subsidiary trades and holds physical commodities, including agricultural products, metals and energy, as well as derivatives.
The FERC in November revoked a JPMorgan energy-trading unit’s right to trade power for six months after accusing the firm of providing misleading information to regulators. The suspension, which took effect in April, marked the first such sanction for an active market participant.
The FERC staff said in today’s allegations, announced by e- mail, that the bank’s energy-trading unit was involved in five market-gaming strategies in California from September 2010 to June 2011. The company engaged in three gaming strategies in the Midwest from October 2010 to May 2011, the staff said.
Bidding Practices
Investigators have suspected that bidding practices by JPMorgan traders improperly got grid operators to overpay for electricity from power plants the bank controls, Thomas Olson, a FERC attorney in the agency’s enforcement office, said in a July 2012 filing with the U.S. District Court for the District of Columbia.
In wholesale electricity markets, buyers and sellers negotiate prices based on supply and demand. There are costs associated with making a bid to provide power, including fuel and starting up the generator, according to Steven Greenlee, a spokesman for the California Independent System Operator, the state’s grid operator. If a sale of electricity doesn’t yield enough revenue for the generator to recover its startup costs, the grid operator will issue the company a “make whole” payment, he said in an e-mail.
Grid Operator
After examining JPMorgan’s bidding practices, FERC staff told JPMorgan in March that it appeared the company’s traders may have violated agency and grid-operator rules, the company said in a May regulatory filing. It also said the regulator’s staff intended to bring an enforcement case against the trading unit and that its personnel and two subsidiaries may face claims stemming from a probe into bidding practices.
Since 2011, the FERC has revealed at least 13 probes of energy-market gaming, including investigations of trading units at Deutsche Bank AG, Barclays Plc and JPMorgan.
“There are big profits that are made in these markets,” Susan Court, a former director of the agency’s enforcement office, said in a July 18 phone interview. “FERC’s mandate is to make sure those markets are not defrauded.”
FERC Chairman Jon Wellinghoff has stepped up scrutiny of corporations as the agency wields policing powers that were expanded in the wake of Enron Corp.’s 2001 collapse. The regulator on July 16 ordered Barclays and four of the company’s former traders to pay a combined $487.9 million in fines and penalties for engaging in what the agency said was a scheme to manipulate energy markets in the Western U.S. from 2006 and 2008.
Next page: Other Cases
Other Cases
Deutsche Bank agreed on Jan. 22 to pay $1.6 million to resolve FERC claims that an energy-trading unit manipulated markets in 2010. The Frankfurt-based bank didn’t admit or deny wrongdoing.
In the Barclays case, the FERC levied $453 million in civil penalties against London-based banks and four its ex-traders. It also directed the lender to give up $34.9 million in profits. The bank has vowed to fight the penalties.
The FERC accused one former Barclays employee, Scott Connelly, of heading a market-gaming scheme, fining him $15 million. It fined three other former traders $1 million each.
“FERC appears to be willing to fine individual traders in some of these larger enforcement cases,” said Carrie Allen, an energy attorney with Akin Gump Strauss Hauer & Feld LLP. “It’s a pretty standard prosecutorial tactic that FERC is embracing.”
The agency fined ex-Amaranth Advisors LLC trader Brian Hunter $30 million in 2011, ruling he manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives. A U.S. Court of Appeals ruled in March that FERC lacked the jurisdiction for the fine.
Public Citizen
“I do not see a positive role in the way that these banks are operating in these markets,” Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer- advocacy group, said in a phone interview. “I don’t understand the value added to reliability, to efficiency.”
The FERC should use its authority under the Federal Power Act to ensure that utility customers are refunded for market violations, he said.
The FERC in March 2012 reached a then-record $245 million settlement with Constellation Energy Group Inc. over alleged energy trading violations in New York. Constellation didn’t admit any wrongdoing.
