The U.S. Federal Energy Regulatory Commission’s probe of JPMorgan Chase & Co. (JPM) demonstrates a renewed focus on market manipulation as the agency beefs up its oversight of the multibillion dollar energy-trading business.
The FERC on July 2 sued New York-based JPMorgan to release e-mails, revealing an investigation of possible gaming of power markets in California and the Midwest. Since January 2011 the agency has announced 11 probes of alleged manipulation in electricity and natural gas markets and a record $245 million settlement with Constellation Energy Group Inc.
The agency issued in December a preliminary determination that Deutsche Bank AG (DBK) manipulated the California power market. In April, the FERC issued a notice of alleged violations to Barclays Plc. (BARC) Deutsche Bank spokeswoman Amanda Williams and Barclays spokesman Michael O’Looney declined to comment.
“I see a fairly steady activity in the enforcement area,” Susan Court, a former director of the FERC’s Office of Enforcement, said in a telephone interview. “There is a theme here.”
In February, the FERC created a division within its enforcement office to police the markets, where electricity is bought and sold by power generators and utilities.
A 2005 overhaul of U.S. energy policy, passed after the collapse of energy trader Enron Corp., gave the agency the authority to fine companies as much as $1 million a day per violation, a vast increase in the agency’s enforcement powers.
The agency is investigating JPMorgan for potential violations that were reported to FERC between March and June of last year, identified after power-grid operators reported unusual trading offers for the supply of energy.
“Our team of Ph.D. economists is vigilant about keeping an eye on questionable activities and stands prepared to address potential issues and report them immediately” to FERC, said Steven Greenlee, a spokesman for the California Independent System Operator Corp., one of the grid managers that reported unusual trading patterns.
J.P. Morgan Ventures Energy Corp. allegedly made bids that resulted in at least $73 million in improper payments to the generators, according to FERC. The investigation came to light when the FERC went to court seeking internal e-mails from JPMorgan. The company and agency agreed today to let a magistrate judge settle the dispute over release of the documents.
“We believe we have complied in all respects with the law, as well as FERC rules and applicable tariffs, governing this market,” Jennifer Zuccarelli, a JPMorgan spokeswoman, said in a statement. “We stress that this investigation is ongoing and that no conclusions have been reached or findings adjudicated.”
The FERC’s emphasis on market manipulation in recent months stems from the authority Congress granted to the agency in the 2005 law, according to Court. Because it takes years to collect and analyze documents before bringing a case against a company, some investigations that began years ago are just coming to light now, said Court.
FERC Chairman Jon Wellinghoff, who declined an interview request, said after the Constellation settlement that the agency will be vigorous in policing manipulation and that senior management at companies “will be held accountable.”
“Conduct involving fraud and market manipulation poses a significant threat to the markets overseen by the commission and is an enforcement priority,” Craig Cano, a spokesman for the FERC, said in an e-mail. The agency’s investigations have led to $302.4 million in civil penalties and repayment of $155.4 million in unjust profits, primarily since passage of the 2005 law, he said.
Consumer groups “have zero confidence in FERC’s ability to police these markets,” Tyson Slocum, director of the Energy Program for Public Citizen, a Washington-based watchdog group, said in a phone interview. “They have become sidetracked” with issues including adding renewable energy to the power grid, he said.
The agency in February created the Division of Analytics and Surveillance within its enforcement office. Run by Lee Ann Watson, a lawyer who previously worked in the agency’s investigations group, the 45-person division examines the natural gas and electricity markets to spot signals of market manipulation.
The retirements of coal power plants and retrofits necessary to meet the Environmental Protection Agency’s rules might also lead to higher power prices -- and more focus on market manipulation -- in the coming years, said Christine Tezak, senior policy analyst at Robert W. Baird & Co. in McLean, Virginia.
“Certainly, the FERC would want to be able to assure customers and state regulators that any upward price movements are appropriate reflections of scarcity and not market manipulation,” Tezak said.
Wall Street firms have been players in energy trading at least since the late 1990’s, when many states restructured their power markets. In so-called deregulated markets, buyers bid for electricity from power generators. Consumers then purchase the power from their local utility.
The FERC’s focus on unusual behavior in the markets has intensified since the 2005 energy law.
“As the amount of resources devoted to this purpose have grown over time, so too has the commission’s ability to pursue such cases,” Shaun Ledgerwood, a senior consultant with the Brattle Group in Washington and a former FERC economist, said in an e-mail.
Consumer groups aren’t convinced that the FERC can control gaming of the power grid.
“I’m not at all satisfied that there’s sufficient control” to prevent price manipulation, said Carl Wood, who was a member of the California Public Utilities Commission when it was responsible for stabilizing California’s utility industry after the 2000-2001 energy crisis. During that event companies including Enron caused power shortages and rolling blackouts.
Wood said the Constellation market-manipulation case shows that “there is something fundamentally broken about the system.”
He says the way the power markets work now doesn’t link power prices with the cost of power generation.
“In some respect, almost every market participant on the seller side, on the supply side is involved in what from a consumer point of view is really manipulation -- they are looking for opportunities to get prices that are out of line with their production costs,” he said. “So every market participant is potentially a market manipulator from that point of view.”
The FERC probe into JPMorgan’s activities doesn’t necessarily mean wrongdoing occurred, said Nora Mead Brownell, a FERC commissioner from 2001 to 2006, said in a phone interview.
“We had vast changes,” after Enron, Brownell said. The agency, like all regulators, has had a difficult time keeping up with the quickly developing financial markets, she said.
The agency’s focus on market manipulation does send a broader message to the players who have the potential to game the markets, she said.
“Not only do you want to get the bad guys, but you want the market to know that you are going to get the bad guys,” she said.
The case is Federal Energy Regulatory Commission v. J.P. Morgan Ventures Energy Corp., 12-mc-352, U.S. District Court, District of Columbia (Washington).
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