The U.S. Federal Energy Regulatory Commission yesterday suspended a JPMorgan Chase & Co. (JPM) unit’s electricity-trading authority, saying it had filed false information to regulators.
The action, part of a more aggressive effort by the commission to monitor U.S. power markets, prohibits J.P. Morgan Ventures Energy Corp. from selling electricity at market-based rates for six months starting April 1, 2013.
The FERC said the company made “factual misrepresentations” and omitted material information in communications with the California Independent System Operator, or Caiso, and in filings to the commission. Caiso operates the state’s power grid.
“This is very significant in the history of that agency,” Charles Peabody, a bank analyst with Portales Partners in New York, said in an interview. “FERC has really been stepping up its investigations into power manipulation.”
In its order released late yesterday, FERC said the JPMorgan unit will essentially be allowed to participate as a bystander in wholesale power markets, granting it the ability to offer electricity into the market without a price attached. This will ensure that utilities have the ability to obtain enough power to serve the demand from customers. JPMorgan would still be able to trade derivatives under the order.
“The provision of false, misleading or inaccurate information undermines the integrity of the FERC decision-making process, the smooth operation of markets and FERC’s ability to ensure just and reasonable rates for customers,” FERC said in an e-mailed statement. “The commission continuously has warned market participants of the consequences associated with failing to abide by FERC rules and regulations.”
A spokeswoman for the bank 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.
The commission is also investigating alleged manipulation by traders for Deutsche Bank AG (DBK) and Barclays Plc. (BARC) Since January 2011, the agency has announced 11 market-manipulation probes, and in March it reached a $245 million settlement with Constellation Energy Group Inc. over one of those cases. Last month, the agency proposed a record $469.9 million in penalties for Barclays, which says it will contest the finding.
The JPMorgan energy unit reported $2.2 billion paid by customers in New England, the Midwest and California in 2011, according to FERC filings.
While the unit accounted for a small portion of JPMorgan’s $97.2 billion in 2011 revenue, yesterday’s decision adds to regulatory trouble for the New York-based company. At least 10 federal agencies and a U.S. Senate panel are investigating a multibillion-dollar trading loss at its chief investment office in London.
“Once you mess up, every regulator starts to look to make sure that they are covered with their oversight,” said Peabody, who downgraded JPMorgan’s shares on Oct. 12 to “underperform.”
This is the first time that an entity active in California’s power market has been suspended by the FERC, said Stephanie McCorkle, spokeswoman for the Caiso.
“The ISO and FERC are in lockstep on the importance of protecting the integrity of energy markets,” Caiso President Steve Berberich said in an e-mailed statement. “We believe the FERC order is a strong signal to the entire market of the importance of proper conduct and cooperation during investigations.”
The FERC said in September it had initiated a proceeding against the energy trading unit. The case focuses on whether JPMorgan’s energy division, a part of the company’s commodities unit run by Blythe Masters, met its obligations to provide documents to Caiso.
J.P. Morgan Ventures Energy allegedly made bids that resulted in at least $73 million in improper payments to the generators, according to the FERC. The investigation came to light when the commission went to court seeking internal e-mails from JPMorgan.
Zuccarelli said in her statement that the issue in the case “was not J.P. Morgan’s conduct in the market, but rather a dispute over document productions.”
In a filing with the commission last month, the bank apologized for what it said were inadvertent mistakes and said that suspending its trading authority would be an “unjustified reaction to unintentional, good-faith mistakes, misunderstandings and miscommunications.”
In its decision, the FERC said “no showing of the respondent’s intent or mindset is necessary in order to demonstrate that a violation” has occurred.
FERC Commissioner Cheryl LaFleur dissented, saying revoking market-based rate authority should stem from market conduct, not because of a disagreement over the documents provided.
“I dissented based on the facts and the law in this case,” she said today in an interview after the agency’s monthly meeting.
J.P. Morgan Venture Energy’s explanation that it wasn’t required to give California power officials information “lacks credibility and cannot be reconciled with a rational reading of the emails from the Office of Enforcement.”
The FERC said that during the suspension period, JPMorgan will only be permitted to “participate in wholesale electricity markets by either scheduling quantities of energy products without an associated price or by specifying a zero-price in its offer as provided in the pertinent tariffs.”
The delay in the suspension is to permit Caiso to maintain system reliability and allow J.P. Morgan Ventures Energy to fulfill contractual obligations, according to the FERC statement. The company schedules and controls the dispatch of electricity from 10 power plant units in Southern California, according to Caiso.
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