JPMorgan Chase & Co. (JPM) manipulated power markets in California and the Midwest, the U.S. Federal Energy Regulatory Commission claimed in a proceeding that sets up a settlement to be announced as early as today.
A JPMorgan trading unit gamed wholesale electricity markets from September 2010 to June 2011, leading to overpayment of “tens of millions of dollars at rates far above market prices” in California alone, FERC staff said in a Notice of Alleged Violations yesterday.
The nation’s biggest bank and its chief energy-market regulator have agreed to settle the matter with sanctions that include a fine of about $400 million, according to a person familiar with the case who asked not to be identified because the terms aren’t yet public. Brian Marchiony, a JPMorgan spokesman, declined to comment on the FERC action.
“JPMorgan picked the pockets of California households and businesses, and their manipulation increased the electric bills that people pay,” said Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer advocacy group.
The case marks another setback for JPMorgan, 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, 57, should keep his chairman role. In May shareholders re-elected him as chairman.
JPMorgan said July 26 it was considering the sale or spin off of 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 the 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.
“These schemes are very complex, and it seems that the banks and the manipulators are always 10 steps ahead of the regulators,” Slocum said. “We need to have a review to determine whether or not these markets are working as advertised.”
Investigators focused in part on “make whole” payments that grid operators pay to generators if the sale of electricity doesn’t yield enough revenue for the company to recover its startup costs.
The FERC staff said yesterday that the energy-trading unit was involved in five market-gaming strategies in California from September 2010 to June 2011, leading to overpayment “far above market prices.” The company engaged in three gaming strategies in Midwest energy markets October 2010 to May 2011, the staff said.
In one scheme, JPMorgan traders made low end-of-day bids to attract large orders from buyers to provide power the next day, the FERC said. In the first two hours the next day, the bank demanded higher rates for making the power available, a maneuver that led the grid operator to pay it millions of dollars for a period in which demand is typically low.
In another strategy, traders offered low rates for providing electricity the next day to lure orders from grid operators, then gamed the bidding system to reap higher payments “far above market prices,” the FERC said without elaborating.
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. Since 2011, the FERC has revealed at least 13 probes of energy-market gaming.
The regulator on July 16 ordered Barclays Plc 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. The bank has vowed to fight the penalties.
Deutsche Bank AG (DBK) 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.
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.
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.
The JPMorgan case differs from those involving Barclays and Deutsche Bank in that it deals only with bidding strategies in electricity markets, according to Susan Court, a former director of FERC’s enforcement office. The latter two investigations dealt with traders who allegedly gamed electricity markets to benefit their positions in financial markets.
“FERC enforcement staff is getting more sophisticated in their understanding of these markets,” Court, now the principal at SJC Energy Consultants LLC in Arlington, Virginia, said in a phone interview. The markets are also becoming more complicated, she said.