JPMorgan Chase & Co. (JPM) will pay $410 million to settle U.S. Federal Energy Regulatory Commission allegations that the bank manipulated power markets, enriching itself at the expense of consumers in California and the Midwest from 2010 to 2012.
The bank agreed to pay a U.S. civil penalty of $285 million and return $125 million in ill-gotten profits to electricity ratepayers, according to a FERC order today. JPMorgan also agreed to give up claims to $262 million worth of disputed payments from California’s grid operator, the state authority said in a separate statement.
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 picked the pockets of California households and businesses, and their manipulation increased the electric bills that people pay,” Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer advocacy group, said in an interview yesterday.
JPMorgan fell 47 cents to $55.22 at 3:04 p.m. in New York trading. The shares rose 27 percent this year through yesterday.
The settlement is a record for the FERC since Congress gave it additional powers to police energy markets in 2005, after the collapse of energy trader Enron Corp. JPMorgan’s $285 million civil penalty is the largest paid to the regulator by any company. The FERC on July 16 assessed a $435 million penalty to Barclays Plc (BARC) for alleged market manipulation, which will be a record if it is paid. The company has vowed to challenge in court.
“JPMorgan’s brazen, Enron-style market manipulation cost California ratepayers over $120 million,” Representative Henry Waxman, a California Democrat, said in an e-mail. “Congress provided FERC with the authority to stop precisely these kinds of fraudulent schemes.”
The FERC said a JPMorgan energy-trading unit engaged in 12 bidding strategies in wholesale energy markets from September 2010 to November 2012, resulting in tens of millions of dollars in overpayments from the grid operators. The agency announced the violations yesterday after investigating the bank’s energy-trading practices for more than a year.
Of the $410 million, $124 million will go to the California electric-grid operator and $1 million will go to an operator in the Midwest, according to the agency. The bank accepted the facts in the settlement agreement without admitting or denying wrongdoing, the FERC said in a statement.
The settlement won’t have a material impact on the bank’s earnings since it has previously set aside reserves to cover the costs, Marchiony, the JPMorgan spokesman, said.
The agreement to settle is another scandal that hurts the bank’s credibility with customers, said Charles Peabody, an analyst with Portales Partners in New York. “It’s very damning because they were duping others,” Peabody said in an interview.
Questions have been raised about the bank’s practices including those involving credit-card debt collections, investment products and mortgage practices, he said.
“There are a lot of these issues that have surfaced within the JPMorgan franchise that say maybe they aren’t looking out for the best interest of their clients,” Peabody said.
The settlement with the FERC ends the agency’s investigation of J.P. Morgan Ventures Energy Corp., a trading unit overseen by commodities chief Blythe Masters. The wholly owned subsidiary trades and holds physical commodities, including agricultural products, metals and energy, as well as derivatives.
The settlement released JPMorgan, all subsidiaries and employees, including Masters, from any future enforcement actions by FERC in this case.
The bidding strategies at issue were developed by a Houston-based unit run by Francis Dunleavy, who was one of eight people who reported directly to Masters.
Dunleavy was a Bear Stearns Cos. veteran who joined in 1982 before rising to become one of its senior energy executives, according to Financial Industry Regulatory Authority records. In 2005, as Bear Stearns lagged energy-trading rivals such as Goldman Sachs Group Inc. and Morgan Stanley, Dunleavy helped lead a venture with power producer Calpine Corp. (CPN) that traded natural gas and electricity.
JPMorgan inherited Bear Stearns’ energy trading operations when it purchased the company in 2008. Dunleavy oversaw Andrew Kittell and John Bartholomew in the company’s principal investments unit beginning in 2010.
All three men are still employed by JPMorgan although they no longer have a role in bidding for energy in California’s power market, according to the FERC. Marchiony declined to comment on their current roles or whether the company would cut their bonuses or Masters’ compensation.
The three traders didn’t agree to a settlement with the FERC, Gibson, Dunn & Crutcher LLP, the law firm representing Dunleavy, Kittell and Bartholomew, said in a statement. The agency decided not to pursue sanctions against them after they explained to the FERC that their conduct was lawful, it said.
“The commission’s decision to voluntarily settle with JPMorgan and not proceed against the individuals can only be read as the commission correctly concluding that no case or findings against the individuals could be sustained in a court of law,” William Scherman, their lawyer, said in the statement.
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.
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.
FERC 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 agency’s investigation covered two periods, September 2010 to June 2011 and March to November 2012. JPMorgan’s energy-trading unit was engaged in 12 strategies to manipulate markets in California and the Midwest, 10 of which began while the investigation was underway, the FERC said.
The company’s traders offered to provide electricity at relatively low rates in forward markets, then offered to provide it at 120 percent of the clearing price in real-time markets, Eric Hildebrandt, director of market monitoring for the California Independent System Operator, the state’s grid operator, said today on a conference call with reporters.
This strategy meant that JPMorgan’s power plants weren’t chosen to provide service, even though it allowed the company to receive payments to recover startup costs from the grid operator for making the units available.
As part of the settlement with FERC, JPMorgan agreed not to pursue claims against the grid operator in two different proceedings, according to the state authority. The company was seeking $227 million in payments from the California ISO for making its power plants available. It was also challenging a FERC ruling in June that allowed the grid operator to recover $35 million in payments JPMorgan had already received.
These claims are separate from the $124 million the company agreed to pay to California authority as part of the settlement.
Today’s agreement is a “full recovery for the California market,” Nancy Saracino, general counsel the grid operator, said today on the call with reporters.
FERC Chairman Jon Wellinghoff has stepped up scrutiny of corporations as the agency wields policing powers that were expanded in the wake of Enron’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 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.
“FERC’s recent enforcement actions to punish illegal manipulation of the power system are exactly what Congress intended when it passed the Energy Policy Act of 2005 and I urge the commission to continue to aggressively police energy markets,” Senator Ron Wyden, an Oregon Democrat and chairman of the Energy and Natural Resources Committee, said in a statement.