JPMorgan May Evade Power-Trading Ban With Swaps, ISO Says

A JPMorgan Chase & Co. unit suspended from market-based power trading in California may be evading the ban through swap agreements with EDF Group and Cargill Inc. subsidiaries, the state’s grid operator said.

EDF Trading North America LLC signed a swap agreement with J.P. Morgan Ventures Energy Corp.’s BE CA LLC unit for energy from units at three power plants in California for the six months that the JPMorgan subsidiary is banned from trading, the California Independent System Operator Corp. said in a filing to federal regulators yesterday. Cargill Power Markets LLC has also acquired control of units at two plants through a swap contract, the filing shows.

“The units covered by the EDF and Cargill contracts together comprise the total capacity previously controlled by JPMVEC and BE CA LLC in California,” Cal ISO said in the filing with the Federal Energy Regulatory Commission. “There is precedent for firms using swap contracts to secure a portion of the profit stream from a unit, while masking the identity of a party that has some level of control over the bidding.”

JPMorgan, the biggest U.S. bank, was warned by FERC in March that its personnel and two subsidiaries may face claims stemming from a probe into bidding practices. FERC revoked J.P. Morgan Ventures’ right to trade power at market-based rates in California for six months starting in April, saying the firm provided misleading information to the ISO.

Internal E-Mails

FERC said in September it had initiated a proceeding against the energy trading unit focused on whether JPMorgan’s energy division met its obligations to give documents to the ISO. J.P. Morgan Ventures Energy 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 commission went to court seeking internal e-mails from JPMorgan.

FERC has stepped up scrutiny of corporations as it wields policing powers that were expanded in the wake of Enron Corp.’s 2001 collapse. The agency has announced since January 2011 at least 13 separate investigations of possible market manipulation, including probes of energy-trading units at Barclays Plc and JPMorgan Chase & Co.

Through contracts with EDF and Cargill, JPMorgan could be bringing in profits during its suspension “beyond those contemplated” by FERC in its order, Cal ISO said. The operator recommended broad changes that would capture any situation in which “a market participant structured transactions to evade its suspension of market-based rate authority.”

Jennifer Zuccarelli, a JPMorgan spokeswoman in New York, declined to comment on the California ISO filing, saying the company is still reviewing it.

Deal Approved

California utility regulators approved a deal yesterday under which BE CA LLC would give Edison International’s Southern California Edison unit all of its rights to energy from power-plant units in California beginning Oct. 1, when JPMorgan’s trading suspension ends.

The tolling arrangement, which runs through May 2018, covers power from 12 natural gas-fired units at the Alamitos, Huntington Beach and Redondo Beach power plants in the Los Angeles Basin area with a total capacity of 3,690 megawatts, the resolution approved by the California Public Utilities Commission yesterday shows.

BE CA previously resold some tolling and resource adequacy rights from the units to Edison, the filing shows.

In a separate proceeding today, FERC granted an April 10 request from J.P. Morgan Ventures for rehearing on how it’ll manage electricity sales in power markets outside California during its six-month suspension and gave the company 15 days to file more information.

(Updates with FERC decision in 13th paragraph.)
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