JPMorgan said to be close to paying penalty for energy trading
07/18/2013 12:00 AM
09/06/2013 2:27 PM
More than a decade after the energy crisis, power traders are still trying to manipulate California's electricity market. This time, though, the energy police are slapping them down.
Investment bank JPMorgan Chase & Co., accused of using improper trading tactics in California and Michigan, is considering paying a fine of at least $500 million to the Federal Energy Regulatory Commission, according to reports Wednesday by the Wall Street Journal and New York Times.
The reports came one day after FERC slammed London's Barclays Bank with a $453 million fine for shady electricity trading behavior in California and three other Western states. Barclays issued a statement Wednesday vowing to fight the fine.
The dual punishments provide further evidence that FERC has changed dramatically since 2001, when it was criticized by state officials for standing idle as traders from Enron and other firms gamed California's electricity market. The result was billions in higher costs to California consumers and multiple days of rolling blackouts.
Nowadays, FERC is responding quickly to allegations of wrongdoing.
"They're nipping any issues in the bud and not letting anything be ignored," said spokeswoman Stephanie McCorkle of the California Independent System Operator. The ISO operates the state's transmission grid.
Although the ISO has been cooperating with FERC's investigation, McCorkle said she isn't aware of any potential settlement.
"We're not privy to that," she said.
The Journal and Times, quoting anonymous sources, said JPMorgan is close to settling a FERC investigation into deceptive trading practices in California and Michigan.
The Times said the fine will total about $500 million; the Journal said it could reach $1 billion. Either way, the fine would be a FERC record.
A FERC spokesman declined comment on the reports; officials with JPMorgan couldn't be reached.
The federal investigation stems from complaints filed by the California ISO about JPMorgan's trading practices. It then expanded into complaints about the firm's operations in Michigan, according to the Times.
For California, the investigation has already borne fruit: FERC has ruled that JPMorgan employed improper trading practices in the state.
In June, the agency said JPMorgan and other firms generated $52 million in unjust profits from 2009 to 2011 through trading mischief. JPMorgan was responsible for the vast majority of that behavior, according to a source with knowledge of the situation.
The ISO has already recovered $35 million, which has been distributed to ratepayers through their utilities.
The firm has insisted it did nothing wrong in the California power markets.
Perhaps just as importantly, FERC has found that JPMorgan executives lied to investigators about the California trades. Last fall, the agency hit JPMorgan with a six-month trading suspension for its "repeated submission of false and misleading statements."
The suspension meant the firm could trade electricity in California but couldn't make a profit on it.
JPMorgan acknowledged that it supplied FERC's investigators with incorrect information but said it was an honest mistake.
The supply of false information could figure into the broader FERC investigation. The Times reported that FERC told JPMorgan in March that it was focusing on false statements made by a senior bank executive, Blythe Masters, and the settlement talks began soon afterward.
The firm's trading practices cited by FERC bore similarities to the chicanery employed by Enron and others more than a decade ago, experts say.
According to court papers filed by FERC lawyers a year ago, during a dispute over access to documents, the agency believes JPMorgan used deceptive trades to inflate "make-whole payments."
Those are the fees paid to generators to keep power plants running at low levels, so they can be ramped up quickly if there's a spike in demand. JPMorgan wasn't a generator but traded the power produced at a dozen plants in Southern California.
According to investigators, JPMorgan concocted a series of trades that all but guaranteed it would get hefty "make-whole payments" while making sure it wouldn't have to actually supply much electricity.
"Any such improper payments to generators are ultimately borne by the households, businesses and government entities that are the end consumers of electricity," wrote FERC lawyer Thomas Olson in court papers last year.
JPMorgan has taken steps to retreat from the California market. In May it sold the rights to market power at the Southern California plants to Southern California Edison.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.
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