Laying the groundwork for a hefty fine, federal officials Monday accused banking giant JPMorgan Chase & Co. of running eight different manipulative bidding strategies to boost its electricity profits in California and the Midwest.
The Federal Energy Regulatory Commission outlined the basics of its investigation against the big bank, saying it used improper trades in 2010 and 2011 to sell power at above-market prices.
With one strategy, the commission said, JPMorgan duped California electricity officials into paying $999 per megawatt-hour during early-morning hours – when the going rate was just $12. A megawatt-hour is roughly enough electricity to power 750 homes for an hour. FERC wouldn't say how often that happened.
FERC's "staff notice of alleged violations" came less than two weeks after initial media reports said the agency was discussing a settlement with JPMorgan that could cost the bank as much as $500 million.
The notice "may be an indicator the settlement will be announced soon," said Stephanie McCorkle, spokeswoman for the California Independent System Operator. The ISO runs the state's transmission grid and blew the whistle on JPMorgan's alleged shenanigans.
The ISO said it was overcharged at least $63 million by JPMorgan and believes it would receive a portion of the proposed settlement. The money would go to ratepayers, via their utility companies.
Craig Cano, a FERC spokesman, wouldn't comment on settlement talks but acknowledged that staff notices typically are issued "as a precursor to some resolution." It was FERC's first public acknowledgment of the JPMorgan investigation since last year, when it sued the bank to gain access to trading records.
JPMorgan had no comment but has previously said it's done nothing wrong in California's electricity market.
The JPMorgan case has stirred memories of the 2000-01 energy crisis, when traders from Enron Corp. and other firms snookered California through questionable trades.
Robert McCullough, an independent energy consultant from Portland, Ore., said the FERC notice describes activities that "are not terribly different from a variety of Enron schemes."
The $999 trades were a form of bait and switch, he said. JPMorgan originally submitted bids of negative $30 – meaning the firm would pay the ISO for the right to generate power. But the next morning, when the power was actually needed, it would charge $999 per megawatt- hour, according to the FERC notice.
The high prices were charged between midnight and 2 a.m.
FERC wouldn't provide details about individual trading strategies, but McCullough said the $999 gambit "may have happened more than once." The federal energy regulator listed five manipulative strategies allegedly used by JP Morgan in California and three in the Midwest ISO, which runs a multistate transmission gride.
McCullough said the JPMorgan case shows the continued vulnerability of California's power market. But California officials say it proves just the opposite. Unlike 2000-01, when trading schemes cost the state billions of dollars, this time the activities were detected quickly, they say. What's more, they say FERC is policing the markets a lot more aggressively than before. The notice against JPMorgan was released two weeks after FERC announced a $453 million fine against another electricity trader, Barclays Bank, over its practices in California and other Western states.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.