Obama Administration Threatens to Pull Plug on JPMorgan Trading in Energy Market

Monday, September 24, 2012

Nearly three months after the U.S. government sued a reluctant JPMorgan Chase & Co. for documents during an investigation of allegations that it had manipulated California energy prices, the Federal Energy Regulatory Commission (FERC) is threatening to suspend its energy trading unit from the state market.


JPMorgan denied manipulating the market and said it had committed an “inadvertent factual error in papers related to discovery and promptly informed the commission of this mistake.”


The bank has 21 days to show cause how its version of affairs dovetails with FERCs contention that it “violated section 35.41(b) by submitting misleading information and

omitting material facts in communications with the Commission, the California Independent System Operator Corporation (CAISO), and CAISO’s Department of

Market Monitoring (DMM).”


The commission also asked JPMorgan why its “authorization to sell electric energy, capacity, and ancillary services at market-based rates should not be suspended.”


FERC’s action concerns JPMorgan’s alleged stonewalling and misrepresentation in providing information to government parties, and doesn’t address accusations of market manipulation. All five commissioners signed off on the show cause order, but two of them expressed reservations about taking a separate regulatory action when enforcement proceedings loom over the underlying issue of JPMorgan’s trading behavior.


FERC became involved after CAISO, which runs the state’s electrical transmission grid, complained in 2011 about the banking giant. CAISO ultimately claimed that JPMorgan had gamed the state’s energy market to the tune of $73 million.


Energy experts consulted by The Los Angeles Times say the scheme being investigated involves manipulation of the state’s market-based energy auction system. The bank essentially submits preliminary low bids for energy (perhaps even at a negative amount), thus qualifying for “a bid cost recovery” payment even if they aren’t accepted. Those bids would be money losers for JPMorgan if accepted, but the next day it submits real bids too high to be accepted and pockets the windfall.


While not flat out saying in its show cause order that JPMorgan was involved in fraud, deception or misrepresentation, the federal agency made clear that, “In granting market-based rate authority, FERC expects that a company’s behavior will not involve fraud, deception or misrepresentation.”


FERC has conducted 11 investigations of alleged manipulation of energy markets since January 2011, one of which resulted in a $245 million settlement with Constellation Energy Group Inc. The agency issued a preliminary finding last December that Deutsche Bank AG had manipulated the California market.

-Ken Broder


To Learn More:

Federal Regulators Launch Probe of JPMorgan's Energy Trading in California (by Dale Kasler, Sacramento Bee)

JPMorgan Power-Trading Business Faces Suspension, FERC Says (by Kasia Klimasinska, Bloomberg)

Order to Show Cause (Federal Energy Regulatory Commission) (pdf)

FERC Initiates Proceeding into Actions by JP Morgan (Federal Energy Regulatory Commission)

JPMorgan Accused of Manipulating Power Market (by Ken Broder, AllGov)


Ryan 11 years ago
Please let these giants fail. There is no way the conrtuy would have suffered as much as we have, nor as much as Henry Paulson forewarned.It is difficult and costly to become politically connected. The politically connected get the best treatment by the political system. The biggest/richest corporations are in the best position to exploit their political connectedness. They will just leverage it to avoid measures such as the too big to fail tax . I say the next sentence as if we actually had a say in the matter: given the choice between the two options we should pick the option that would allow all companies to fail, to reintroduce real risk into decision-making. Government essentially begins by shielding these giants from competition through elaborate barriers to market-entry of all shapes an sizes (allowing them to seize more market share than they otherwise would have, which of course makes them grow bigger than they otherwise would have growth to the point of becoming too big to fail) and then their losses are socialized. And a proposed solution is keeping the barriers to entry, continue socializing their losses, but tax them for reaching a certain size ? Wouldn't it make more sense to remove the possibility of being bailed out and to systematically eliminate all state-created and state-maintained barriers to market entry? If you were the only show in town you wouldn't much care what your customers thought of how you invested their money. You were the only place where they could store it and beat inflation. As soon as you introduce one additional bank you suddenly will become very preoccupied with their operations because you want to offer at least as good of a deal as they are offering. With the removal of barriers to market entry you allow potential competitors to enter the market, making every market participant have to worry more still that they are offering the best deal. I really like the fact that you recognize that the bail-outs make it so that the tax payer incentivizes excessive risk taking.

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