JPMorgan Chase (NYSE: JPM) appears to be headed for a fresh round of controversy over claims that the company artificially tinkered with electricity prices in California and in the Midwestern region in 2010 and 2011.
USA Today notes that the Federal Energy Regulatory Commission is alleging that JPMorgan relied on inappropriate bidding practices to try and elicit excess payments from various agencies that run power grids in those areas. JPMorgan is already embroiled in negotiations with FERC over a possible settlement.
Also involved in the mess is Barclays (NYSE: BCS), Britain’s second-biggest bank. FERC hit Barclays with a $453 million fine for similar allegations centering on California and some western states; Barclays has pressed disputations.
JPMorgan’s energy unit, the Houston-based JPMorgan Ventures Energy, is at the center of the controversy. It appears the company used as many as five “manipulative bidding strategies,” two in California between September 2010 and June 2011 and three in the Midwest from October 2010 to May 2011.
While JPMorgan Ventures Energy holds contracts with power-producing companies under which it trades their electricity, the accusations state that JPMorgan’s traders tried to sell electricity at artificially lowered prices in what FERC calls a “day-ahead” market. The outcome of this was that companies would end up putting their plants on standby mode in order to rapidly generate energy, thus garnering JPMorgan extra fees for helping to put the power plants on standby.
Finally, traders would offer to sell this electricity at higher prices in the general market to respond to emergency electricity demand. In other words, it sounds like one more in a long list of financial games for which big banks have become notorious over the past few years.
The scheme appears to have unwound when the California Independent System Operator took the situation all the way to FERC in 2011. As of now, Bloomberg reports that JPMorgan will cough up $410 million in response to these allegations, hoping for a settlement.
There’s a civil penalty of $285 million, and JPMorgan will also give back $125 million to electricity ratepayers. Further, JPMorgan will relinquish all claims on $262 million in disputed payments from California’s grid operator.
JPMorgan’s Rough Patch
It’s been a bit of a rough time for JPMorgan, which famously maneuvered through the great financial crisis of 2008 without any losses and earned praise from President Obama himself.
Just last year, JPMorgan attracted much negative press when it posted losses exceeding $6.2 billion from derivative bets executed by its London traders. The drama resulted in a U.S. Senate-led investigation, the resignation of several top executives, and CEO Jamie Dimon’s leadership coming under serious scrutiny. Yesterday, the company’s shares fell .65 percent to $55.33, though they had risen about 24 percent thus far in the year until yesterday.
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It’s worth noting that JPMorgan’s settlement is actually the biggest such penalty ever paid (at least, unless Barclays agrees to pay its even higher fine). Out of the $410 million being paid by JPMorgan, $124 million will be sent to the Californian operator; the Midwestern operator will receive $1 million. It’s at least worth mentioning that JPMorgan didn’t even bother contesting the claims (though it neither denied nor admitted any wrongdoing).
FERC has recently come under media attention for its work policing the often-questionable dealings of some of the biggest banks and lending agencies in the U.S. After the Enron fiasco, FERC saw its regulatory and investigatory powers significantly expanded. Since 2011 alone, FERC has been responsible for unveiling as many as 13 major instances of energy-market manipulation.
Before the JPMorgan and Barclays affair, FERC hit Deutsche Bank AG (NYSE: DB) with allegations of energy-market tinkering back in 2010. The bank agreed to pay $1.6 million to settle the claims (again, with no denial or admission of wrongdoing). Another major instance was in March last year, when FERC elicited a $245 million settlement from Constellation Energy Group Inc. over charges of energy market manipulation in New York.
From Bloomberg:
“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.
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