* Federal ban on market-based rates will not apply in ERCOT
* Market players cite importance of JPMorgan unit in West Texas
HOUSTON Nov 21 (Reuters) - A federal regulator's order penalizing JPMorgan Chase & Co's energy trading arm will not affect the unit's business activity in the Texas wholesale power market, state and federal agencies said on Wednesday.
Last week, the Federal Energy Regulatory Commission (FERC) said it would revoke JP Morgan Ventures Energy Corp's ability to charge competitive prices for physical power it sells for six months starting in April 2013 after it made factual misrepresentations during an investigation into market manipulation in California.
The order created uncertainty in the Texas wholesale power market, according to industry sources, because JP Morgan operates in Texas and has a significant presence in the West Texas market which is less liquid than other regions of the state.
The Electric Reliability Council of Texas (ERCOT), which oversees the $34 billion wholesale power market for most of the state, said the ruling would have no direct impact on JP Morgan's business in Texas because ERCOT is not subject to FERC jurisdiction.
"The ruling is based on FERC authority that does not apply in ERCOT, so it has no direct effect on JP Morgan's market activities here," according to a statement from the grid operator.
"ERCOT expects that all market participants, including JP Morgan, will comply with all relevant laws, regulations and market rules, and we have no indication at this time that JP Morgan is not compliant with its obligations as a market participant in this region," the statement said.
FERC officials concurred.
The order "does not suspend JP Morgan's ability to make sales at market-based rates within ERCOT, because sales within ERCOT are not subject to the commission's jurisdiction under section 205 of the Federal Power Act," said FERC spokesman Craig Cano in an emailed statement.
Market-based rates allow power traders like JP Morgan to sell electricity at whatever price the market will bear. If electricity traders lose the authority to trade at market-based rates, they must trade at much lower cost-based or other rates, hurting their trading profits.
ERCOT said the agency and Texas regulators will continue to perform market oversight activity and "will address any compliance issues that arise by any market participant."
Companies that buy power in West Texas said the loss of participation by the JPMorgan unit, even for six months, could hurt the ability to buy power for longer periods of time, a market that is fairly illiquid.
JPMorgan did not respond to a request for comment. FERC's order does not affect its ability to trade derivatives, futures, natural gas and other commodities.
Section 205 of the Federal Power Act grants FERC the authority to determine the reasonableness of rates charged by public utilities that transmit or sell power in interstate commerce.
Unlike other U.S. power markets, ERCOT operates outside of direct FERC jurisdiction due to its historical status as a "power island," with limited ability to import or export power across state lines.