U.S. FERC power-market crackdown targets Dreyfus-Highbridge unit

NEW YORK Mon Jan 6, 2014 5:14pm EST

NEW YORK Jan 6 (Reuters) - Commodity merchant Louis Dreyfus Energy Services may have manipulated North Dakota power markets four years ago, U.S. regulators said on Monday.

In the latest example of the Federal Energy Regulatory Commission's crack-down on power market players, the agency's enforcement arm said it has made a preliminary determination that the firm had violated rules on market manipulation.

At the time, the unit was part of a joint-venture between privately held trader Louis Dreyfus and JPMorgan Chase & Co hedge fund Highbridge.

The firm had placed "virtual trades in MISO at a node in North Dakota to affect the value of its nearby Financial Transmission Rights (FTRs) during the period November 2009 to February 2010," it said, referring to the Midwest Independent System Operator (MISO) that runs the power grid in the region.

No further details of the trading activity were available.

Virtual trades are a form of financial transaction in the cash electricity market that do not involve any actual supply or purchase of power. FTRs are hedging tools used to protect against price risk when delivering energy on the power grid.

Highbridge and Dreyfus sold the energy-trading firm in 2012 to a group of investors who renamed it Castleton Commodities International. Officials at Castleton did not immediately reply to an email seeking comment.

Over the past two years, FERC has rattled the U.S. power industry with a series of allegations and charges related to market manipulation. Experts say several of these cases represent a significantly tougher approach on gray-area trading activities such as physical-versus-financial deals.

Congress expanded FERC's powers in 2005. Over the summer, the agency approved a record $410 million penalty against JPMorgan in combined civil penalties and the disgorgement of unjust profits for alleged power market manipulation.

FERC is also poised for a legal battle with Barclays Plc over other charges that the UK bank denies.

Its enforcement office staff opened 24 investigations in fiscal 2013, up sharply from 16 in fiscal 2012, FERC said in November. Of the investigations opened in 2013, the commission said 11 involve market manipulation or false statements.

Monday's so-called "notice of alleged violations" is the first public step in the enforcement process, and occurs after FERC staff has investigated alleged misconduct and believes there is likely sufficient evidence to move toward formal charges.

However it can take many more months before the office makes a formal finding, or seeks commissioners' support to enforce penalties. Many such cases are settled in the interim.

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