* JPMorgan penalty to last 6 months starting April 2013
* One Commissioner dissents, says FERC starts new precedent
* FERC alleges market manipulation by other banks
By Cezary Podkul and Scott DiSavino
NEW YORK, Nov 15 U.S. federal regulators
temporarily banned JPMorgan Chase & Co's energy trading
arm from a segment of the domestic power market, the first time
such a penalty has been imposed for making factual
misrepresentations during an investigation into market
The move will prevent the U.S. bank from receiving
competitive market prices for physical power it sells for six
months starting in April 2013, though it will still be able to
sell the power at cost.
"That's serious punishment because, clearly, they can't
profit from that business," Susan Court, former chief of
enforcement at the Federal Energy Regulatory Commission (FERC),
said in an interview. JPMorgan, she said, was also the "most
notable company" she could think of that had been dealt such a
JPMorgan's ability to trade derivatives, futures, natural
gas and other commodities will not be impacted.
The decision came just months after a major derivatives
trading scandal rocked JPMorgan and left it with some $6.2
billion in losses from bad bets on corporate debt.
FERC dealt the punishment to JPMorgan after a months-long
investigation into complaints that JPMorgan traders may have
manipulated electricity prices in California and the Midwest by
some $73 million.
In investigating the complaint, FERC said the JPMorgan unit,
JP Morgan Ventures Energy Corp, "made factual misrepresentations
and omitted material information" in filings to the commission
and statements to California power authorities.
That, alone, was enough to take away the company's right to
trade electricity at so-called market-based rates, FERC said,
because "the Commission grants market-based rate authority to
companies on the presumption that they will not engage in fraud,
deception or misrepresentation."
JPMorgan disagreed with the decision, which drew one
dissenting vote on the commission.
"As the dissenting Commissioner stated, this is a novel use
of FERC's authority over market-based rates and is unsupported
by FERC's own regulations," JPMorgan spokeswoman Jennifer
Zuccarelli said in an emailed statement.
She added that the bank is reviewing FERC's opinion and will
determine its next steps prior to the proposed April 2013
effective date for the market-based authority revocation.
Market-based rates allow power traders like JPMorgan to sell
electricity at whatever prices 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.
The punishment against JP Morgan brought back memories of
the Enron-driven California energy crisis of 2001 for some
"This is the first time I can remember, since Enron, that a
major market player has had its market-based rate authority
removed," said Tyson Slocum, director of the energy program at
Public Citizen, a Washington DC-based consumer advocacy group.
FERC gained expanded powers to tackle market manipulation in
2005 thanks largely to the fallout from Enron's meltdown. It has
since used that power to pursue market manipulation charges
against companies, including BP, Barclays PLC
and Deutsche Bank.
FERC's order against JPMorgan does not find the bank
committed fraud. The bank apologized to FERC in October and said
it had simply made an inadvertent mistake in not providing
certain information to the commission.
Still, Slocum lauded the decision, saying "this is going to
send a clear signal that lying and cheating cannot be tolerated
in electricity markets".
Not all five FERC commissioners were in agreement to reduce
the JPMorgan's ability to trade power.
In a dissent, FERC Commissioner Cheryl LaFleur said
JPMorgan's alleged misrepresentations do not relate to its
conduct in the market, but are instead litigation positions that
pertain to whether it had the obligation to provide documents.
"I believe the statements should be addressed as part of the
ongoing investigation into JPMorgan's b idding activities, either
as separate counts of obstruction, or as aggravating
circumstances that factor into the determination of any civil
penalty," LaFleur said.
The Commission's decision to proceed with the suspension
represents a novel use of its authority over market-based rates,
and is unsupported by its own regulations, she added - words
echoed by JPMorgan in its objection to the punishment.
LaFleur also said the Commission was establishing a new and
potentially dangerous precedent: "An entity can lose its
market-based rate authority for litigation positions it takes
before the Commission or Commission Staff, even if those
positions do not relate to its activity or honesty in the
"JP Morgan may well face the loss of its market-based rate
authority as a consequence of the pending investigation. But if
so, it should be because of its conduct in the market, not
because of a dispute over document production," she concluded.
Since Norman Bay joined FERC as it enforcement chief in June
2009, the agency has accused several big banks of manipulating
power markets, mostly in California.
In late October, the commission demanded British bank
Barclays demonstrate why it should not pay a $435 million civil
penalty, plus $34.9 million to repay ill-gotten gains, for
manipulation of California power markets between 2006 and 2008.
Barclays has said it will vigorously fight the FERC charges,
likely setting the stage for a landmark court battle.
Just a month earlier, FERC staff asked Deutsche Bank to
explain why the commission should not fine the German bank's
trading arm $1.5 million and give up $123,198 in profits for
allegedly manipulating the California power market in 2010.
Deutsche Bank said in a response in November it would fight