NEW YORK (Reuters) - 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 manipulation.
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 punishment.
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 consumer advocates.
“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 bidding 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 market.”
“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 the allegations.
Editing by Muralikumar Anantharaman