JPMorgan Chase & Co. (JPM) will pay $410 million to settle U.S. Federal Energy Regulatory Commission allegations that the bank manipulated power markets in California and the Midwest from 2010 to 2012.
The bank agreed to pay a U.S. civil penalty of $285 million and return $125 million in ill-gotten profits to electricity ratepayers, according to a FERC statement today. The agency, which had been investigating the bank's energy-trading practices for more than a year, announced the violations yesterday.
The company's market manipulation led to overpayment of "tens of millions of dollars at rates far above market prices" in California, according to a staff Notice of Alleged Violations posted yesterday on the agency's website.
Of the $410 million, $124 million will go to the California electric-grid operator and $1 million will go to an operator in the Midwest, according to the agency. The bank neither admitted nor denied wrongdoing, the FERC said in an e-mailed statement.
"We're pleased to have this matter behind us," Brian Marchiony, a spokesman for JPMorgan, said today in a statement.
The case marks another setback for JPMorgan, which sailed through the 2008 financial crisis without a single quarterly loss. Last year JPMorgan lost more than $6.2 billion from wrong-way derivatives bets placed by traders in London. The incident prompted a U.S. Senate investigation, the departure of two senior executives and a debate over whether Chief Executive Officer Jamie Dimon, 57, should keep his chairman role. In May shareholders re-elected him as chairman.
JPMorgan said July 26 it was considering the sale or spin off of its physical commodities business, including energy trading, three days after a congressional hearing examined whether banks are using their ownership of raw materials to manipulate markets.
"JPMorgan picked the pockets of California households and businesses, and their manipulation increased the electric bills that people pay," said Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer advocacy group.
Commodities chief Blythe Masters oversees the unit, J.P. Morgan Ventures Energy Corp. The wholly owned subsidiary trades and holds physical commodities, including agricultural products, metals and energy, as well as derivatives. Neither Masters nor any traders were penalized by the FERC.
The FERC in November revoked the unit's right to trade power for six months after accusing the firm of providing misleading information to regulators. The suspension, which took effect in April, marked the first such sanction for an active market participant.
"These schemes are very complex, and it seems that the banks and the manipulators are always 10 steps ahead of the regulators," Slocum said in an interview before FERC announced the settlement. "We need to have a review to determine whether or not these markets are working as advertised."
Investigators focused in part on "make whole" payments that grid operators pay to generators if the sale of electricity doesn't yield enough revenue for the company to recover its startup costs.
The FERC staff said yesterday that the energy-trading unit was involved in market-gaming strategies in California starting in September 2010, leading to overpayment "far above market prices." The company also engaged in gaming strategies in Midwest energy markets, the staff said.
In one scheme, JPMorgan traders made low end-of-day bids to attract large orders from buyers to provide power the next day, the FERC said. In the first two hours the next day, the bank demanded higher rates for making the power available, a maneuver that led the grid operator to pay it millions of dollars for a period in which demand is typically low.
In another strategy, traders offered low rates for providing electricity the next day to lure orders from grid operators, then gamed the bidding system to reap higher payments "far above market prices," the FERC said without elaborating.
FERC Chairman Jon Wellinghoff has stepped up scrutiny of corporations as the agency wields policing powers that were expanded in the wake of Enron Corp.'s 2001 collapse. Since 2011, the FERC has revealed at least 13 probes of energy-market gaming.
The regulator on July 16 ordered Barclays Plc and four of the company's former traders to pay a combined $487.9 million in fines and penalties for engaging in what the agency said was a scheme to manipulate energy markets in the Western U.S. from 2006 and 2008. The bank has vowed to fight the penalties.
Deutsche Bank AG agreed on Jan. 22 to pay $1.6 million to resolve FERC claims that an energy-trading unit manipulated markets in 2010. The Frankfurt-based bank didn't admit or deny wrongdoing.
The agency fined ex-Amaranth Advisors LLC trader Brian Hunter $30 million in 2011, ruling he manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives. A U.S. Court of Appeals ruled in March that FERC lacked the jurisdiction for the fine.
The FERC in March 2012 reached a then-record $245 million settlement with Constellation Energy Group Inc. over alleged energy trading violations in New York. Constellation didn't admit any wrongdoing.
The JPMorgan case differs from those involving Barclays and Deutsche Bank in that it deals only with bidding strategies in electricity markets, according to Susan Court, a former director of FERC's enforcement office. The latter two investigations dealt with traders who allegedly gamed electricity markets to benefit their positions in financial markets.
"FERC enforcement staff is getting more sophisticated in their understanding of these markets," Court, now the principal at SJC Energy Consultants LLC in Arlington, Virginia, said in a phone interview yesterday. The markets are also becoming more complicated, she said.