J.P. Morgan Settles Electricity-Market Case

July 30, 2013
The Wall Street Journal
Ryan Tracy

Bank to Pay $410 Million Over Allegations of Manipulating Prices

J.P. Morgan Chase on Tuesday agreed to pay $410 million to settle accusations its Houston-based electricity trading desk squeezed $125 million in unjust profits out of California and Midwest markets over a two-year period.

The settlement, announced in an enforcement order from the Federal Energy Regulatory Commission, is the agency's largest settlement since it received new powers in the wake of the Enron Corp. fiasco.

The nation's largest bank by assets didn't admit any wrongdoing as part of the settlement, which comes as J.P. Morgan retreats from the business of owning physical commodities like electricity.

"J.P. Morgan Ventures Energy is pleased to have reached an agreement with FERC to put this matter behind it," the company said in a statement referring to its subsidiary involved in electricity trading. It said the penalties wouldn't have a material impact on earnings "due to reserves previously set aside."

The commission, known as FERC, described 12 allegedly manipulative trading schemes in settlement documents, providing the first detailed account of J.P. Morgan's alleged manipulation of U.S. electricity markets since the probe was first disclosed the summer of 2012.

FERC said the trading desk, using power-marketing rights acquired with the bank's 2008 acquisition of Bear Stearns & Co., developed a plan in 2010 to turn money-losing power plants into profitable assets. One internal scenario estimated the trading strategies might yield a net profit of $1.5 billion to $2 billion by 2018.

The traders allegedly gamed a complex web of rules that help set the cost of electricity in California and the Midwest. Regulators alleged the bank continued to come up with inventive and illicit ways to extract money from the California market more than a year after it had been notified it was under investigation. On at least five occasions, electricity-system operators concerned by J.P. Morgan's trading scrambled to rewrite their rules.

Many of the strategies focused on maximizing so-called make-whole payments, which are designed to compensate power providers if the market fails to do so properly—for example, if the system operator commits to buy electricity at $50 per megawatt-hour, but the actual market price turns out to be $30. In one such scheme, traders allegedly yielded a profit of $125,000 in one day in September 2010.

Another strategy took advantage of market rules designed to help power plants that can't quickly modulate generating output. With its plant set to operate until midnight on a given day, J.P. Morgan bid $999 per megawatt-hour for the two hours after midnight, even though market prices at the time were about $12, according to the FERC order. The California system operator paid J.P. Morgan the high price because the plant was in "ramp-down" mode from the previous day and the operator was required to do so, FERC said.

Under the terms of the settlement, J.P. Morgan will pay a $285 million fine and surrender the profits.

FERC isn't pursuing individual sanctions against the four J.P. Morgan employees named in the settlement, including commodities chief Blythe Masters. Ms. Masters declined comment through a bank spokesman.

The three other J.P. Morgan employees—Francis Dunleavy, Andrew Kittell and John Bartholomew—are "gratified" the agency didn't bring any charges, penalties or sanctions against them, said their lawyer, William Scherman of Gibson, Dunn & Crutcher LLP. All three, who still work at the bank, told FERC "their conduct was fully lawful and that they would not agree to any settlement that suggested otherwise," Mr. Scherman said in a statement.

FERC's enforcement staff had previously accused the four J.P. Morgan personnel of making false representations under oath, but FERC Chairman Jon Wellinghoff in an interview Tuesday said the agency decided that naming the traders publicly and extracting financial penalties "was sufficient to ensure deterrence going forward."

The penalties and forfeited claims added up to the largest financial penalty FERC has extracted from a participant in electricity markets. Barclays PLC is separately fighting a $435 million fine related to trading in California's electricity market between 2006 and 2008 in a case the company is set to challenge in federal court. FERC says the trades were manipulative, but the British bank says the charges are baseless.

J.P. Morgan last week said it would seek a sale of its commodities business-everything from metals warehouses to trading desks that buy and sell oil, gas, power and coal.

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