The Federal Energy Regulatory Commission has accused J.P. Morgan Ventures Energy Corp. of misleading regulators and said its authority to sell electricity may be suspended.
FERC issued an order Thursday that directs the unit of New York-based JPMorgan Chase & Co. to show that it didn’t violate FERC regulations and explain why its authorization to sell electric energy and related services at market-based rates should not be suspended.
“That can be more serious than a penalty, that could be more serious than disgorging profits,” said Susan Court, principal at SJC Energy Consultants LLC in Arlington, Va., and a former FERC enforcement director. “That could entail a lot more money than just paying a penalty.”
The order is part of FERC’s effort to increase transparency and eliminate manipulation of the electricity market. The agency is investigating JPMorgan’s power trading in California and the Midwest. That investigation came to light when FERC went to court seeking internal emails from JPMorgan, saying the bids from the company might have resulted in at least $73 million in improper payments to generators.
“JPMorgan made an inadvertent factual error in papers” and informed FERC, Jennifer Zuccarelli, a JPMorgan spokeswoman, said Thursday. “Such an inadvertent error does not justify revoking JPMorgan’s market-based rate authority.”
The FERC allegations are the latest challenge for the bank, which is also the subject of investigations by at least 11 agencies and a U.S. Senate panel related to the disclosure of a multibillion-dollar trading loss at its chief investment office in London. The lender lost $5.8 billion on the trades during the first six months of this year and has said it could lose as much as $7.5 billion while closing out the position.
Last year, the company was one of five mortgage servicers that agreed to spend $25 billion to settle charges they improperly foreclosed on borrowers. Also, the U.S. Treasury Department announced an $88.3 million settlement with JPMorgan for apparent violations of international sanctions programs. The company, through its correspondent banks, maintained prohibited financial transactions with sanctioned entities in countries including Cuba and Iran, according to Treasury.
FERC Chairman Jon Wellinghoff has pledged to expand oversight of the multibillion dollar energy-trading business. In February, the agency created a division within its enforcement office to police the markets where electricity is bought and sold by power generators and utilities.
Thursday’s FERC order stems from requests in 2011 by the California Independent System Operator, a grid operator, for information about JPMorgan’s energy profits. JPMorgan told the operator that the matter should be referred to FERC, even though FERC directed CAISO to get the information from the company.
JPMorgan eventually provided the information, though said it was doing so voluntarily even as FERC told the company it was obliged to comply, according to the order posted on FERC’s website Thursday.
The order “preliminarily finds that JPMorgan may have omitted material information or submitted misleading information” four times in communications with FERC, the California grid operator and that agency’s Department of Market Monitoring, according to FERC.
JPMorgan must respond within 21 days of the order being published in the Federal Register.
Power companies can sell wholesale energy at market-based rates, or cost-based rates, which are usually lower. FERC, which grants the authority to sell electricity at market-based rates, does so assuming that “a company’s behavior will not involve fraud, deception or misrepresentation,” the commission said Thursday in the order.
“Thus, the commission has repeatedly emphasized that companies failing to adhere to the commission’s rules and regulations are subject to suspension or revocation of their market-based rate authority,” according to the order.
“It’s hard to prove market manipulation, but filing a false document that’s material — that’s not so hard to prove,” SJC Energy’s Court said. “Either you did it or you didn’t.”
Wall Street firms have been players in energy trading at least since the late 1990’s, when many states restructured their power markets. In so-called deregulated markets, buyers bid for electricity from power generators. Consumers then purchase the power from their local utility.