JPMorgan will pay for market manipulation

August 4, 2013 | By Barbara Vergetis Lundin

The Federal Energy Regulatory Commission (FERC) has approved a stipulation and consent agreement under which JPMorgan Ventures Energy Corporation (JPMVEC) will pay $410 million in penalties and disgorgement to ratepayers for allegations of market manipulation stemming from the company's bidding activities in electricity markets in California and the Midwest from September 2010 through November 2012. JPMVEC admits the facts set forth in the agreement, but neither admits nor denies the violations.

The case stems from multiple referrals to FERC from the California ISO and MISO market monitors in 2011 and 2012 regarding JPMVEC's bidding practices, which were the subject of four emergency tariff filings by the California ISO and MISO -- each of which was approved by the Commission. FERC investigators determined that JPMVEC engaged in 12 manipulative bidding strategies designed to make profits from power plants that were usually out of the money in the marketplace. In each of them, the company made bids designed to create artificial conditions that forced the ISOs to pay JPMVEC outside the market at premium rates.

FERC investigators further determined that JPMVEC knew that the California ISO and MISO received no benefit from making inflated payments to the company, thereby defrauding the ISOs by obtaining payments for benefits that the company did not deliver beyond the routine provision of energy. FERC investigators also determined that JPMVEC's bids displaced other generation and altered day ahead and real-time prices from the prices that would have resulted had the company not submitted the bids.

FERC has acted to send the overcharges back to ratepayers.

Under a settlement agreement, JPMVEC will pay a civil penalty of $285 million to the U.S. Treasury and disgorge $125 million in unjust profits. The first $124 million of the disgorged profits will go to ratepayers in the California ISO; the remaining $1 million will go to ratepayers in the MISO region.

The settlement also references JPMorgan waiving all rights to pursue further legal proceedings. This includes a case JPMorgan filed in 2012, challenging the ISO's application of its tariff to mitigate high bids submitted by JPMorgan during times that the power plant units it controlled were needed for reliability purposes. To ensure that suppliers cannot exercise market power under certain conditions, FERC has approved rules requiring that suppliers be paid the market rate, rather than what they bid, when the units are needed for reliability.

The ISO applied those rules and mitigated JPMorgan's bids throughout 2012. The tariff rule worked to mitigate significant excess costs of $227 million in 2012, almost all of which is attributable to JPMorgan units. Those dollars were never paid out to JPMorgan; instead, JPMorgan received the same amount that other generators received for power that was delivered.

The second proceeding where JPMorgan is waiving its right to challenge an ISO action relates to a matter where the ISO had sought FERC's approval to resettle bid cost recovery payments because generators were overpaid due to a misapplication of the market rules. In June of this year, FERC ruled that the ISO could recover $52 million from generators who were overpaid, approximately $35 million of which was paid to JPMorgan. JPMorgan challenged that FERC decision by filing a rehearing request. Under the conditions of the settlement, it will forgo the challenge.

The fact that JPMorgan's conduct was detected, stopped and punished illustrates the effectiveness of ongoing market oversight.

"The California ISO is extremely pleased with the FERC-ordered settlement with JPMorgan. This is a vindication for California ratepayers and for market participants who play by the rules and work to support an effective market," said California ISO General Counsel Nancy Saracino. "Our market safeguards are working. FERC's office of enforcement acted swiftly when we reported the suspicious bidding behaviors, and this historic settlement demonstrates that FERC has delivered on its promise to protect the integrity of wholesale energy markets."

The American Public Power Association (APPA) commends FERC for its recent efforts to address manipulation within wholesale electricity markets operated by RTOs but has continuing concerns that RTO-administered wholesale energy markets are susceptible to such manipulation and abuse, due to their complex rules, opacity, price volatility and limited number of active players.

For more:
- see the Stipulation and Consent Agreement

http://www.fierceenergy.com/story/jpmorgan-will-pay-market-manipulation/2013-08-04