JPMorgan case shows why energy trading schemes are chronic problem


We all know what corporate law firms are for, right? To represent their clients’ interest fairly and professionally, of course. To obfuscate, obstruct, delay, misdirect — sometimes that too.

So the saga of JPMorgan Ventures Energy Corp. and a slick little two-step it engaged in with its two law firms to fend off the Federal Energy Regulatory Commission bears exceptional interest, not least because its outcome may hint at a new approach to enforcement by that long-overmatched agency.

To put things in a nutshell, JPMorgan’s electricity trading operation was accused of bid-rigging by the California Independent System Operator, which manages much of the state’s wholesale power market through regular auctions. We explained in an earlier column how the alleged scheme in 2010 and 2011 may have cost California ratepayers as much as $200 million.


FERC duly launched an investigation of JPMorgan’s trading, which will take months at least and could cost the firm a maximum of $1 million for every day it’s found to have violated trading rules. Given that revenue of $14 billion a year flows into the JPMorgan division that houses the energy trading unit, that fine wouldn’t count for much more than a rounding error.

That may be why manipulation seems to be a chronic disease of the California wholesale electricity market — and of those in other regions. For example, FERC has accused Deutsche Bank’s energy trading arm of bogus bidding in the California market and threatened it with a $1.5-million penalty. Deutsche Bank has until Oct. 19 to respond to the allegations.

JPMorgan, which doesn’t own a power plant in California but has trading rights to the output of 10 Southern California generating stations, keeps FERC and the California ISO on their toes all by itself. In 2011, days after ISO closed the original loophole it says Morgan exploited, the firm found another one, according to ISO filings. That chicanery cost ratepayers $5.3 million over just five days, ISO said.

Just last month, JPMorgan was alleged to have exploited yet two more loopholes in the trading rules, which may have garnered the firm nearly $10 million in possibly excessive payments. The California ISO is currently withholding $3.7 million from the firm, apparently to cover its losses. FERC hasn’t launched an investigation of that trading, and Morgan has said it has done nothing wrong.

This month FERC opened a new front in this battle. The commission charged that JPMorgan, with the assistance of its lawyers, gave it the runaround when it asked for financial information in connection with its investigation. According to FERC public documents, JPMorgan dodged the request for months and then provided misleading and incomplete information.

How ticked off is FERC? It’s proposing not to fine JPMorgan over the information exchanges, but to suspend its right to participate in the California auction. To an electricity trading firm, that’s a nuclear attack. The last electricity wholesaler that got its trading rights revoked was Enron — after it went bankrupt.

If FERC follows through, JPMorgan would still be allowed to sell electricity in California, but would be allowed only to collect its costs plus a nominal profit. That’s likely to be a fraction of what it could make by bidding in the open auction, and it could drive JPMorgan out of the market.


“When a company is faced with significant sanctions, not just a financial slap on the wrist, it’s going to take it seriously,” says Tyson Slocum, director of the energy program at the Washington public interest group Public Citizen. “No longer is a violation just a calculated risk, and a cost of doing business if they get caught.”

JPMorgan will have until mid-October to respond to FERC’s show-cause order, which asks why the firm’s bidding rights shouldn’t be suspended. So let’s take a closer look at its alleged subterfuge.

The case began May 4, 2011, when the California ISO, as part of the investigation into the bidding allegations, asked JPMorgan for trading and other financial data related to its trading in the California wholesale market. Morgan was to comply by May 18. On deadline day, Morgan’s lawyers wrote back, telling ISO in essence to stuff it. They pointed to a regulation stating that once ISO referred its accusations against Morgan to FERC, ISO lost its right to demand any data from Morgan. The lawyers repeated that position in two letters in June.

JPMorgan did provide ISO with some of the data it requested, but waited until as long as 162 days after the deadline. (It said it was doing so “voluntarily.”) In February, the fed-up ISO fined Morgan $486,000 for the delay.

JPMorgan then filed its own complaint with FERC, stating in essence that it was being harassed by ISO. It noted that the rule clearly states that once a matter is in FERC’s hands, ISO “shall not undertake any investigative steps,” which include issuing demands for information. Morgan asked FERC to overrule the “unreasonable” $486,000 penalty.

Here’s the punch line. Morgan flagrantly misrepresented the rule, which says, in its totality, that ISO can’t “undertake any investigative steps except at the express direction of FERC.”

Moreover, FERC indeed had given ISO that “express direction.” The commission had notified JPMorgan in writing that it had done so, via two separate emails to JPMorgan’s lawyers at the Washington firm of Sutherland, Asbill & Brennan. And Sutherland had acknowledged receiving them, also in writing.


All this was laid out in a filing by FERC’s enforcement staff June 19. The staff accused JPMorgan of misleading the commission about the “express direction” rule, and called the firm’s claim that it never knew ISO was acting at FERC’s direction a lie.

Within days after the staff blew the whistle, JPMorgan fessed up. It admitted that there was “a factual error” in its original complaint and swore that it hadn’t intended to mislead FERC. It explained that the attorneys at Sutherland had forgotten all about the emails they’d received from the commission in 2011, so they hadn’t mentioned them to attorneys at Skadden, Arps, Slate, Meagher & Flom, who had drafted JPMorgan’s complaint to FERC.

Morgan also pledged to withdraw its complaint posthaste. “We hope this … shows that we acted in good faith at all times with no intent to mislead anyone,” the Skadden Arps lawyers told the commission, as if to plead no harm, no foul.

But think about this. FERC informed JPMorgan at least twice in the summer of 2011 (via its lawyers) that ISO’s questions should be treated as though they came from FERC. Morgan ignored the directives at the time, and a year later blamed the whole thing on the lawyers, who obligingly pleaded to have forgotten all about legal instructions delivered to a client by that client’s federal regulator.

In response to my request for a comment, JPMorgan emailed: “We made an inadvertent factual error in papers related to discovery and promptly informed the Commission of this mistake. Such an inadvertent error does not justify revoking J.P. Morgan’s market based rate authority.”

“Inadvertent?” Inadvertence is when a meteor destroys your house. Your lawyer ignoring communications from a regulator? That sounds more like inadvertence by design. Is there any wonder that FERC Chairman Jon Wellinghoff doesn’t buy this story?


“The excuse that, ‘Oh, we made a mistake’ doesn’t work for me,” Wellinghoff told me last week. “‘The dog ate my homework’ doesn’t work for me. ‘My attorney made a mistake’ doesn’t work for me.”

That brings us to the issue of how to deal with endemic market manipulation in California and other electricity markets. One remedy would be to shut down the loophole-ridden auction process and return to the traditional utility model, which means paying power producers their costs plus a regulated profit.

ISO and FERC both say that’s no option. ISO spokeswoman Stephanie McCorkle says wholesale costs in the ISO market have come down 10% over the last year to the lowest level since 1999 (though she acknowledges that a steep drop in natural gas prices may have something to do with that). Wellinghoff also says market-based rates have been a boon for consumers.

“There’s no going back,” he says, “because the benefits far outweigh the costs of minor manipulations.”

Others say that even if one accepts that auctions are the best way to set wholesale rates, California’s system of allowing bidding to take place in secret is a failure.

“Everything should be totally public, with none of the intense secrecy in California, and the track record is not all that good,” says Robert McCullough, a Portland, Ore.-based energy consultant. He says the secrecy of bidding in California has made this state’s power prices consistently higher than in states that require public bids, like his own.


Wellinghoff maintains that FERC’s ability to enforce the rules is improving all the time — in 2005 it won new authority from Congress to chase down manipulation and got the penalties raised to $1 million a day from a paltry $10,000. The agency has expanded its analytical staff, which monitors trading anomalies.

“When we find manipulation,” he promises, “we will impose penalties that are so severe, people will think twice about doing it again.”

But in this cat-and-mouse game, it’s hard to escape the impression that the rich and clever mice just have too many ways to outsmart the cats. That’s especially so given that tens of millions of dollars can be won by squeezing through a single loophole before anyone notices.

“This JPMorgan case is reassurance for the consumer that there is someone on the beat,” McCullough says. But enforcement is complicated and spotty. “If I was going to start a life of crime today,” he says, “I’d start it in the energy business.”

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at, read past columns at, check out and follow @latimeshiltzik on Twitter.