JPMorgan Chase & Co. (JPM:US) apologized yesterday for what it said were inadvertent mistakes by its energy-trading unit as it sought to continue operating a business that reported $2.2 billion in transaction revenue last year.
The largest U.S. bank could have its license to trade electricity suspended by the Federal Energy Regulatory Commission for what JPMorgan says were miscommunications with the Washington-based agency and California’s grid operator during an investigation of energy-market manipulation.
While the energy unit accounted for a small portion of JPMorgan’s $97.2 billion in 2011 revenue (JPM:US), the case adds to regulatory trouble for the New York-based bank. At least 10 federal agencies and a U.S. Senate panel are investigating a multibillion-dollar trading loss at its chief investment office in London.
JPMorgan “regrets and apologizes,” the company said in a filing disclosed yesterday. Suspending trading authorization would be “unjustified reaction to unintentional, good-faith mistakes, misunderstandings and miscommunications.”
At least one former California regulator was unpersuaded by JPMorgan’s contention that it didn’t commit the violation that would lead to a loss of its trading authority.
“I wish I could go and violate the law, and then, when I get caught, I, you know, I could apologize,” said Carl Wood, who was a member of the California Public Utilities Commission when it was responsible for stabilizing California’s utility industry after the 2000-2001 energy crisis.
“The fact is that under the regulations they are required to do certain things, disclose certain information, if they don’t do that, then there has to be consequences,” Wood said in a phone interview yesterday.
The energy unit, J.P. Morgan Ventures Energy Corp., reported $2.2 billion paid by customers in New England, the Midwest and California in 2011, according to FERC filings.
The case focuses on whether JPMorgan’s energy division, a part of the company’s commodities unit run by Blythe Masters, met its obligations to provide documents to the California Independent System Operator Corp., or CAISO, which operates the state’s power grid.
JPMorgan said its energy-trading unit “believed it was discharging its obligation” and didn’t realize that it was required to provide documents to CAISO that it had provided to FERC.
The bank said it believed that under FERC rules it wasn’t obligated to also file documents with the state once the federal investigation had begun. JPMorgan eventually provided the information to California, though said it was doing so voluntarily.
JPMorgan said it had asserted, in seven letters over 10 months, its “voluntariness position” on whether it must provide data to CAISO. “While CAISO briefly contended that compliance with its discovery was not voluntary, it never indicated the reasons why,” JPMorgan said.
JPMorgan hired “multiple experienced lawyers,” produced more than 600,000 pages of information, submitted to 27 depositions and exchanged thousands of e-mails with FERC’s Office of Enforcement in a separate investigation into allegations of manipulating power markets.
While JPMorgan said it regrets the “mistakes that were made” when it withheld information from California, it asked FERC to terminate its action against the company in the matter.
One of the attorneys signing yesterday’s filing is William Scherman, former FERC general counsel and chief of staff now with Skadden Arps Slate Meagher & Flom LLP in Washington.
The FERC ordered JPMorgan on Sept. 20 to show that it didn’t violate agency rules and said it may suspend the company’s authority to sell power and related services at market-based rates. Power companies can sell wholesale energy at market-based rates, or cost-based rates, which are usually lower. FERC grants the authority to sell electricity at market- based rates.
In the order, FERC wrote that it “relies on the openness and honesty of market participant in their communications with the commission.”
“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, in addition to the disgorgement of unjust profits and the assessment of civil penalties,” the FERC said.
“It’s one thing to pay a fine,” Susan Court, a former director of the FERC’s Office of Enforcement, said in a telephone interview yesterday. “It’s another thing to lose your ability to make money in the first instance, and that is a much more serious punishment than a fine.”
Edison International (EIX:US)’s Edison Mission power-generating unit in 2008 agreed to pay $9 million to settle allegations that its employees misled FERC staff investigating bidding practices in mid-Atlantic power markets.
While the FERC has suspended trading licenses in the past for companies that didn’t file quarterly sales reports or updated market-power analyses, those were usually cases of “small traders that were no longer active,” according to Rich Heidorn Jr., an energy analyst with Bloomberg Government.
“The facts in issue here are kind of technical and legal,” Heidorn said in a phone interview. FERC is “using this to get JPMorgan’s attention, because they felt like they were getting jerked around by their lawyers.”
The lender is still recovering from a wrong-way bet on credit derivatives that cost the bank about $6.25 billion through the first nine months of this year, not including what the bank said was a “modest” additional loss in the third quarter.
JPMorgan “mounted a strong defense, but they have packaged it in very polite terms,” Court said. “They just want to keep their authorization to trade power.”
The disclosure issue emerged as the agency was investigating JPMorgan’s power trading in California and the Midwest. That probe came to light when FERC went to court seeking internal e-mails from JPMorgan, saying the bids from the company might have resulted in at least $73 million in improper payments to generators.
Since January 2011, FERC has announced more than 10 probes of alleged manipulation in electricity and natural-gas markets and a record $245 million settlement with Constellation Energy Group Inc.
FERC will take JPMorgan’s filing under review and has no deadline to respond, agency spokesman Craig Cano said yesterday.
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