One day after being slapped with a record $453 million civil fine for electricity market manipulation, Barclays teed up a showdown with the Federal Energy Regulatory Commission by refusing to pay the fine and vowing to fight it in federal district court.
The move by Barclays on Wednesday poses a test of FERC’s enforcement powers and came amid media reports that JPMorgan Chase might be on the verge of settling similar charges with FERC for half a billion dollars.
A federal court trial over the Barclays fine would be the first such test of powers granted to FERC under the Energy Policy Act of 2005, which expanded the agency’s ability to prohibit and punish market manipulation in the wake of the 2001 Enron scandal that caused an energy crisis in California. The legislation raised maximum penalties from $10,000 a day per violation to $1 million a day per violation.
Since passage of the legislation, the agency’s enforcement staff has grown from about a dozen to more than 200 people, including many experienced prosecutors and regulators. In the past 17 months, FERC has settled energy market manipulation cases with Constellation Energy, Deutsche Bank, Rumford Paper and two other firms.
“This is a very important case and will be closely watched by everybody,” said Susan Court, a former FERC director of enforcement now with SJC Energy Consultants.
Until now, FERC’s cases to punish electricity market manipulation have been settled or litigated in the agency’s own administrative courts.
A case over manipulation of natural gas markets by Brian Hunter, a trader who brought down a trading firm called Amaranth Advisors, went from a FERC administrative court straight to the U.S. Court of Appeals for the District of Columbia, which ruled that FERC had overstepped its regulatory boundaries and that jurisdiction over derivatives trading belonged to the Commodity Futures Trading Commission.
A common thread in most of the cases is FERC’s assertion that financial firms are making trades in one market in order to move prices in different but related markets in which they make more money due to greater leverage or larger positions. Many financial firms argue that this is part of savvy trading, while FERC says it is deceptive and manipulative.
In the Barclays case, FERC has accused the British bank of taking losing positions in fixed-price electricity sales for the sole purpose of influencing indexed prices so that the firm could profit from financial swap transactions that paid greater sums. FERC said that four Barclays traders carried out the transactions in western U.S. electricity markets from November 2006 to December 2008. The agency said they did so “not in an attempt to profit from the relationship between the market fundamentals of supply and demand, but instead for the fraudulent purpose of moving” prices so that Barclays could profit from other financial transactions.
The agency said that Barclays should pay an additional $34.9 million plus interest on the unjust profits it made on the transactions to Low Income Home Energy Assistance Programs of Arizona, California, Oregon and Washington.
FERC also said that “communications among the traders not only describe and substantiate the scheme, but also demonstrate the affirmative, coordinated, concerted, and intentional effort” by Barclays to carry it out.
Barclays replied Wednesday that “we believe the penalty assessed by the FERC is without basis, and we strongly disagree with the allegations made by FERC against Barclays and its former traders.” In a statement, the firm added that “we believe that our trading was legitimate and in compliance with applicable law.”
By refusing to pay the penalties, Barclays sidesteps FERC’s administrative court and forces the agency to go to federal court to enforce the fine. There, a judge will conduct a trial and weigh the merits of FERC’s approach of linking actions in two separate markets and targeting transactions that serve only financial ends.
“The FERC will have the burden of proving its allegations and we will be able to present a balanced and full presentation of the facts,” Barclays said.
The agency’s case against
JPMorgan Chase remains unclear, but the New York-based bank said Feb. 28 in its annual report that FERC was “investigating the Firm’s bidding practices in certain organized power markets.” In similar cases, FERC has accused financial firms of submitting artificially high or artificially low bids for electric-power deliveries and then profiting more when those bids move the prices of related financial instruments or derivatives.
JPMorgan said that FERC had issued an order suspending a JPMorgan Chase energy subsidiary from certain transactions for six months commencing April 1 because FERC believed the bank gave it “misleading information” during the discovery process of its investigation.
The Wall Street Journal and the New York Times reported Wednesday that FERC and JPMorgan were near a settlement.