The Federal Energy Regulatory Commission unveiled charges against JPMorgan Chase on Monday, accusing the bank of charging California and Midwest electricity grids more than 80 times prevailing power prices through “manipulative bidding strategies.”
FERC said that a JPMorgan subsidiary, J.P. Morgan Ventures Energy Corp., engaged in eight manipulative techniques to take advantage of power market rules to “obtain payments at above-market rates” between September 2010 and June 2011.
JPMorgan did not comment, but a source familiar with negotiations said that a $400 million settlement is imminent.
The schemes were tied to the complicated rules for electricity markets, where regional grid operators buy power according to an hourly and daily bidding system. In certain markets, wind power generators bid minus $29 per megawatt hour — actually paying the regional grid — because if they remained idle, they would lose $30 per megawatt hour worth of federal production tax credits.
In California, JPMorgan allegedly bid minus $30 per megawatt hour in the final hours of a day, then would jack up prices for the first hour or two of the next day to $999 per megawatt hour. The going rate at that time, between midnight and 2 a.m., averaged about $12 a megawatt hour.
Because it is hard to quickly ramp up power plants or store electricity, the California Independent System Operator would be stuck paying what FERC called “tens of millions of dollars at rates far above market prices.”
FERC’s notice to JPMorgan also said that the company followed similar strategies with the Midwest Independent System Operator. The bank would submit bids a day ahead for as little as minus $60 a megawatt hour for a four-hour minimum, then charge $1,000 a megawatt hour for a 20-hour minimum on day two. FERC said in its notice that the bank’s assertion that its power generator required a 20-hour minimum run was “false.” The agency said that JPMorgan violated regulations about minimum run times on several occasions at its Kinder Jackson power plant in Michigan.
In June, FERC also ordered JPMorgan to reimburse $52 million to California’s system. The agency also suspended JPMorgan from trading in U.S. electricity markets for six months for giving false information during an investigation of California power markets.
JPMorgan announced last Friday that it would exit the physical commodities trading business, though it will remain in financial commodity trading.
The bank expanded into commodity trading with its acquisitions of Bear Stearns in 2007 and RBS Sempra’s oil and metals business in 2010. In addition to owning three power plants, JPMorgan trades energy on behalf of other power plants and wind farms.