J.P. Morgan Chase & Co. (JPM) agreed Tuesday to pay $410 million to
U.S. energy regulators to settle accusations that its traders
manipulated electricity markets in California and the Midwest.
The nation's largest bank by assets didn't admit any
wrongdoing as part of the settlement, which ranks among the largest
enforcement settlements by the Federal Energy Regulatory Commission.
J.P. Morgan will pay a $285 million penalty to the commission,
known as FERC, and give back $125 million in profits. The bank will
also relinquish roughly $200 million in claims against the California
electric grid operator, according to people familiar with the matter.
The outlines of the settlement, which involves the firm's J.P. Morgan
Ventures Energy Corp. unit, were reported by The Wall Street Journal
last week.
"J.P. Morgan Ventures Energy is pleased to have reached an
agreement with FERC to put this matter behind it," the company said in a
statement. A spokesman said the penalties paid will not have a material
impact on earnings "due to reserves previously set aside."
The settlement relieves the company of a legal headache as it
retreats from the physical ownership of commodities around the U.S. On
Friday, the New York bank announced that it would seek a sale of its
commodities business - everything from metals warehouses to trading
desks that buy and sell oil, gas, power and coal. The FERC case involved
J.P. Morgan's ownership of rights to provide electricity in certain
markets of the U.S., which the bank is also looking to sell.
J.P. Morgan's involvement in the physical world of commodities
represents a small piece of the bank's overall business, contributing
roughly 1% to J.P. Morgan's revenue through the first half of the year.
But its involvement in these pursuits is turning into a distraction as
the Federal Reserve and some members of Congress question whether banks
should be profiting from their ownership of such assets and warn of
pitfalls arising from allowing giant institutions to play so many
different roles in a market.
FERC enforcement staff notified the bank in March that it
concluded the bank engaged in electricity-bidding behavior that resulted
in overpayments in California and the Midwest, while alleging employees
had made false representations under oath. The bank disputed the
allegations in a lengthy response to FERC, said people familiar with the
situation, but momentum for a settlement increased in recent weeks as
bank officials sought to put the matter behind them.
Even with the FERC episode resolved, J.P. Morgan still faces
heightened regulatory scrutiny on other fronts. Federal bank examiners
are preparing to slap the bank for weaknesses in its consumer collection
practices, and other agencies are still looking into the circumstances
surrounding a series of bad trading bets that cost the company more than
$6 billion last year.
For FERC, the penalties and forfeited claims added up to one
of its largest settlements reached with a participant in electricity
markets. The low-profile federal agency that watches over electricity
transmission lines beefed up its enforcement division after the Enron
Corp. fiasco and has lately been pursuing big-ticket fines against Wall
Street banks.
Barclays PLC is separately fighting a $435 million FERC fine
related to trading in California's electricity market between 2006 and
2008 in a case the company is set to challenge in federal court. FERC
says the trades were manipulative, but the British bank says the charges
are baseless.
The previous record settlement agreed to by FERC and an
outside party was a $245 million agreement with Constellation Energy
Commodities Group in 2012.
The J.P. Morgan allegations date to 2011 when the California
Independent System Operator, which oversees the daily trading that sets
wholesale electricity prices in the state, saw bidding strategies it
believed allowed J.P. Morgan's energy trading unit to extract excessive
prices from the market.
FERC said Tuesday that J.P. Morgan traders engaged a series of
"manipulative bidding strategies" between September 2010 and November
2012 that were designed to make money off of otherwise unprofitable
power plants. The company's strategies "were intended to, and in almost
all cases did, lead [electricity-system operators] to pay [the bank] at
rates far above market prices," FERC said in an order laying out the
settlement.
On five separate occasions, the California and Midwestern
system operators asked FERC for emergency changes to their market rules
so that they could stop the bidding strategies from continuing.