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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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JPMorgan Sanctioned for Energy Trade Manipulation

It’s not so easy any more to manipulate energy trades. Ask JPMorgan Chase & Co. (JPM: NYSE), which last week became the first ever actively trading company to be sanctioned by the Federal Energy Regulatory Commission (FERC).

The Commission has revoked JPMorgan Ventures Energy Corp’s right to trade power for six months in 2013.

JPMorgan isn’t the only one to be targeted for energy trades manipulating this month: The Commission has also proposed fines for some of the world’s other largest banks, including Barclays Plc (BARC:LSS) and Deutsche Bank AG (DBK:ETR).

Since 2005, and as a direct result of the collapse of Enron Corp. in 2001, FERC has won more personnel and power and is increasingly demonstrating that it means business. They’re going after anyone involved in manipulative or fraudulent activities in the energy market.

What are the fines if you’re caught, for instance, tampering with electric-grid reliability? Up to $1 million a day.

But the collapse of Enron in 2001 was the decisive factor. Enron traders’ energy market manipulation led to rolling blackouts in California in 2000-2001. Enron traders essentially engaged in illegal practices intended to drive up prices that then led to blackouts. FERC says it’s not going to happen again.

The sanctions against JPMorgan derive from the company’s blatant lack of cooperation in a California energy trading manipulation investigation. The company is accused of deliberately producing incorrect documents related to the investigation. JPMorgan insists it was an inadvertent mistake, according to Bloomberg.

In Huntington Beach, California, JPMorgan is using its controlling stake in electric generators to block changes to plants that must be implemented by the state in 2013.

FERC believes the bank was exploiting an unintended flaw in market rules to receive excessive payouts.

Barclays earlier this year had to pay out $453 million in a settlement with US and British regulators for manipulating the London interbank offered rate (Libor). Then in October, FERC proposed a $435 million fine on allegations that the bank manipulated energy prices in California and elsewhere in the west.

Deutsche Bank Energy Trading LLC is about to be slapped with $1.6 million for alleged energy trading misconduct in 2010. 

Now, energy traders are taking things a step further, according to FERC, and playing one market off the other. This is apparently what Barclays is under scrutiny for. To wit, traders are purposely taking losses in physical energy markets in order to make money on financial exchanges.

What do the sanctions mean, exactly, for JPMorgan? Well, as we’ve already mentioned, they are barred from trading for six months next year. This means that JP Morgan Ventures Energy Corp will not have the ability to receive competitive market prices for selling its physical power beginning in April 2013.

Texas was worried because JPMorgan enjoys a major presence in the state’s $34 billion wholesale power market, which is controlled by Electric Reliability Council of Texas (ERCOT_. However, because the sanctions are not targeting ERCOT, JPMorgan’s trading in Texas will not be affected. 

What does it mean for the market? Look to see a further tightening of energy trading regulations, more fines and a new trend for revoking rights.

By Charles Kennedy for Oilprice.com


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