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FERC, JP Morgan Unit Agree to $410 Million in Penalties, Disgorgement to Ratepayers The Federal Energy Regulatory Commission (FERC) said today that it approved a stipulation and consent agreement under which JP Morgan Ventures Energy Corporation (JPMVEC) will pay $410 million in penalties and disgorgement to ratepayers for allegations of market manipulation stemming from the company’s bidding activities in electricity markets in California and the Midwest from September 2010 through November 2012.
The FERC investigation leading to the settlement has been cited by market observers as one the reasons prompting JPMorgan Chase & Co. to pursue strategic alternatives for the physical commodities business (see related story today)
Under the agreement, JPMVEC will pay a civil penalty of $285 million to the U.S. Treasury and disgorge $125 million in unjust profits. The first $124 million of the disgorged profits will go to ratepayers in the California Independent System Operator (California ISO), which operates the California electricity market. The other $1 million will go to ratepayers in the Midcontinent Independent System Operator (MISO).
According to a FERC news release, "JPMVEC admits the facts set forth in the agreement, but neither admits nor denies the violations. The company did, however, agree to waive claims for additional payments from the California ISO relating to two of the strategies under investigation. JPMVEC also will conduct a comprehensive assessment by outside counsel of its policies and practices in the power business."
The case stems from multiple referrals to FERC from the California ISO and MISO market monitors in 2011 and 2012 regarding JPMVEC’s bidding practices. These practices were the subject of four emergency tariff filings by the California ISO and MISO, each of which was approved by the Commission.
According to a FERC news release, "FERC investigators determined that JPMVEC engaged in 12 manipulative bidding strategies designed to make profits from power plants that were usually out of the money in the marketplace. In each of them, the company made bids designed to create artificial conditions that forced the ISOs to pay JPMVEC outside the market at premium rates."
According to a FERC news release, "FERC investigators further determined that JPMVEC knew that the California ISO and MISO received no benefit from making inflated payments to the company, thereby defrauding the ISOs by obtaining payments for benefits that the company did not deliver beyond the routine provision of energy. FERC investigators also determined that JPMVEC’s bids displaced other generation and altered day ahead and real-time prices from the prices that would have resulted had the company not submitted the bids."
Yesterday, FERC had issued its first formal notice that, "staff of the Office of Enforcement of the Federal Energy Regulatory Commission has preliminarily determined that JP Morgan Ventures Energy Corporation (JPMVEC) violated the Commission's Prohibition of Electric Energy Market Manipulation, 18 C.F.R. § 1c.2 (2012) by engaging in eight manipulative bidding strategies," which described in more detail the specific allegations.
According to the FERC notice:
"Staff alleges that between September 2010 and June 2011, JPMVEC engaged in five manipulative bidding strategies designed to improperly obtain payments at above-market rates from the California Independent System Operator (CAISO):
• "submission of Day Ahead energy bids of -$30/MWh (the bid floor) that falsely appeared economic to the CAISO system, but in fact led to payments to JPMVEC of tens of millions of dollars at rates far above market prices when JPMVEC's bidding strategy was fully implemented.
• "submission of energy self-schedules every third hour to obtain large Day Ahead awards, combined with submission of high-priced energy bids in the intervening hours, to lead the CAISO system to pay JPMVEC at its high bid prices for ramping energy in the latter hours.
• "self-scheduling the ancillary service Regulation Down while also submitting high-priced energy bids for the same hours, leading the CAISO system to pay JPMVEC millions of dollars at above-market rates for the energy needed to support the Regulation Down self-schedule.
• "bidding at -$30/MWh in the final hours of Day 1, which led to large Day Ahead awards in those hours, and then bidding at $999/MWh for the opening hours of Day 2, which led the CAISO system to pay JPMVEC millions of dollars for ramping energy at $999/MWh between midnight and 2 a.m. Market prices averaged around $12/MWh during these hours of low demand.
• "obtaining Day Ahead awards for ancillary services, while making energy bids that made it impossible to fulfill those awards, leading the CAISO system to pay JPMVEC its bid price of $999/MWh to exceptionally dispatch JPMVEC's plants."
According to the FERC notice, "Staff alleges that between October 2010 and May 2011, JPMVEC engaged in three manipulative strategies aimed at improperly obtaining excessive payments from the Midwest Independent System Operator (MISO):
• "making Day Ahead bids of -$50/MWh or -$60/MWh in the hours before midnight on Day 1, with a Minimum Run Time of four hours, to obtain a Day Ahead award in the final hours of Day 1, followed by $1,000/MWh energy bids and a (false) 20-hour Minimum Run Time on Day 2, leading the MISO system to pay JPMVEC $1,000/MWh for 14 hours on Day 2;
• "submission of low bids (around $10/MWh) in odd-numbered hours and high bids (up to $178/MWh) in even-numbered hours, leading the MISO system to pay JPMVEC for ramping energy at above-market prices in the latter hours; and
• "submission of -$15/MWh Day Ahead bids to get Day Ahead awards, followed by Real Time bids aimed at buying back those awards, to obtain unnecessary Day Ahead Market Assurance Payments from MISO."
"Staff further alleges that JPMVEC violated Section 39.2.5.c of the MISO tariff by increasing the Minimum Run Time of the Kinder Jackson unit from the plant's actual Minimum Run Time of four hours to 20 hours on multiple trade dates in October and November 2010," FERC's notice states
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