Will FERC Administer "Death Penalty" for Market Manipulation? Show Cause Order Requires JP Morgan to Show Why Its Market-Based Trading Authority Should Not Be Revoked

September 28, 2012

In what may become a major test of FERC authority to penalize market manipulation, the agency has ratcheted up the stakes in its ongoing investigation of alleged manipulation of the California ISO market by JP Morgan. In the order issued late September, FERC required JP Morgan to show cause why its market-based rate authority should not be revoked for failure to provide information to the ISO's investigative arm when requested. The revocation of market-based rate authority is considered the "death penalty" for energy traders and, if FERC actually revokes JP Morgan's authority, would mark the first time FERC has used this remedy against a major power marketer since it revoked Enron's market-based rate authority in 2003. And, unlike in Enron's case where the order was largely symbolic because Enron was already bankrupt, imposing the penalty will have severe consequences for JP Morgan, well beyond FERC's usual remedies for market violatins, which include disgorging unjust profits and monetary penalties.

The investigation of JP Morgan stems from the California ISO's March 2011 FERC filing, which noted that unnamed traders had discovered and were exploiting a flaw in the ISO's market rules, and requesting that FERC approve an emergency correct to the ISO's tariff to correct the flaw. As part of its investigation of these allegations of market abuse, FERC this summer filed motions in the U.S. District Court for the District of Columbia seeking to force JP Morgan to turn over a number of emails. Last week's order is the latest attempt by FERC to obtain information from JP Morgan, but this time FERC has significantly increased the stakes for JP Morgan's apparent intransigence.

The alleged JP Morgan manipulation, along with FERC investigations of similar schemes reported in other markets, suggest that unscrupulous traders continue to develop Enron-style trading schemes to exploit flaws and loopholes in organized electricity markets to collect artificial profits. The ISO estimates that the schemes netted approximately $57 million in unjust profits, but other published reports suggest the number may be much higher.