FERC Battles Market Manipulation, Suspending JP Morgan's Market-Based Rate Authority and Collecting A Substantial Penalty from Gila River Power

November 20, 2012

To borrow a phrase from the Sacramento Bee's editorial page, the Federal Energy Regulatory Commission has finally grown adult teeth. Over the last few months, FERC has issued a number of decisions aggressively seeking to combat market manipulation in the Western energy markets. Two important decisions were issued last week.

First, at its November 15 meeting, FERC issued an order suspending the market-based rate authority of JP Morgan Ventures Energy Corp., JP Morgan's energy trading subsidiary. As reported in our September 28 post, FERC initially proposed to suspend JP Morgan's market-based rate authority, considered a "death penalty" for energy traders, because JP Morgan refused to cooperate, and provided misleading information, in an investigation of JP Morgan's manipulation of certain rules of the California ISO.

Effective April 1, 2013, JP Morgan's market-based rate authority will be suspended for a period of six months. The delay in implementing the suspension, along with several related measures FERC took to ensure that JP Morgan's delivery obligations will be met, was necessary to ensure that the suspension does not disrupt the Western power markets. Speculation in the trade press suggests that the suspension could cost JP Morgan hundreds of millions of dollars.

In a second order, issued on November 19, FERC adopted a consent agreement requiring Gila River Power, LLC to pay a civil penalty of $2.5 million and to disgorge profits of $911,553 plus interest. The penalty stems from improper scheduling practices adopted by Gila River in an attempt to obtain higher prices for the output of its 2,200 MW power plant, which is located near Phoenix, Arizona. Specifically, in an attempt to get around transmission congestion at the Palo Verde hub, which limited its ability to provide firm service to California customers and therefore reduced the price it could obtain for selling into California, Gila developed two trading strategies, the "Standalone Wheel" and the "Adjustment Wheel," that involve false representations about the nature of the transmission involved.

The strategies were designed so that Gila could claim its power was being delivered to California under a "Wheeling Through" schedule, but the California ISO tariff requires that a "Wheeling Through" schedule can be used only if both the source and the sink of the power are located outside the ISO. Because the sink for the Gila's power deliveries was, in fact, within California, the strategies amount to an intentional misrepresentation of the transaction, resulting in a higher price than would have been obtained if the transmission path had been truthfully represented. Notably, FERC did not suspend Gila's market-based rate authority because, in contrast to JP Morgan, it cooperated fully with FERC's investigation.

These orders, along with recent aggressive actions against Barclays and Deutsche Bank, reported in our November 2 post, send a strong signal that FERC is now aggressively using its authority to combat market manipulation. The Sacramento Bee's assessment that FERC is finally shaking off the reputation for laxity and lassitude it developed in response to rampant market manipulation during the 2000-01 Western energy crisis appears to be correct.

If you have any questions about the FERC orders discussed here, FERC enforcement matters, or other matters related to the utility industry or FERC, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in FERC and BPA matters, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.