Within days of announcing its plan to exit the physical commodity business, JPMorgan Chase & Co. (JPM) reached an agreement with the Federal Energy Regulatory Commission (FERC) to resolve the investigation by the agency for alleged manipulation of electricity prices in California and the Midwest region. The company will pay $410 million, without admitting or denying any wrongdoing.
Of the total amount, $285 million is the penalty fee and the remaining $125 million is the improper profit that the company allegedly earned. This improper profit will be returned to the ratepayers of California and the Midwest regions.
JPMorgan has contracts with power generating firms to trade electricity. Most of the power plants were operated by the California Independent System Operator Corporation (CAISO) and the Midwest Independent Transmission System Operator, Inc. (MISO).
The FERC alleged that JPMorgan used 12 improper bidding procedures to extract unwarranted payments from the wholesale energy markets between Sep 2010 and Nov 2012.
Further, as part of the settlement, JPMorgan agreed to waive claims for more payments from CAISO related to 2 strategies under investigation. The company was seeking $227 million as claims.
The aforesaid settlement is the second largest penalty received by the FERC since the $1.5 billion deal Enron Corp. deal in 2001. In Mar 2012, Constellation Energy Group Inc. – subsidiary of Exelon Corporation (EXC) – agreed to pay $245 million for alleged energy trading violations in New York. Moreover, in Jan 2013, Deutsche Bank AG (DB) agreed to pay $1.6 million to resolve the FERC’s charges accusing the former of manipulating California energy markets in 2010.
Furthermore, earlier this month, the FERC ordered Barclays PLC (BCS) to pay $488 million in fines and penalties for the alleged manipulation of energy markets in Western U.S. from 2006 to 2008. However, Barclays has decided to challenge the order.
For JPMorgan, the settlement removes a litigation overhang. Notably, the company is planning to exit the physical commodity business. This step comes amid heightened regulatory and political scrutiny of banks’ ownership in such assets.
Currently, JPMorgan carries a Zacks Rank #2 (Buy).
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