JPMorgan case shows why energy trading schemes are chronic problem

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But think about this. FERC informed JPMorgan at least twice in the summer of 2011 (via its lawyers) that ISO's questions should be treated as though they came from FERC. Morgan ignored the directives at the time, and a year later blamed the whole thing on the lawyers, who obligingly pleaded to have forgotten all about legal instructions delivered to a client by that client's federal regulator.

In response to my request for a comment, JPMorgan emailed: "We made an inadvertent factual error in papers related to discovery and promptly informed the Commission of this mistake.  Such an inadvertent error does not justify revoking J.P. Morgan's market based rate authority."

"Inadvertent?" Inadvertence is when a meteor destroys your house. Your lawyer ignoring communications from a regulator? That sounds more like inadvertence by design. Is there any wonder that FERC Chairman Jon Wellinghoff doesn't buy this story?

"The excuse that, 'Oh, we made a mistake' doesn't work for me," Wellinghoff told me last week. "'The dog ate my homework' doesn't work for me. 'My attorney made a mistake' doesn't work for me."

That brings us to the issue of how to deal with endemic market manipulation in California and other electricity markets. One remedy would be to shut down the loophole-ridden auction process and return to the traditional utility model, which means paying power producers their costs plus a regulated profit.

ISO and FERC both say that's no option. ISO spokeswoman Stephanie McCorkle says wholesale costs in the ISO market have come down 10% over the last year to the lowest level since 1999 (though she acknowledges that a steep drop in natural gas prices may have something to do with that). Wellinghoff also says market-based rates have been a boon for consumers.

"There's no going back," he says, "because the benefits far outweigh the costs of minor manipulations."

Others say that even if one accepts that auctions are the best way to set wholesale rates, California's system of allowing bidding to take place in secret is a failure.

"Everything should be totally public, with none of the intense secrecy in California, and the track record is not all that good," says Robert McCullough, a Portland, Ore.-based energy consultant. He says the secrecy of bidding in California has made this state's power prices consistently higher than in states that require public bids, like his own.

Wellinghoff maintains that FERC's ability to enforce the rules is improving all the time — in 2005 it won new authority from Congress to chase down manipulation and got the penalties raised to $1 million a day from a paltry $10,000. The agency has expanded its analytical staff, which monitors trading anomalies.

"When we find manipulation," he promises, "we will impose penalties that are so severe, people will think twice about doing it again."

But in this cat-and-mouse game, it's hard to escape the impression that the rich and clever mice just have too many ways to outsmart the cats. That's especially so given that tens of millions of dollars can be won by squeezing through a single loophole before anyone notices.

"This JPMorgan case is reassurance for the consumer that there is someone on the beat," McCullough says. But enforcement is complicated and spotty. "If I was going to start a life of crime today," he says, "I'd start it in the energy business."

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at, read past columns at, check out and follow @latimeshiltzik on Twitter.

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