Ban JPMorgan from California's electricity trading business

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With banks, the task of oversight becomes even harder because of the numerous regulatory gaps they can exploit. For example, Barclays is accused of having played the physical electricity markets against the financial markets in energy futures from 2006 to 2008 (its trades in the electricity markets were allegedly designed to pump up the value of its financial contracts).

The former is regulated by FERC and the latter by the Commodity Futures Trading Commission; one reason it took the regulators until 2013 to lower the boom on a 7-year-old scheme is that it fell through the cracks between them. And that's not even counting that the banks' overall soundness is overseen by a third regulator, the Federal Reserve.

The biggest problem in California, McCullough says, is that power bidding in the state is done in secret — unlike other states where bids and offers are made in public. That allows for more manipulation and may help explain why wholesale power prices in California tend to be higher than in surrounding states. But FERC also needs to examine whether electricity is too important a commodity to be traded by auction at all.

Morgan's behavior provides a perfect example of the costs of this system. As I've chronicled in the past, the California ISO accused Morgan of having made bogus bids in its electricity auctions so it could pocket undeserved and inflated trading profits.

The ISO estimated its direct losses from Morgan's trading at $83 million, costs shouldered one way or another by California ratepayers. But that could be only the tip of the iceberg, thanks to the price discrepancies Morgan's trading may have introduced into the statewide power market.

Once the ISO brought its complaint about Morgan to FERC, the bank stiff-armed FERC's enforcement staff, withholding financial information and other records the agency sought. A fed-up FERC dropped a nuclear bomb: It suspended Morgan's authority to participate in California's auction-based electricity market for six months, starting April 1.

That's the sort of step that could really hurt Morgan's bottom line, but there's evidence that the bank found a way to evade the penalty. According to documents the ISO filed with FERC in May, a Morgan subsidiary reached agreements with two independent trading firms temporarily ceding to them the California power the bank controlled. Suspiciously, those agreements involved precisely the power rights that the FERC suspension affected, and ran from April 1 to Sept. 30, precisely the period of the suspension.

Morgan, the ISO said, "may be evading the commission's order" by using these contracts to conceal its financial interest and "to obtain profits during the suspension period beyond those contemplated in the commission's suspension order."

McCorkle says Morgan's sale of its trading rights to Edison made that accusation moot, "though we'll be keeping a close eye on bidding behavior."

That's not enough. The incessant accusations of manipulation in California and around the country show that the power markets are rotten and their participants aren't feeling enough heat from regulators. Two steps are necessary: Outlaw the banks' trading and reconsider the move to market trading for this crucial service.

"Turning electricity into another casino commodity has hurt consumers," says Tyson Slocum, an electrical regulation expert at the consumer advocacy group Public Citizen. He's right, and giving cheats free access to the casino floor has only made things worse.

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

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