So much for the new, "tougher" Federal Energy Regulatory Commission.
FERC, as the agency is known, is in the process of negotiating a settlement with JPMorgan Chase & Co., the huge New York bank that has been accused of serial frauds against California electricity customers and the state's electric distribution system.
The reported size of the settlement price could be as high as $500 million, which would be a record penalty in a FERC proceeding.
That certainly sounds like a big number. But here's the number that measures the deterrent effect the settlement likely would have on JPMorgan's inclination and ability to stage similar schemes again and again: zero.
That's true for two reasons. First, it's unlikely that the settlement would cost any high-ranked Morgan executive any money, much less his or her job. (The most often-mentioned individual is Blythe Masters, who essentially created Morgan's commodity business.) Second, there's no sign that FERC is inclined to bar Morgan permanently from the electricity trading business. That's a costly sentence that could really make the bank reconsider its past misbehavior.
No matter the size of the fine the regulators impose, these players will always find a way to outsmart the watchdogs. "The more complicated the market, the more opaque it is," Robert McCullough, an energy consultant who follows the trading markets from Portland, Ore., told me. "We're going to learn what yesterday's manipulation is, but we're never going to get ahead of it."
In fact, there's evidence that Morgan actually evaded a stiff penalty FERC imposed for its earlier shenanigans by concocting yet another shady scheme. More on that in a moment.
Morgan's behavior may not be menacing Californians' pocketbooks at the moment; in May it sold to Southern California Edison its rights to control and trade the output of 12 California power generating units, removing a headache its presence in the market had caused for state regulators. But its past trading has already roiled state power sales. And nothing says Morgan couldn't reenter the California market any time it wishes. Morgan wouldn't comment on any aspects of its adventures in the California electric power market.
In any case, the settlement negotiations dodge the most important question about the business model of Morgan and other banks: Why are they allowed in the commodity markets in the first place?
That question was the subject of a hearing Tuesday before the Senate Banking Committee, which delved into the drawbacks of allowing big commercial banks into the electricity, metals and oil trading businesses. The upshot, observed Sen. Sherrod Brown (D-Ohio), has been "a host of anticompetitive activities."
The banks contend that they perform a service for clients and the economy as a whole by making the trading markets more liquid, reducing costs for the commodities' buyers and sellers alike.
But Saule T. Omarova, a regulatory expert at the University of North Carolina law school, pointed out that the potential for conflicts of interest, market manipulation and bank profiteering might outweigh those benefits.
"There's no particular benefit to the economy in having JPMorgan play the role that Enron played," Omarova told me.
Indeed, a spokeswoman for the California Independent System Operator, a quasi-state agency that oversees much of California's electrical distribution grid and filed the initial complaints about Morgan's scheme, essentially told me that the ISO regards electricity-trading banks as pests.
"The banks have introduced a new culture in the market, not consistent with the kind of trading we've seen with energy companies," says the spokeswoman, Stephanie McCorkle.
Let's not overlook that the activities Morgan was accused of are crimes: market manipulation, fraud and lying to government officials. If JPMorgan were just an average mook on the street, by now it would have been consigned for life to San Quentin under the state's three-strikes law. But its color is green and its collar is white, and as a result it continues to skate. No criminal charges against the bank, its traders or its executives are on the table, and that's improper.
The $500-million penalty wouldn't rank as a big hit in terms of the bank's wealth. It comes to about 2.35% of Morgan's $21.3-billion profit last year. If the sum were to come directly out of its shareholders' hides, it would cut their annual $1.20 dividend per share less than three cents.
A Morgan settlement with FERC would come on the heels of several other eye-catching actions by the agency, which has been playing itself up as a serious sheriff over the electricity markets. Earlier this month, the agency slapped a $470-million penalty on Barclays Bank for market manipulation in California. Barclays says it will fight the case in court.
What's worst about enforcement by cashier's check is that it allows FERC to evade the real lesson taught by these endlessly repeated shenanigans in the energy markets — the markets are too complex, and the potential profits from wrongdoing are too high, for government regulators to supervise properly.