Three days ago I mentioned Barclays was accused of manipulating energy prices and the feds, specifically the Federal Energy Regulatory Commission, claim a $487.9M fine is due from them. The case is heading to court – Barclays to Dispute Electricity-Manipulation Charges.
The Wall Street Journal reports J.P. Morgan is now negotiating a settlement for allegedly playing games with electricity prices.
Time to start paying attention to another banking fiasco.
The article Big Bank Staring at Record Fine Over Energy says the bank began negotiations with FERC with a possible billion dollar fine on the table.
That has been negotiated downward to the range of the bank possibly
..paying hundreds of millions of dollars, [sources] said. The fine, they said, likely will be larger than the record $435 million fine levied by FERC on Tuesday against British bank Barclays…
The article suggests Morgan wants to settle this case to move on to other enforcement cases it is dealing with. Their legal costs are increasing – the article says they added $600 million (yes, over half a billion) to their litigation reserves in Q2. So maybe a $400M or $600M fine wouldn’t be out of the question.
“Make whole” payments
The article explains the alleged manipulation at the end of the article. I’ll quote the play and then describe it.
The filings describe the strategy this way: Traders would submit a relatively low bid to deliver electricity in the “day-ahead” market, ensuring that system operators would schedule their power plant to turn on the following day.
Then the traders would make an offer the next day to deliver electricity from that same plant at a relatively high price, which prevented them from being chosen to provide electricity that day.
While the traders might lose money because they weren’t dispatched to generate power, they would also be eligible for a “make-whole” payment because their power plant unit had been scheduled the day ahead to deliver a substantial amount of electricity. The “make-whole” payment could cover any losses and generate a profit for the firm overall.
So on day 1, you bid for electricity from your plant on day 2 at a below market price. That means you fire up your plant, which would otherwise be idle, to provide the electricity. Part of that deal apparently is that the buyer agrees to make up for any shortfall you have in sales potential from having a plant running if the only thing you do is meet their commitment. Then on day 2, you bid above market, which means you won’t sell any more electricity that day. Thus you meet your commitment on day 2, calculate how much your sales fell short, and send a bill to the buyer from day 1.
At least, I think that the claimed scheme.
This is a couple of orders of magnitude more complex than those three paragraphs suggest because the article says Morgan’s rebuttal to the FERC claims was a document several hundred pages long.
The WSJ provides background on the electricity market, FERC, and their stepped up enforcement effort in FERC Increases Scrutiny of Electricity Market.
Like I said, time to start paying attention.