The California Independent System Operator estimates that JPMorgan Chase… (AFP/Getty Images )
The next time your electricity bill prompts you to curse your local utility, here's another target where you should direct your anger: JPMorgan Chase & Co., which has manipulated the California energy market for its own profit and at a cost to residents and businesses in the state that could be $100 million, $200 million or much more.
That's the accusation leveled by the California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission. The ISO, a nonprofit corporation controlled by the state government, estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.
But that could be just the tip of the iceberg: The bank continued its activities past that time frame, according to the ISO. It also says JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.
The Federal Energy Regulatory Commission, the regulator of the ISO and its trading markets, has started a formal investigation into Morgan's allegedly manipulative energy deals in California and with the Midwest ISO, which covers 11 states from Michigan to Montana.
Forget JPMorgan's well-publicized multibillion-dollar trading loss in derivatives; this trade turned a handsome profit, and it came directly out of electric customers' hides. The toll may not have amounted to much for each of the 37 million men, women and children in California. But collectively it's a massive, illegitimate tax on the entire state.
What's worse, it shows that we haven't learned anything from Enron's bogus energy trading, the disclosure of which helped destroy that firm in 2001 and land several of its executives in jail. To the extent it was designed to exploit loopholes in energy trading rules, experts say, the scheme allegedly perpetrated by JPMorgan Ventures Energy Corp. is cut from the same cloth as Enron's infamous "fat boy" swindle, which cost the state's ratepayers an estimated $1.4 billion in 2000.
"There's nothing really new under the sun," says Robert McCullough, a Portland, Ore., energy expert who reviewed the ISO complaint at my request. "But it's a cost you're paying in your monthly bill."
Asked for a response to the ISO's allegations, a JPMorgan spokeswoman referred me to a court brief the bank filed last week stating that its trading involved no misconduct and pointing out that FERC hasn't found any, to date. FERC says its inquiry is still at an early stage. But given the complexity of the energy market, this may be one of those cases in which the scandal lies not in what's illegal, but in what's legal.
One issue raised by this affair is whether government regulators have adequate tools to enforce trading rules. FERC's investigation could take years, and its maximum penalty is $1 million per day of violation. If the agency hit JPMorgan for even six months of misbehavior, the $180-million bill would be a pittance compared with the $14 billion in revenue collected annually by JPMorgan's investment banking arm, which houses the energy trading.
The incentive remains for outfits like JPMorgan to stretch the rules to the breaking point — if they get caught, the cost is tolerable; if not, the returns are fabulous. This raises again the age-old question: Can Wall Street be trusted? And it suggests an age-old answer: no.
"You set up these rules," says Carl Wood, a former Public Utilities Commissioner who served during the California power crisis of 2000-01, "and you have all these very smart people figuring out how to game them."
Indeed, there are signs that trading scams are rife: FERC in December accused Deutsche Bank of manipulating the California market and in March extracted a $245-million settlement from Baltimore-based Constellation Energy over charges it made manipulative trades in the New York market. (The Deutsche Bank determination is "preliminary" and subject to further investigation.)
These are trades that "don't create jobs or economic value," says Tyson Slocum, director of the energy program at the public advocacy organization Public Citizen.
Hints of JPMorgan's behavior leaked out this month, when FERC went to court to demand unedited versions of emails it had subpoenaed from the bank. News reports generally treated FERC's demand as little more than a PR embarrassment for Morgan.
But the email dispute is a sideshow. The center ring should belong to the underlying allegations of manipulation. These involve an energy trading unit the bank set up in 2005 as part of a plan to make money via short-term trading in a broad range of commodities with rapidly changing prices, including electricity. JPMorgan doesn't actually own any plants providing power to California, but holds contracts with generators allowing it to offer their power in trading markets.