July 19, 2012

Another Head Should Roll at JPMorgan if Investigation Proves It Engaged in Enron-Style Power Market Manipulation

Statement by Tyson Slocum, Director of Public Citizen’s Energy Program

J.P. Morgan Ventures Energy Corporation is under investigation for practices that may have resulted in overcharging consumers $73 million or more on their household utility bills. J.P. Morgan Ventures Energy Corp. operates under the oversight of JPMorgan Chase & Co.’s head of global commodities, Blythe Masters. Best known as the inventor of credit default swaps, which Warren Buffet properly described as “weapons of financial destruction,” Masters should be fired or forced to resign if allegations made by the California Independent System Operator Corporation (CAISO) are true and it is confirmed that she had managerial responsibility. The non-profit CAISO manages the flow of electricity across the high-voltage, long-distance power lines that make up 80 percent of California’s power grid.

There’s no question that our deregulated electricity markets are a mess. The Federal Energy Regulatory Commission (FERC) has abdicated much of its responsibility for overseeing power markets, farming out a great deal of its regulatory power to independent system operators (ISO) and allowing power marketers easy opportunities to game the system and price-gouge families.

I am reminded of the 2001 Enron scandal, when the Texas energy giant’s enormous accounting fraud landed some of its executives in prison but never resulted in anyone taking the fall for stealing billions of dollars from West Coast electricity consumers. J.P. Morgan Ventures Energy Corp. is the company’s energy trading unit, and if these allegations are true, it appears to have conducted itself like an Enron-esque enterprise, unconscionably siphoning off millions of dollars from electricity consumers. 

In September 2011, ISOs in California and the Midwest noticed that certain payments to power sellers for ensuring that energy would be available if needed (bid cost recovery) had more than quadrupled. Bid cost recovery rules allow power marketers to be paid just for making a bid to sell power, even if the bid isn’t accepted, and ISOs authorize these costs to be passed on to consumers. It’s a loophole that CAISO says J.P. Morgan Ventures Energy Corp. took advantage of: making bids at prices it knew would not be accepted so it would be paid for power it did not and never intended to provide. 

In March 2012, CAISO asked FERC for permission to change the rules to avoid these overpayments, alleging that J.P. Morgan Ventures Energy Corp. was the power seller grossly overcharging its customers. If Blythe Masters’ unit is found guilty of the allegations, losing her job won’t be justice enough. FERC should take the additional step of permanently revoking J.P. Morgan Ventures Energy Corp.’s market-based rate authority and send a shockwave across the entire industry that market manipulation will not be tolerated.