U.S. energy regulators announced a $410 million fine against JP Morgan Chase for rigging electricity markets on Tuesday. It is the second such penalty the Federal Energy Regulatory Commission (FERC) has levied in two weeks. Barclay’s is fighting that previous FERC penalty, but JP Morgan has agreed to pay a civil penalty of $285 million and return $125 million in wrongful profits without either admitting or denying its guilt.
According to FERC, JPM Ventures Energy Corporation used 12 separate trading strategies “designed to create artificial conditions that forced [utilities] to pay JPMVEC outside the market at premium rates.” Markets that are supposed to use competition to drive down prices for consumers were instead being fixed by energy traders working on behalf of one of America’s largest banks.
Regulators around the world have uncovered such perversion of market forces by financial companies in a wide range of markets, including oil, currency exchanges, and hard commodities from precious metals to aluminum.
Such widespread market manipulation has brought increased scrutiny to the finance industry’s influence over markets for goods and services. Sen. Sherrod Brown (D-OH) called a pair of hearings, the first on July 23 and the second scheduled for Tuesday, to examine financial companies’ role in commodity markets. Days after the first hearing, JP Morgan announced it would unravel its commodity operations, including the energy business whose trading behavior lead to the fine announced Tuesday.
Industry deregulation in the 1990s allowed banks to become direct participants in physical commodity markets, rather than just dealing in financial products that are based on commodity prices. Enron, whose former CEO Jeffrey Skilling could be released from prison within five years, is the most notorious example of how an ill-intentioned company can combine the financial and physical sides of commodities trading to extract large profits while hurting consumers. When a witness at last week’s Senate hearing raised the Enron comparison, Sen. Elizabeth Warren (D-MA) noted that “this movie won’t end well.”