FERC Tuesday approved a stipulation and consent agreement ordering JP Morgan Ventures Energy Corp. (JPMVEC) to pay $410 million in penalties and disgorge profits for allegedly manipulating power markets in California and the Midwest.

The settlement of an investigation that has been ongoing for some time came just days after JPMorgan Chase & Co., parent of (JPMVEC), announced it would be joining some other large marketers in exiting the physical commodities business, disposing of its holdings of commodities assets and its physical trading operations (see Daily GPI, July 29).

Under the stipulation and consent agreement inked with FERC Tuesday, JPMVEC will pay $285 million in penalties and disgorge $125 million of unjust profits, of which $124 million will go to ratepayers in the California Independent System Operator (California ISO), which operates the California electricity market, and $1 million will go to ratepayers in the Midcontinent Independent System Operator (MISO).

The case stems from multiple referrals to the Federal Energy Regulatory Commission from the California ISO and MISO market monitors in 2011 and 2012 regarding the JPMorgan subsidiary’s bidding practices. FERC investigators determined that the JPMorgan subsidiary engaged in 12 manipulative bidding strategies designed to make profits from power plants.

“In each of them, the company made bids designed to create artificial conditions that forced the ISOs to pay JPMorgan [prices] outside the market at premium rates. Further investigators determined that JPMorgan knew that the California and MISO received no benefit from making inflated payments to the company,” the stipulation and consent agreement said (IN 11-8, IN13-5).

Earlier this month, FERC ordered Barclays Bank plc and four of its traders to pay $453 million in civil penalties and disgorge $34.9 million, plus interest, in unjust profits for manipulating electric power prices in California and other western markets between November 2006 and December 2008 (see Daily GPI, July 17).

The crackdown by FERC, the imposition of new rules under the Dodd Frank financial reform legislation, recent threats by the U.S. Federal Reserve Bank and Congress, all are adding increased costs and pressure on commodities market traders.

The Federal Reserve recently put bank marketers on notice, questioning whether they should even be allowed to trade in physical commodity markets, and Congress followed up with a hearing to air its own doubts. The Fed said it is reviewing a landmark 2003 decision that allowed Citigroup’s Phibro unit to trade oil, a move that at the time set a precedent other banks followed (see Daily GPI, July 24).

Announcing its move to get out of the business, JPMorgan said it would “explore a full range of options over time including, but not limited to a sale, spin-off or strategic partnership of its physical commodities business.”

The bank’s gas commodities business in 2012 ranked eighth in a chart derived from FERC 552 data of top marketers by volume of natural gas bought and sold (see Daily GPI, June 4). Goldman Sachs was No. 37, Deutsche Bank was No. 41 and Bank of America was No. 48.

Separately, JP Morgan ranked ninth in NGI‘s Top North American Gas Marketers Rankings, moving 6.21 Bcf/d during 1Q2013 (see Daily GPI, June 10).

Among commodities, natural gas trading is losing interest for speculators, banking or otherwise, as gas prices and volatility continue in the lower ranges. The lack of volatility and the high cost of maintaining the necessary firm storage and transportation was identified as the primary reason Oneok Inc. said in June it was disbanding its energy services unit (see Daily GPI, June 13).

And on Tuesday, the same day the FERC settlement with JPMorgan was announced, Direct Energy Business, the North American subsidiary of Centrica plc, said it had agreed to acquire Hess Corp.’s energy marketing business for $731 million in cash and approximately $300 million in net working capital. Hess is No. 42 among top marketers (see related story).

If banks and smaller marketers like Oneok (No. 20 on the chart of top marketers) move out of the business it “means that the top non-financial natgas marketers will get even bigger, both short- and long-term. They might pick up some of the existing books from the banks today, and there will be fewer deep-pocketed players to absorb growing U.S. natural gas production tomorrow,” said Patrick Rau, NGI director of strategy and research.

“If the larger natural gas marketers were to take more share, I doubt that would cause much of a fuss by regulators in Washington, at least initially. The U.S. natgas industry is pretty fragmented. The top eight marketers in the U.S. had a combined 30% market share by volume in 2012. My guess is that would have to grow to 50% or more before regulators would become concerned,” Rau said.

If others see profits drop and head for the exits, the question is will there be enough buyers.

“If the banks and other companies can’t get out of the physical business entirely, because of their book (contractual obligations), one option for them would be to outsource to established marketing companies or producers to market for them for a fee,” Rau said. “Or, they can sell their books to established companies for less than their books are worth. That discount would add margin on that gas to the established players right there.

“Another option they have is to exit the business gradually, by not entering into any new contracts, and by downsizing their operations as they satisfy existing obligations. I believe this is the approach Williams took when they unwound their book eight to 10 years ago. But when you do this, you run the risk that people jump ship and other firms poach your talent before you can effectively unwind your book. That can make this option a lot easier said than done.”

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