Barclays Bank plc and a quartet of its traders manipulated the electricity markets in and around California for a two-year period beginning in 2006 and should be assessed an “unprecedented” penalty under the Federal Power Act, according to a filing by FERC staff.

Barclays and the traders “deliberately engaged in uneconomic physical trading to benefit its related financial positions,” the staff of the Federal Energy Regulatory Commission said in its recommendation to the commissioners [Docket No. IN08-8].

In October FERC issued an order directing Barclays to show cause why it should not be assessed a $435 million civil penalty and disgorge $34.9 million. The individual traders were also assessed civil penalties totaling $18 million. Barclays and the traders have denied any wrongdoing. They said they will defend themselves in court.

In responses filed in December, Barclays said FERC staff had not demonstrated “any manipulative pattern, any manipulative intent or any manipulative effect,” and asked the Commission to decline to assess any penalties and terminate the investigation.

“Barclays traded to achieve legitimate business objectives based upon its expectation of market fundamentals,” the company said in its filing. Further, “the Commission repeatedly has found that Barclays had no market power. Barclays therefore had neither the intent nor the ability to move or manipulate the prices of financially-settled day-ahead power transactions as alleged…”

According to the FERC staff filing, the traders developed and implemented a manipulative scheme for 35 monthly products where they would build substantial physical positions opposite to Barclay’s financial positions and then flatten the physical positions through loss-generating next-day fixed-price physical trading. “While losing approximately $4.1 million through its cash trades, Barclays reaped gains of approximately $34.9 million in its financial positions. Barclays’ manipulative trading scheme cost other market participants at least $139.3 million,” FERC staff said.

The civil penalty proposed by FERC “is unprecedented because this is the first case of such size and scope to reach the Order to Show Cause stage since the Commission received its increased penalty authority under the EPAct of 2005,” FERC staff said.

FERC has gone after the trading desks of the large Wall Street banks — Deutsche Bank, Barclays Bank and an affiliate of JPMorgan and Chase (JP Morgan Ventures Energy) — for manipulation of the electricity markets. Last month Deutsche Bank agreed to pay a $1.5 million civil penalty and disgorge $172,645 to settle a FERC proceeding resulting from its trading in California Independent System Operator markets in 2010. Deutsche Bank stipulated to the facts “and neither admits nor denies the violations,” FERC said.

In the natural gas market, the largest civil penalty was assessed against Brian Hunter, former head gas trader at Amaranth, which made a number of wrong-way trades that led to more than $6 billion in gas trading losses and the collapse of the hedge fund in September 2006 (see NGI, Oct. 9, 2006). The $30 million penalty, which is still pending in court, was one of the largest imposed on a gas trader since the passage of EPAct 2005 (see NGI, April 25, 2011).

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