FERC Initiates a Proceeding and Issues Show Cause Order against JP Morgan

On September 20, 2012, the Commission released an order making a preliminary finding that J.P. Morgan Ventures Energy Corporation (“JP Morgan”) may have omitted material information or submitted misleading information in communications with FERC, the California Independent System Operator Corporation (“CAISO”), and CAISO’s Department of Market Monitoring (“DMM”). The Commission directed JP Morgan to (1) show cause why JP Morgan did not violate FERC regulations under the Federal Power Act (“FPA”); and (2) show cause why its authorization to sell electricity, capacity, and ancillary services at market-based rates should not be suspended.

The order concerns JP Morgan’s response to investigations by CAISO and FERC into its bidding behavior in California. In March 2011, CAISO informed JP Morgan that it was referring certain JP Morgan bidding activities in the CAISO market to the Commission’s Office of Enforcement (“OE”). CAISO subsequently sent two data requests to JP Morgan. One data request was sent on May 4, 2011 and required data to be provided by May 18, 2011. Citing CAISO tariff provisions, JP Morgan responded to CAISO’s data requests with letters stating the matter was required to be referred to FERC, and accordingly CAISO and its DMM should stop acting independently from FERC in an investigation.

In June 2011 and again in July 2011, OE staff notified JP Morgan via e-mail that its staff had directed CAISO to continue to seek responses to CAISO’s data requests along with the company’s economic profit and loss statements for generating units under investigation by CAISO. On October 15, 2011, OE sent a letter to JP Morgan asking for certain materials that had still not been received. JP Morgan responded with a letter on October 18 stating the CAISO tariff still required CAISO to refer market violation concerns to OE unless FERC expressly directed CAISO to investigate a matter. The letter to OE also included materials that JP Morgan characterized as a “voluntary” submission to the May 4 data request.

CAISO informed JP Morgan that its October 18 answer to the May 4 data request came 162 days late, and CAISO fined JP Morgan $486,000 for failure to submit responsive materials prior to the May 18 deadline. JP Morgan than filed a non-public appeal of CAISO’s penalty with FERC, which the Commission rejected in a non-public order on April 20, 2012. JP Morgan then filed a complaint with the Commission under section 206 of the FPA, arguing that the CAISO fine is unjust, unreasonable, and unduly discriminatory. JP Morgan also renewed its claims that the CAISO tariff bars CAISO and DMM from continuing to seek data requests without the “express direction” from OE. JP Morgan argued that nothing in the OE e-mails triggered “express direction” to respond to CAISO’s data requests.

Once OE responded to JP Morgan describing the correspondence between JP Morgan and OE staff, JP Morgan withdrew its complaint and later acknowledged there were some “factual errors” in the complaint. JP Morgan explained that it did not recall the earlier e-mails from OE and that additionally, the e-mails did not refer to the “express direction” provisions of the CAISO tariff.

JP Morgan must respond within 21 days of the show-cause order. The Commission will then consider whether there is enough evidence in the record to decide the case on its merits or if a hearing is necessary. The Commission also reserved the right to defer a decision on the show-cause order until OE market manipulation investigation has been completed.

Commissioner Moeller issued his own concurring statement and also joined in a concurrence with Commissioner LaFleur. Commissioner Moeller noted the lack of formal letters between the parties and said that “all of the individuals working on this matter could have communicated with each other in a better way.” He also emphasized the need for an extensive review of the evidence in order to answer questions about the knowledge of individuals working on behalf of FERC, JP Morgan, and CAISO. The separate joint concurrence written by both Commissioners LaFleur and Moeller questioned the propriety of revoking JP Morgan’s market-based rate authority and warned their colleagues to “think carefully about the consequences of unduly blurring the line between enforcement and ratemaking.”

A copy of the order is available here.