From Partner Mark Perlis of our DC office:

FERC today approved an enforcement settlement agreement with JP Morgan, which requires JP Morgan to pay a civil penalty of $285 million and disgorgement of unjust profits of $125 million in connection with abusive bidding practices in the California Independent System Operator (“CAISO”) Day-Ahead and Real Time markets for generating units scheduled by JP Morgan under tolling agreements.

JP Morgan admits the bidding practices described in the FERC order and settlement agreement, but does not admit they constituted a violation of the Anti-Manipulation Rule, as found by the Commission and its enforcement staff.  The essence of the various bidding practices is that JP Morgan submitted uneconomic bids in the Day Ahead market for high heat rate generating units largely out of the money in expectation of inducing CAISO exceptional dispatch instructions that would qualify the units for make-whole bid cost recovery payments under then-applicable tariff rules.

FERC’s application of the Anti-Manipulation Rule to the described bidding practices is noteworthy because the bidding practices and dispatch responses appeared consistent with CAISO tariff rules and the company was taking advantage of bid cost recovery formulas that were entirely objective.

Nonetheless, FERC found the bidding practices to be part of a fraudulent scheme that violated the Anti-Manipulation Rule.

This order signals that FERC will take enforcement action and potentially seek significant penalties against bidding strategies that are designed to game tariff rules and qualify uneconomic assets for above-market bid cost recovery incident to out-of-market dispatches by the CAISO that the bidding strategy was known and expected to induce.

FERC found fraudulent the submittal of uneconomic, “money-losing” negative bids in the Day Ahead market and unrealistic high bids in the Real Time market that were conceived to induce the CAISO to dispatch the generating units at operating levels that maximized the units’ recovery of uplift and as-bid payments.  FERC asserts that the bids were “false” because they “appeared economic to the CAISO’s automated software,” but were intended to trigger out-of-market compensation that was intended to be available only to generating units that “had been bid in good faith to seek to make money in the marketplace.”

FERC also found the scheme “defrauded” the CAISO because the JP Morgan units provided no benefits to the CAISO beyond the routine provision of energy and that they did not deliver any benefits associated with out-of-market or exceptional dispatches for which the out-of-market compensation rules were intended.  FERC emphasized that even though JP Morgan was not accused of violating the CAISO Tariff, “falsehoods communicated through conduct,” absent a tariff violation, are sufficient to establish a violation of the Anti-Market Manipulation Rule.

The Order is also noteworthy because FERC found objectionable the company’s failure to come clean during FERC’s investigation on the purpose of its bidding strategy.  FERC accuses the company and its representatives (including counsel) of obfuscating the gaming rationale for its bidding practices.