On November 14, 2012, FERC suspended J.P. Morgan Ventures Energy Corporation’s (“JP Morgan”) market-based rate authority for six months beginning April 1, 2013, for allegedly submitting false or misleading information to FERC and the California Independent System Operator Corporation (“CAISO”) in violation of Section 35.41 the Commission’s regulations.  Section 35.41 prohibits sellers from submitting “false or misleading information” or omitting material information in any communication with the Commission and certain other entities, including Regional Transmission Organizations and their market monitors. 

The November 14 order follows a September 20, 2012 show cause order, in which FERC made a preliminary finding that JP Morgan may have omitted material information or submitted misleading information in communications with FERC, CAISO, and CAISO’s Department of Market Monitoring (“DMM”) (see September 23, 2012 edition of the WER).  The show cause order also directed JP Morgan to show why its market-based rate authority should not be suspended for its conduct in resisting data requests of the DMM and the direction of FERC’s Office of Enforcement (“OE”).

The case involves a dispute over an investigation into JP Morgan’s bidding behavior in the CAISO markets (the details of which have not been publicly disclosed).  In the course of that investigation, a dispute arose about whether the DMM had the legal authority to compel data production from JP Morgan after the point in time at which the investigation had been referred to OE.  The Commission concluded that JP Morgan improperly resisted the CAISO’s efforts to collect data even when OE asked JP Morgan to comply. 

The Commission also faulted JP Morgan for two other filings it made with the Commission contesting the CAISO’s proposal to penalize JP Morgan for failure to timely respond to data requests.  In those filings, JP Morgan made no mention of the OE’s directives to JP Morgan to comply with the CAISO’s investigation.  The Commission found that omission, as well as other statements made to the Commission, constituted false or misleading statements or omissions in violation of its regulations.  Importantly, it appears it was the statements JP Morgan made in defense of its position, not the failure to produce documents that FERC found actionable.

The Commission suspended JP Morgan’s market-based rate authority even though the investigation into the underlying conduct has not been completed.  FERC stated that the misrepresentations and the underlying investigation are two separate matters that warranted earlier action on the misstatements.  Also, FERC clarified that suspending JP Morgan’s market-based rate authority maintains the boundaries between FERC’s ratemaking and enforcement roles. 

FERC explained that delaying the suspension until April 2013 is necessary to give the CAISO and other market participants time to address any reliability concerns.  The time delay also allows JP Morgan time to make alternative arrangements for existing contractual obligations.

Commissioner Cheryl LaFleur dissented from FERC’s decision to suspend JP Morgan’s market based-rate authority.  Commissioner LaFleur argued that the suspension of market-based rated authority is “unsupported” by FERC’s regulations and that FERC was departing from precedent that requires a nexus between the underlying facts of a violation and JP Morgan’s market-based rate authority when revoking such authority.  Commissioner LaFleur stated that by departing from the nexus requirement, FERC “establishes a new and potentially dangerous precedent: an entity can lose its market-based rate authority for litigation positions it takes before the Commission or Commission Staff, even if those positions do not relate to its activity or honesty in the market.”

After the Commission’s November open meeting, Chairman Jon Wellinghoff spoke to reporters about OE’s new role.  Chairman Wellinghoff underscored the need for FERC to impose high penalties in order to deter market participants from violating the Commission’s rules. Although Commissioner Philip Moeller suggested at the monthly meeting that the industry may need more guidance on what actions are considered illegal, Wellinghoff stated that OE is focusing on “very clear” areas of law.  In addition, Wellinghoff also dismissed concerns high dollar penalties may lead to reduced liquidity in the market due to companies exiting. 

A copy of the FERC order is available here.