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Categorized | Banks

Barclays feels force of energy regulator

Posted on October 31, 2012

In the early 2000s, the US electricity sector was seen as the wild west of the commodities markets. It lurched from crisis to crisis and was notorious for spiking prices. Not any longer.

The revelation that Barclays is about to be fined in the US for allegedly inappropriate trading in power markets highlights the tougher approach being taken by US regulators a decade after the collapse of energy trader Enron.

    Wholesale electricity has faced tougher scrutiny by Washington since the Californian energy crisis of 2000-01, when Enron and other traders were accused of rigging supplies and causing huge blackouts.

    Regulatory attention has risen even further over the past 18 months as the US Federal Energy Regulatory Commission, the watchdog, has flexed its muscles by launching a series of crackdowns.

    The tougher stance comes as support is growing for stricter oversight of commodities markets from US lawmakers, prompted by large price swings over the past five years and following the 2008-09 global financial crisis.

    The London-based bank is not alone. JPMorgan, Constellation Energy and Deutsche Bank are among the companies that have been caught in the tighter regulatory net of the US electricity market over the past year and a half.

    Nor is FERC alone in adopting a more aggressive attitude. The US Commodity Futures Trading Commission, which polices the commodities derivatives market, has stepped up its oversight and launched a nationwide investigation into the oil markets in 2007.

    Moreover, energy and commodities lawyers say that FERC and the CFTC have increased information sharing, allowing them to pursue related cases from different angles. The Federal Trade Commission, the agency that promotes competition in the US economy, has also stepped up its efforts in antitrust cases in the energy market.

    In the clearest example of the new approach, FERC agreed this year to a record $245m settlement with Constellation Energy for alleged manipulation of the country’s power markets. The settlement contrasts with fines totalling just $127m in aggregate in the previous five years, despite new rules introduced in 2005 that gave the Washington-based regulatory body the power to impose penalties of up to $1m a day on companies found to have manipulated US energy markets.

    “Understand that the [Federal Energy Regulatory] Commission will be vigorous in using its anti-manipulation authority to protect consumers,” Jon Wellinghoff, FERC chairman, said after the regulator announced the fine on Constellation.

    In addition to tougher financial penalties, FERC has increased its market surveillance. Earlier this year it opened a new division dedicated to monitoring the multibillion-dollar markets for electricity and natural gas in the US.

    Carlos Blanco, an expert on US energy regulation at the Oxford Princeton Programme, said in a recent article that the creation of the new market surveillance division and the record fine to Constellation Energy suggested participants in the US electricity and natural gas markets were facing a “new world”.

    “FERC is strengthening its monitoring efforts and pursuing more aggressively any perceived wrongdoing by gas and power market participants,” he wrote.

    The more aggressive approach has resulted in 11 probes into potential manipulation of the country’s power market since January 2011, including around the activities of JPMorgan, Barclays and Deutsche Bank.

    In December, FERC said Deutsche Bank’s energy trading business might have engaged in manipulation of the California power market between January 2010 and March 2010. FERC has also subpoenaed JPMorgan twice this year as it investigates whether the bank manipulated power markets in California.

    The investigation into Barclays and four former traders forms part of the crackdown. The regulator has in the past alleged the bank and the traders bought and sold electricity in enough volume to move exchange prices up or down to benefit parallel positions in the derivatives market.

    The bank on Wednesday said FERC was investigating its “power trading in the western US with respect to the period from late 2006 through 2008”, warning that it could be fined. People familiar with the situation said the proposed fine was likely to be “high”. The bank, in a statement, said it intended to “vigorously defend” its trading activities in the US market, opening the door to a protracted lawsuit. A FERC spokesman declined to comment, saying the commission has not issued an order in the case.

    Other regulators have also brought significant cases outside electricity. In a notorious case, the CFTC last year charged Parnon Energy, a US oil trader, together with its Swiss and UK affiliates Arcadia, with manipulating oil prices in 2008. Arcadia has denied any wrongdoing.

    Additional reporting by Gregory Meyer in New York