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JPMorgan Energy Spat Resurrects Ghost of Enron

Adam Jeffery | CNBC

The last time investors heard the terms "manipulation" and "energy markets" in conjunction with one another, it was during the heady days of now-bankrupt Enron – which became a byword for fraud and market excess.

Yet just last week, regulators used those sharp words to accuse JPMorgan Chase of manipulating energy markets, language similar to that which once buffeted -- and eventually took down -- bankrupt energy giant Enron.

The bank now finds itself in the midst of a new regulatory morass.According to several reports, a unit of the banking giant is being scrutinized by the Federal Energy Regulatory Commission (FERC) for "manipulative schemes" that turned power plants into profit-making engines. The FERC may bring enforcement against them for what reports say were "schemes" adopted by traders to inflate market bids and JPMorgan's profits.

In a statement e-mailed to CNBC, the bank denied wrongdoing. JPMorgan is "in the process of responding to the staff's notice, so that the Commission has a full and fair record before it," the statement read. "We intend to vigorously defend the firm and the employees in this matter."

Details of the impact of JPMorgan's troubles on electricity markets are still largely unknown. At least for the time being, however, the fallout appears limited as electricity markets show no discernible signs of strain.

Earlier this week, California power regulators said there should be adequate power supplies in California this summer – much unlike 2000-2001, when Enron traders manipulated an already severe energy crisis for profit. Meanwhile, analysts at Platts noted that JPMorgan's activities have had "limited or no impact on supply or demand, since there is no impact on how much generating capacity exists."

Additionally, experts say that lessons learned in the wake of Enron's fraud – most notably in the form of closer independent scrutiny and tighter regulation of energy markets – has helped to buffer markets against irregularities and potential manipulation.

Marc L. Spitzer, a lawyer and former FERC regulator, said that the agency encourages the participation of banks, which help enhance energy market fluidity and transparency. However, he added those objectives may sometimes collide with the rough and tumble realities of Wall Street trading.

"The FERC likes markets because it creates liquidity and opportunities for hedging – its viewed as a positive," he said. But some of the traders have pretty sharp elbows," he added, which can be especially true of Wall Street behemoths like JPMorgan.

Additionally, the details of JPMorgan's dispute with the FERC remain murky, which sets the stage for potentially more damaging information to come. Spitzer pointed out that Enron's problems were not discovered "until many years after the fact."

"I don't think you can conclude it's not an Enron, and you can't conclude it is," the former regulator said. He noted the vast majority of the time, the FERC settles its cases outside of public view, but said the agency has an "obligation to pursue" behavior that may have shortchanged electricity customers.

"Maybe the JPM case gets resolved, although the verbiage looks kind of severe," Spitzer said. "But you don't need to have a blackout or physical crisis on the grid to have a situation that ratepayers were ripped off."

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