[authors:  Neil L. Levy, David G. Tewksbury, Grace Su]

The Federal Energy Regulatory Commission (“FERC”) recently issued an order directing J.P. Morgan Ventures Energy Corporation (“JP Morgan”) to show cause why it should not be found to have violated FERC’s Market Behavior Rules, and why its authorization to sell electric energy, capacity, and ancillary services at market-based rates should not be suspended. In particular, JP Morgan is alleged to have made four separate statements to FERC, the California Independent System Operator Corporation (“CAISO”), and CAISO’s Department of Market Monitoring (the “DMM”) that violate FERC’s Market Behavior Rule 3, which is codified in 18 C.F.R. § 35.41(b) and requires sellers to provide accurate and factual information, and prohibits sellers from submitting false or misleading information or omitting material information, in any communication with FERC, independent system operators, and market monitors.

According to the order, in March 2011, CAISO sent initial data requests to JP Morgan concerning its bidding activities, and in May 2011, CAISO referred the matter to FERC’s Office of Enforcement. Under the CAISO’s tariff, following such a referral, the DMM is prohibited from undertaking further investigative activities “except at the express direction of FERC or FERC Staff.” In communications with CAISO and the DMM, JP Morgan refused to provide complete responses to the data requests from the DMM on the grounds that it was obligated to stop its investigation after the matter was referred to FERC. On three occasions, however, FERC’s Office of Enforcement notified JP Morgan that it had, in fact, expressly directed CAISO and the DMM to continue to seek responses to the outstanding data requests, and/or directed JP Morgan to provide information to CAISO and the DMM. Nonetheless, JP Morgan did not submit the last of its responses until October 18, 2011, causing CAISO to impose a financial penalty of $486,000 for JP Morgan’s six-month delay in responding.

On March 21, 2012, JP Morgan filed a non-public appeal of CAISO’s decision to impose the $486,000 penalty, which FERC rejected as procedurally deficient. On May 21, 2012, JP Morgan filed a complaint against the CAISO challenging the imposition of the penalty on the grounds that, after referring the matter to the Office of Enforcement, CAISO was prohibited under its tariff from taking any further action against JP Morgan except at the express direction of FERC or FERC Staff. JP Morgan further asserted that it had not been informed that the DMM had been authorized by FERC Staff to continue to seek information from JP Morgan. After the Office of Enforcement filed an answer including copies of its prior communications with JP Morgan, JP Morgan moved to withdraw its complaint. On June 22, 2012, JP Morgan also filed an answer acknowledging its factual error and explaining the circumstances that led to the error. The Office of Enforcement submitted additional information regarding the chronology of events in response to JP Morgan’s answer.

In its September 20, 2012 show cause order, FERC found that the following statements by JP Morgan may have been misleading or omitted material information: (1) the October 18, 2011 response to CAISO and the DMM; (2) the March 21, 2012 non-public appeal; (3) the May 21, 2012 complaint; and (4) the June 22, 2012 answer. FERC therefore instituted an investigation to determine whether statements by JP Morgan violated FERC’s Market Behavior Rules, and whether JP Morgan’s market-based rate authority should be suspended. FERC also stated that it would determine whether hearing procedures are necessary after reviewing JP Morgan’s response, as well as any materials submitted by other parties. The order sets a refund effective date as of the date of publication of the notice in the Federal Register, and directs JP Morgan to respond to the order within 21 days of such publication.

In a separate concurrence, Commissioners Moeller and LaFleur emphasized that while misrepresentation to FERC and independent system operators “cannot be tolerated,” FERC “should carefully consider whether opening a proceeding under its ratemaking authority is the most appropriate course of action.” The two Commissioners encouraged FERC to “think carefully about the consequences of unduly blurring the line between enforcement and ratemaking,” and urged the Commission to explore other options, including whether the alleged misrepresentations could be treated as “additional allegations in the underlying investigation” or “as obstruction under the Penalty Guidelines.”