Financial Services
Proprietary Business Activities

JPMorgan's commodity arm eyes sale of power plant trading deals

Burgess COMMENTARY

Peter Burgess

JPMorgan's commodity arm eyes sale of power plant trading deals

(Reuters) - JPMorgan Chase & Co's commodity trading arm is looking to sell more of the electricity deals it has with U.S. power plants and wind farms, a source familiar with the business said on Wednesday, at a time when Wall Street's involvement in physical commodity markets is under heightened scrutiny.

The so-called power tolling and marketing deals cover enough electricity to light up Indiana's 2.8 million homes, according to detailed regulatory filings, and include almost 3,000 megawatts of power generation spread across nine states.

The potential sale follows the company's move to largely exit the California power market in May, where the bank has been embroiled in a market manipulation scandal. The bank is reportedly close to a more than $400 million settlement with the Federal Energy Regulatory Commission (FERC).

It is not clear if formal discussions have been held with possible buyers for the agreements, which allow the firm to buy fuel and sell power on behalf of the facilities.

But the bank's commodity arm has already divested more than 50 percent of its tolling agreements this year after the sale of around 3,600 megawatts of capacity to Edison International in California two months ago.

The bank's commodity division, known as JPMorgan Ventures Energy Corporation, also owns interests in three power plants.

The remaining tolling agreements include one with privately held Tenaska's 844 MW Lindsay Hill plant in Alabama, which produces enough electricity to power 800,000 homes in the state, according to the company's website.

A spokeswoman for Tenaska said the company had no knowledge of JPMorgan's plans. The bank's commodity traders provide the fuel and own the power produced by the facility, she added in an email, but declined to disclose further terms of the contract.

Other deals include a marketing agreement with Algonquin Power to sell around 400 MW of capacity from three wind farm projects in Illinois, Pennsylvania and Texas. Those deals, which were originally set to last 10 to 15 years, were signed less than nine months ago. A spokesperson for Algonquin did not respond to telephone calls seeking comment.

JPMorgan does not plan to exit physical power markets entirely, the source said, and will continue to trade physical and financial electricity contracts in the United States.

A power trader at an energy hedge fund, who previously worked for a large Wall Street firm, said he saw banks retreating from the sector.

'With the FERC market manipulation cases, I'm not sure the banks have the appetite to keep trading in power - unless they have a customer that wants them to do it' the hedge fund trader said. He declined to be named because he is not authorized to speak to the media.

Increased regulation and bank capital requirements have led some banks to review their exposure to physical commodity trading, while total revenues from the sector have fallen by about 50 percent across Wall Street from a peak above $12 billion between 2007 and 2009.

POWER PLANTS

The pullback comes as political and regulatory scrutiny of Wall Street's role in physical commodity trading intensifies.

A Senate Banking Committee hearing in Washington on Tuesday questioned whether banks should be allowed to own physical commodity assets such as pipelines, refineries and metal warehouses.

And on Friday, the U.S. Federal Reserve issued a surprise statement saying it was rethinking a decade-old decision allowing banks to trade in physical commodities market.

Previously, the Fed was thought to be primarily debating the right of commercial banks to own physical trading assets.

JPMorgan Ventures Energy Corporation acquired a number of U.S. power plants, tolling agreements and marketing arrangements after it acquired Bear Stearns and RBS Sempra during the financial crisis.

In late 2007, Bear Stearns' commodity arm, Houston-based Bear Energy, acquired the rights to more than 9,000 MW of electric power output after purchasing Williams Power Co.

JPMorgan has sold many of the power plants it inherited from Bear Stearns in 2008, according to a source familiar with the matter.

The company's commodities division still has an equity interest in three entities that own power plants in the United States, which are held as merchant banking investments or other permissible investments, according to the source.

One of the plants, the 545 MW Kinder Jackson facility that powers roughly half a million homes in Michigan, is also embroiled in the FERC market manipulation case.

The other equity interests held by the commodity arm are in the 230 MW Brandywine power plant in Maryland and a small 75 MW biomass plant in Florida, the source said.

The case against JPMorgan revolves around an FERC accusation that the bank's commodity arm used an elaborate trading scheme to try to make loss-making plants profitable.

Last week, the FERC imposed a record $470 million fine against Barclays Plc and four of its traders for manipulating U.S. power markets between 2006 and 2008. Barclays has said it will fight the fine in Federal court.

JPMorgan's commodity division also want to sell its Henry Bath metals warehousing business, according to industry sources.

The U.S. Commodity Futures Trading Commission has put Wall Street banks and other big traders on notice that their metals warehousing businesses might be investigated following years of complaints about inflated prices.

JPMorgan also owns interests in power plants and wind farms through its private equity arm, JPMorgan Capital Partners, and JPMorgan Infrastructure Investments Group, its asset management division.