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How Enron changed regulation

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A regulator is cracking down on big banks, but it’s not the SEC, the CFTC or any of the more familiar parts of the financial regulation apparatus. It’s the FERC, the Federal Energy Regulatory Commission.

The commission levied a $435 million fine against Barclays, and is now reportedly looking at a half billion dollar settlement with JPMorgan. Both charges are for manipulating energy markets.

The cases may be reminiscent of Enron, but the differences are just as telling.

“Enron was shutting down plants to drive spikes in prices,” says Marc Spitzer, a partner at Steptoe & Johnson. “You can’t do that anymore. It’s not been done.”

Enron’s manipulation caused rolling black-outs in California, and traders were caught laughing on tape about price gouging.

Trader #1: “That money you guys stole from those poor grandmothers in California?”

Trader #2: “Yeah, Grandma Millie, man.”

Trader #1: “Yeah, now she wants her **** money back.”

Back then, the FERC, which was supposed to regulate Enron, couldn’t even force it to pay a fine. Legislation passed in the wake of the Enron scandal changed that. 

“There’s much more structure, much more oversight, fining authority, and ever increasing dedicated staff,” says Nora Mead Brownwell, a FERC commissioner who served from 2001 to 2006.

But the energy market has changed too, since Enron’s bankruptcy.

“The banks have slowly gotten into that same space that Enron used to occupy,” says David Spence, a professor of law and regulation at the University of Texas.

In other words, banks and other purely financial players now dominate the energy markets. Their purely financial interest could mean more of the market manipulation that Barclays and JPMorgan have been accused of. “Clearly there’s an incentive that that’s the case,” says Spence.

But so far, Barclay has denied any wrongdoing, and JPMorgan hasn’t commented on any possible settlement.

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