Insight: Wall Street, facing fiercer watchdog, flees U.S. power markets

Fri Dec 21, 2012 6:10am EST
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By Cezary Podkul, David Sheppard and Scott DiSavino

NEW YORK (Reuters) - When federal regulators proposed a six-month penalty on JPMorgan Chase & Co's electricity trading arm last month, they took aim at what is now a rare sight on Wall Street: a large and growing power sales business.

After five years of rapid and lucrative growth, the world's biggest investment banks are now dramatically scaling back their U.S. power operations, a Reuters analysis of electricity sales has found.

In 2008, when they were most active in the market, the 15 biggest banks sold enough electricity in the United States to power two out of every five residential customers for a year, Reuters found. By last year, their sales would only power about one out of every five customers.

The pull-back means fewer deep-pocketed players in an already shrinking $200 billion U.S. physical power market and strongly invites the question of who will fill the banks' role of cushioning the risks of buying and selling in one of the world's most volatile commodities.

"If big banks leave the market . . . it means that somebody else has to absorb those risks. And it could be utilities or consumers - those would be the two leading candidates," said Craig Pirrong, a University of Houston professor and expert in energy trade regulation.

Others cheer the exit as a potential win for consumers.

"All the banks are doing is feasting on overly complicated market rules to find vulnerabilities, which they pounce on to make large short-term profits," said Tyson Slocum of Public Citizen, a consumer advocacy group.

Regardless, some electricity buyers are already expressing nervousness about JPMorgan's penalty. The bank had been one of just four banks, alongside Bank of America Merrill Lynch, Australia's Macquarie Group and Germany's Deutsche Bank, to sell more electricity in 2011 than in 2008, according to quarterly data sellers are required to provide to the Federal Energy Regulatory Commission (FERC), the country's top power market regulator.   Continued...

A Wall St. sign is seen in New York's financial district September 16, 2008. REUTERS/Lucas Jackson