Swindle quoted in article

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Swindle quoted in article
Electricity firms are gloomy about JP Morgan’s departure from power markets, saying trading houses and oil majors are not providing the same level of liquidity as banks once did

Author: Alexander Osipovich
Source: Energy Risk | 09 Oct 2014

JP Morgan’s long-awaited deal to sell its physical commodities business to Switzerland-based trading house Mercuria, which was completed on October 3, had a little-noticed side effect: the bank’s full exit from US and European power markets.

With the deal, JP Morgan completely severed its physical power business, while it is also in the process of winding down its financial power business, according to sources familiar with the situation.

Moreover, the bank’s top power traders have left en masse for Mercuria. Energy Risk understands that Sean O’Neal and Rob Cauthen, formerly JP Morgan’s Houston-based co-heads of North America power, have moved to Mercuria. On the other side of the Atlantic, Etienne Amic, who was previously London-based head of power and emissions for Europe, the Middle East and Africa, has also joined the Swiss trading house.

JP Morgan’s quiet exit from electricity follows similar moves by other major banks. Barclays announced it would close its US and European power desks in February this year. Deutsche Bank began cutting back its power business in 2012, before axing what remained of it in December 2013 amid a broader retreat from commodities.

Market observers say the retrenchment of banks from electricity has made it much tougher for utilities and power generators to find counterparties for hedging transactions, especially for the long-dated deals that were once a specialty of banks. It is unclear whether non-bank commodity traders such as Mercuria will step in and fill the void.

“JP Morgan was definitely a substantial presence, and so were a number of other dealers that have all left the power markets, such as Deutsche Bank and Barclays,” says Glen Swindle, managing partner of New York-based advisory group Scoville Risk Partners and former co-head of power and gas trading at Credit Suisse. “The JP Morgan exit just compounds the ongoing liquidity crisis.”

In the US, market sources say JP Morgan began to scale back its power trading activities well before the sale to Mercuria was finalised. The bank is said to have pulled back substantially after the US Federal Energy Regulatory Commission (Ferc) suspended its market-based rate authority for six months starting on April 1, 2013 – a move that effectively stopped the bank from trading power during that period. Ferc announced the penalty in November 2012, saying the bank had misled the regulator over an investigation into alleged market manipulation by JP Morgan power traders in California. The bank denied misleading the regulator and protested the severity of the penalty.

JP Morgan ultimately agreed to pay $410 million to settle the California market-manipulation case, while neither admitting nor denying that it had broken the law. The Ferc settlement was announced on July 30, 2013, four days after JP Morgan revealed it was exploring a potential sale of its physical commodities business.

As banks have retreated from power, many of their top traders have gone to commodity trading houses like Switzerland-based Vitol or Mercuria. But unlike banks, trading houses generally do not offer the kind of long-dated transactions energy companies use to lock in the economics of large projects, such as the construction of new power plants. Instead, such non-bank traders tend to focus on the more liquid front end of the curve, say market participants.

That has power companies feeling gloomy about the departure of JP Morgan and its peers. “I would expect to see a lot poorer executions in the future, wider bid-ask spreads and conditions where there are no bids, certainly on some of the more illiquid positions that some of these guys were good at risk-managing,” says an executive with a Houston-based power generation firm.

“That’s not to say that others are not taking their place,” he adds. “Mercuria and a number of others can perform a similar function. I just have a hard time perceiving that they are going to do it nearly as well or as responsively or as robustly as large financial players.”

Nonetheless, some of JP Morgan’s old clients are now set to face Mercuria as their new counterparty. In a July 8 order, Ferc authorised the transfer of a number of long-term electricity agreements in JP Morgan’s power book to Mercuria, pending the completion of the October 3 sale. The agreements due to be transferred include a tolling deal with an 844-megawatt natural gas-fired power plant in Alabama and agreements to supply power to electric cooperatives in Georgia.

JP Morgan and Mercuria declined to comment for this article.

Market sources say oil majors BP and Shell have also been stepping up their activities in US power markets as banks have pulled back. Both BP and Shell registered their US-based gas and power trading units as swap dealers under the US Dodd-Frank Act in 2013 – a move that allows them to compete more directly with banks in energy derivatives.

Still, liquidity remains poorer than energy firms would like. Scoville’s Swindle says the collapse in liquidity can be seen by looking at the electronic trading screens of Atlanta-based Ice, which are widely used by US power traders. For PJM – the wholesale electricity market for the US mid-Atlantic, which boasts the deepest liquidity of any US power market – live markets on Ice screens will often be limited to a tenor of about two years, he says. By contrast, several years ago there was trading activity in PJM as far as eight to 10 years out on the forward curve.

“The question is, when will new players, like Mercuria and others, step in to take the place of the banks?” Swindle asks. “Shell and BP, which are not the usual banking dealers, are actively participating in US power. But it’s going to take more entrants to make the markets more competitive and liquid.”

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