JPMorgan Gets Back Into the Electricity Business
Mega-bank JPMorgan Chase, years after being fined over $400 million for manipulating energy markets, is effectively purchasing an electric utility in El Paso, Texas, laundered through an allegedly independent investment fund. The “owners” of the fund appear to not be owners at all, but members of its board of directors, all of whom have ties to JPMorgan. And 48 executives of the investment fund are actually paid employees of JPMorgan, which is lending out their services.
The fund, known as the Infrastructure Investments Fund, or IIF, contends that it is merely “advised” by JPMorgan. “It’s no secret that there’s a relationship there,” says Tyson Slocum of Public Citizen, who has tracked the sale. “But I’ve been looking at electric utility mergers for 20 years, and I have never seen anything as convoluted as this.”
It’s not even necessarily illegal for a bank to purchase an electric utility, though some believe it should be. The Bank Holding Company Act of 1956 was intended to separate banking and commerce, but decades of Federal Reserve interpretations broke down that wall, allowing banks to justify their ownership of nonfinancial businesses as part of “merchant banking” activities.
An ownership stake in physical commodities, including metals mining, oil and gas drilling, and electricity generation, gives banks tremendous information advantages that can be used to trade for profit. “If we have three big banks controlling the energy sector, and three big tech companies controlling everything else, then what kind of world are we living in?” asks Saule Omarova, a professor at Cornell Law School who specializes in analyzing linkages between banking and the commercial economy.
At issue in this case is El Paso Electric, a franchise utility inaugurated in 1901, serving 429,000 customers in the city of El Paso and other parts of Texas and New Mexico. The investor-owned utility has been traded on the New York Stock Exchange for 72 years. In June, El Paso Electric agreed to be taken private in a $4.3 billion deal with IIF. It would continue as an independent system operator, with the same staff.
To win the approval of the El Paso City Council, IIF put in sweeteners, including $21 million in credits on ratepayer electric bills (which amounts to only $1.36 per month on people’s bills, for three years), charitable contributions, and funds for a local economic-development fund. Though at least one former Texas Public Utility Commission member believes that IIF is still extracting too much profit without enough givebacks, the city council, one of several government entities that needed to approve the merger, seemed poised to rubber-stamp it.
At the time, IIF was described in the press as “JPMorgan’s Infrastructure Investment Fund,” though the El Paso Electric press release called it “an Investment Vehicle Advised by JPMorgan Investment Management.” The $11.3 billion fund has interests in the U.S., Europe, and Australia. El Paso Electric would be its first U.S. electric utility, but it holds 11 other energy and electric-generation companies in its portfolio. It operates like a private equity fund; investors can buy into it and earn dividends and awards as the portfolio companies rise in value. Most of IIF’s investors are retirement funds.
Slocum, of Public Citizen, was immediately skeptical of the merger. For one, in the application to authorize the merger with the Federal Energy Regulatory Commission (FERC), IIF listed three “owners” of the fund but never actually named them. A footnote to that application stated that the names were disclosed in a “confidential attachment” in a separate filing to FERC from nine months earlier. “Public Citizen lacks access to time travel necessary to intervene and request the contents of a confidential attachment filed 270 days before,” Slocum’s organization wrote in an objection to the failure to disclose.
Lawyers for El Paso Electric and IIF filed a dismissive response. “They were like, ‘Go F yourself,’” Slocum says. However, the response offhandedly noted that the owners were named in a separate application with the Nuclear Regulatory Commission in conjunction with a different purchase. It turned out that document wasn’t public either, but the response did name the owners as Rita J. Sallis, Christopher Ward, and Dennis Clarke. Sallis formerly ran New York City’s public pension fund, the type of investor client that IIF caters to.
But the disclosure raised additional questions. In numerous documents filed with the Securities and Exchange Commission, Sallis, Ward, and Clarke are described as “directors” and “managers” of different entities of IIF. They are also all affiliated with JPMorgan Investment Management, a subsidiary of JPMorgan Chase. “That seems to indicate that they’re no more than a board of directors,” Slocum says.
The Nuclear Regulatory Commission application, eventually obtained by Slocum, also includes evidence that these are just directors, not owners. The application states that Clarke intends to “resign” as an owner at the end of the year, with the others conducting a search for a replacement. “Owners do not typically resign, and remaining owners do not typically seek a replacement candidate,” Public Citizen wrote in an October 7 filing with FERC.
An owner would have exclusive control of the fund, while a board of directors would leave the question of who actually owns IIF open. And if the “owners” are all affiliated with JPMorgan Chase, it’s reasonable to assume that IIF is merely an affiliate. For its part, IIF states on its FERC application that JPMorgan is not an affiliate or parent or merger subsidiary, and not party to the deal.
Slocum then found a 2019 PowerPoint presentation IIF made to various cities it was looking to persuade to invest in pension funds. While the presentation insists that JPMorgan Investment Management “does not own or control” IIF, it states that “material decisions are made by IIF’s independent board of directors in light of recommendations” made by JPMorgan (emphasis mine). The board’s existence was never disclosed to FERC; IIF only talked about “owners.”
Furthermore, the PowerPoint notes that a team of 48 individuals provides fundraising, asset management, and acquisition services to IIF (which is practically everything IIF does), and that this team is “within JPMorgan Investment management solely dedicated to IIF.” That entire team is listed on page 6 of this public presentation IIF made to the city of Fresno, California. One of the team members, Managing Director Landy Gilbert, is named as IIF’s managing director in news stories. JPMorgan directors have also spoken on behalf of IIF in public hearings. As Slocum puts it, “JPMorgan literally staffs IIF.”
Slocum believes IIF is trying to have it both ways, while hiding the depth of the JPMorgan relationship from FERC. “IIF bends over backwards to say we have the best of both worlds, we can access great services by JPMorgan, but we’re free and independent of them,” he says. “JPMorgan is making management recommendations, with some sort of contractual relationship. But hey, independent board, so it’s all kosher.”
When I described this relationship to Cornell Law professor Saule Omarova, she responded that “it’s sort of straight out of the playbook all these big financial holding companies have been using to acquire commercial businesses.” She added that the financial disclosures are often not granular enough to make out what a bank holding company actually owns or controls, and where there’s merely an advisory relationship. “They’re trying to comply on the face with all the regulations, but in reality all it does is create many layers of BS on top of the same business,” Omarova says.
Under the Dodd-Frank Act, big banks like JPMorgan can set up or sponsor private equity–style funds, as long as they limit their equity stake in them to no more than 3 percent. But Slocum brings up another factor. In 2013, JPMorgan paid a record $410 million settlement with FERC, over a bank subsidiary charging electricity grids in California and the Midwest “as much as 80 times the prevailing power prices at certain hours of the day.” The market manipulation yielded $125 million in “unjust profits.”
According to Slocum, “The understanding in 2013 was that FERC said we’re going to go easy on you in exchange for you guys getting out of the physical energy business.” So the obfuscation may be a function of JPMorgan trying to honor that handshake agreement while still buying back into the electricity market.
Scooping up El Paso Electric would be lucrative for JPMorgan. Not only are there 429,000 captive customers delivering steady cash flow, but the service territory includes the Permian basin, one of the largest fields for fracking in America. “Fracking is power hungry,” Slocum says. “You’re hooking up a jet engine to force chemicals and water into that shale formation. El Paso Electric is in a good geographic position to become a pure utility for the Permian.”
Slocum wants FERC to hold an evidentiary hearing to get answers on the corporate structure of IIF, the “ownership” stakes, and any affiliate, financial, and contractual relationships with JPMorgan.
Shareholders overwhelmingly approved the El Paso Electric sale in September; regulators in Texas and New Mexico still must sign off, as well as FERC. JPMorgan Chase and IIF did not return requests for comment. The New Mexico attorney general’s office, which also has jurisdiction over the deal as a consumer advocate, responded that they were looking into the matter.
The Prospect also asked Beto O’Rourke, the presidential candidate and El Paso native, if he had a comment about his hometown electric utility entering into a deal with a large Wall Street bank. O’Rourke’s campaign declined to comment.
Banks with stakes in commercial businesses increase concentrations of economic power. So do tech companies that are now moving into financial services, These corporations effectively build conglomerates with the power to affect market dynamics. For example, if JPMorgan knows that El Paso Electric, or its suite of electricity generation companies, will be surging or shutting down power to the grid, they can use that information in trading in energy markets. On a larger scale, integrated banking and commerce giants can intimidate suppliers, abuse customers, and use their political power to obtain favorable rules.
“The business and commerce separation, this principle has been ignored and mocked over the years,” Omarova says. “But the question of who owns El Paso Electric is actually not so little. It’s one example in a big game, and we don’t know where it leads.”