Dive Brief:

• J.P. Morgan Investment is an affiliate of private equity firm Infrastructure Investments Fund, called IIF US Holding 2, the owner of El Paso Electric, gas-fired power plants totaling close to 5 GW and other energy assets, the Federal Energy Regulatory Commission said last week.

• “There is liable to be an absence of arm’s length bargaining between IIF US Holding 2 and J.P. Morgan Investment,” FERC said in its Sept. 21 decision, which will trigger higher reporting requirements and scrutiny for J.P. Morgan-related activities under the agency’s jurisdiction, such as investing in utilities and power plants.

• Citing FERC’s decision, Public Citizen, a consumer watchdog group, on Monday asked the Federal Reserve to investigate whether JPMorgan Chase, parent to J.P. Morgan Investment, violated the Bank Holding Company Act and the Volker Rule by owning non-banking related assets and operating a private equity company.

Dive Insight:

FERC’s decision reflects the agency’s growing toughness in its tests to make sure companies in the markets it regulates, such as J.P. Morgan, don't control other ones through their investments, which could harm consumers, according to Joshua Macey, an assistant professor of law at the University of Chicago law school.

Thursday’s decision on J.P. Morgan Investments follows FERC’s October 2021 finding that Evergy, a utility company, and Bluescape Energy Partners, an investment firm, were affiliated companies, said Macey, an expert in energy law and the regulation of financial institutions, among other things.

In the Evergy decision, FERC said sharing board members triggered an affiliated status, even though Bluescape owns less than 10% of Evergy’s shares, the agency’s standard threshold for being deemed an affiliate.

Increasingly, FERC is finding affiliations even if the 10% ownership threshold isn’t reached, according to Macey. When FERC conducts market power tests, the agency looks at affiliated entities together and aims to make sure their ability to contract with each other is limited to arm’s-length negotiations, he said.

Reflecting a lack of arm’s-length distance, in its letter to the Federal Reserve board, Public Citizen said in 2018 JP Morgan Chase recommended that IIF buy 120 million Class A shares of Coastal States Wind. IIF took the advice and bought the share, according to the group. “The seller? JP Morgan Chase,” Public Citizen said.

JPMorgan didn’t respond to a request for comment about FERC’s decision or Public Citizen’s request for an investigation by the Fed.

The link between JP Morgan and IIF

FERC’s decision stems from a 2020 “change in status” and revised market-based rate filing to reflect the purchase of Xcel Energy’s Mankato power plant in Minnesota by an IIF subsidiary.

In its decision, FERC said an investment advisory agreement and the partnership agreement governing the relationship between IIF US Holding 2 and J.P. Morgan Investment, and IIF 2 GP and J.P. Morgan Investment, respectively, show there is likely to be an absence of arm’s length bargaining between IIF and J.P. Morgan Investment. J.P. Morgan and J.P. Morgan Investment employees signed both sides of the agreements, FERC said.

The investment advisory agreement allows J.P. Morgan Investment to make “virtually every major decision” for IIF US Holding 2, FERC said.

Also, IIF US Holding 2 has no employees. “This lack of employees, and the need for J.P. Morgan Investment to execute documents on behalf of IIF US Holding 2 … indicates that IIF US Holding 2 cannot function without J.P. Morgan Investment,” FERC said.

In addition, a J.P. Morgan Investment executive is on the board of an upstream owner of the Mankato power plant, which indicates that J.P. Morgan Investment may be able to exercise control over the power plant, FERC said.

The commission’s decision puts on notice private investment firms that are looking to buy utility, power plant and other assets under FERC jurisdiction that they need to be careful about how they structure their relationship with their investment manager, according to Tyson Slocum, energy program director for Public Citizen. “It's pretty important, especially as private funds take a bigger and bigger role in investing in U.S. infrastructure,” he said.

FERC directed Mankato to file a new notice of change in status that includes updated asset information to reflect its affiliation with J.P. Morgan and its affiliates, and updated market power analysis with their affiliates’ generation and transmission assets, and inputs to electric power production.

J.P. Morgan Investment Management created IIF in 2006 as an investment vehicle for pensions, according to Public Citizen.

According to Public Citizen, among its assets IIF owns:

• El Paso Electric, which has 432,800 customers in New Mexico and Texas;
• Summit Utilities and South Jersey Industries, two natural gas utility companies;
• a 633-MW stake in the Palo Verde nuclear plant in Arizona;
• 13 gas-fired power plants; and,
• Midstream gas and oil pipelines and storage facilities.