FERC issued an order Thursday finding J.P. Morgan Investment Management qualified as an affiliate of Mankato Companies and IIF US Holding 2, through which it is tied to other firms, including El Paso Electric.
The order came after a Section 206 briefing process FERC started after consumer group Public Citizen questioned the investment bank’s ties to firms it said were not appropriately disclosed.
Public Citizen said the investment bank effectively controlled IIF, through Mankato and other subsidiaries. The two legal entities share employees and effectively let the investment bank make decisions on running IIF.
FERC found the relationship between J.P. Morgan Investment, IIF and Mankato was such that there is liable “to be an absence of arm’s length bargaining in transactions between them,” so it’s appropriate to consider them affiliates for the protection of investors and consumers.
The two firms share operations under an Investment Advisory Agreement and a Partnership Agreement, which delegate J.P. Morgan Investment broad duties to run IIF. A J.P. Morgan Investment employee sits on the board of directors of Onward Energy as a representative of IIF.
“We emphasize that in the market-based rate context, an assessment of affiliation is necessary to understand the relationships between entities to ensure that rates are just and reasonable, to protect against the exercise of market power and to protect customers from affiliate abuse that can result from affiliate transactions, regardless of the presence of fiduciary duties,” FERC said.
Employees of J.P. Morgan and J.P. Morgan Investment signed the partnership agreement and investor advisory agreement for both firms. That at least shows J.P. Morgan was empowered to execute documents that bind IIF into agreements, including agreements with the investment bank itself.
The investment agreement between the firms authorizes J.P. Morgan as investment adviser to “have full authority to undertake and perform any and all acts deemed necessary or appropriate by it in connection with the rights, powers and duties delegated to it.” The partnership agreement explains J.P. Morgan has the power to manage IIF’s business and affairs, to make business decisions, to act on its behalf and take any actions it deems appropriate.
“These rights and powers allow J.P. Morgan Investment to make virtually every major decision on behalf of IIF US Holding 2,” FERC said.
The commission directed Mankato to file a change in status and update its asset appendices to reflect J.P. Morgan Investment as an affiliate. The firm’s market power analysis will need to be updated to reflect the affiliation.
The order drew a concurrence from Commissioner James Danly, and a response to that from Chairman Willie Phillips.
Danly wrote to make clear that while he supports the outcome of the order, he takes issue with the majority’s reasoning. He argued concurrences should be the same as a dissent as a result.
“I disagree with the means by which we arrive at that conclusion,” Danly said. “I do not believe that we need to disclose privileged information to the extent we do to justify our conclusion. We could and should have been more measured.”
Phillips said concurrences amount to the opposite of a dissent and Danly cited no precedent supporting his view that concurrences should be treated that way on review by the courts.
“Commissioner Danly is, as ever, entitled to his opinion,” Phillips said. “I write separately to stress that I do not share that opinion and to underscore that Commissioner Danly is not stating the commission’s view on this issue. As Commissioner Danly correctly notes in his concurrence, it is our agency’s ‘institutional decisions — none other — that bear legal significance.’”
