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A July 12, 2011 file photo shows the headquarters of Deutsche Bank reflected in a puddle in Frankfurt. The bank disputes U.S. allegations that its traders manipulated the energy market.ALEX DOMANSKI/Reuters

Deutsche Bank AG's energy trading arm told U.S. regulators that it did not manipulate the California power market and should not have to pay a $1.5-million (U.S.) fine and give up $123,198 in profits.

The fine that the U.S. Federal Energy Regulatory Commission is seeking from Deutsche Bank is much smaller than the record $435-million that the energy regulator sought last week from British bank Barclays PLC, also for allegedly manipulating the power markets in California.

FERC's enforcement arm issued a "show cause" order to Deutsche Bank in September, asking the German bank to explain why the agency should not fine the bank's trading arm.

In its response filed with FERC on Nov. 5, Deutsche said: "The allegations in the Show Cause Order never should have been brought. If the Commission does not abandon those deeply flawed allegations now, they will be overturned by a federal district court."

FERC's enforcement division has become much more aggressive over the past few years, accusing several banks and energy companies of manipulating power markets, mostly in California.

In December, FERC's enforcement staff said Deutsche Bank had violated the law by "scheduling and trading energy in California in order to benefit its Congestion Revenue Rights positions" from January to March 2010.

A Congestion Revenue Rights position can be used as a financial hedge to manage the cost of transmitting electricity.

"The legal position (FERC) Enforcement has taken here is radical," Deutsche said in its response to the show cause order. "Essentially, Enforcement's position is that knowingly trading in two related markets is per se unlawful market manipulation, even if the trading is profit-seeking in both markets."

Deutsche disputed FERC's allegation that the bank's traders had manipulated the market by losing money in a physical power market to make money in a financial market.

The California Independent System Operator, which oversees the power market in the state, referred the case to the FERC enforcement arm in June 2010.

In October, the FERC staff issued a "show cause" order to Barclays, asking why the agency should not fine the bank's trading arm a record $435-million and force it to give up $34.9-million in ill-gotten gains for allegedly manipulating the California power market during 2006-2008.

Barclays said it would fight the allegations.

In September, the FERC staff issued a "show cause" order to U.S. bank JPMorgan Chase and Co asking why the agency should not take away the bank's market-based rate authority for providing misleading information about its California market trading.

If electricity traders cannot trade at market-based rates, they must trade at much lower cost-based rates, potentially driving them out of the market.

JPMorgan Chase & Co. apologized to FERC in October and said it had made an inadvertent mistake.

FERC was investigating JPMorgan following complaints that its traders may have bid up electricity prices in California and the Midwest by some $73-million.

In March, FERC won a $245-million fine from Constellation Energy over charges of power market manipulation in and around New York.

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