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* FERC previously recommended almost $470 million in fines
* Latest filing said bank failed to address alleged scheme
* Showdown in federal court expected
Jan 29 (Reuters) - Regulators correctly found that tradersfor Barclays Plc manipulated the California power market fromlate 2006 to 2008 and should pay the record penalties proposedin October, the Federal Energy Regulatory Commission staff saidin a report.
The report, dated Monday but posted on the agency's websiteon Tuesday, found Barclays and four of its traders usedlosses in physical markets to make gains in financial markets,and that they knew their activity was unlawful.
The FERC staff's 124-page report was in response toBarclay's on Dec. 14 denying that it did anything wrong andsaying that FERC's findings were erroneous.
FERC staff is recommending the matter be sent to federalcourt, where Barclays previously vowed to vigorously defenditself.
FERC staff said the bank lost about $4.1 million through itsphysical cash trades, but "reaped gains of approximately $34.9million in its financial positions."
The staff said Barclays' manipulative trading scheme costother market participants at least $139.3 million.
"We believe that our trading was legitimate and incompliance with applicable law," Barclays said in an emailedstatement.
"The FERC should reject the Office of Enforcement'srecommendations, decline to assess any penalties, and terminatethis matter without any further proceedings."
FERC proposed in October that the bank pay a $435 millioncivil penalty and refund its almost $35 million in tradingprofits for allegedly engaging in a "coordinated scheme" tomanipulate trading in four major western electricity hubs.
The case is expected to be a first major test of FERC'senforcement powers, expanded by Congress in 2005 legislationthat had its genesis in the Enron electricity manipulationscandals in the western United States earlier in the decade.
Since 2005, FERC has increased its enforcement division'sstaff to more than 200 from about a dozen, led by a number ofhigh-profile law enforcement recruits.
Barclays in a Dec. 14 document termed the allegations thatare the center of the agency's case "erroneous inferences drawnfrom mere fragments of documents."
FERC termed the bank's December response, at over 500 mostlysingle-spaced pages, "remarkable."
"In all these pages, Barclays and its individual traders donot directly address the three-part manipulative schemediscussed above and detailed in the report," the agency said.
