UPDATE 1-Dreyfus to pay $4.1 mln fine in U.S. market manipulation settlement

Feb 7 (Reuters) - Louis Dreyfus Energy Services LP on Fridayagreed to pay a civil penalty of $4.1 million and disgorgeanother $3.3 million plus interest to settle U.S. allegations ofpower market manipulation.

This is the latest instance of the crackdown by the FederalEnergy Regulatory Commission, the U.S. energy regulator, onpower market players accused of manipulating prices.

FERC said the settlement resolves its investigation intowhether Louis Dreyfus Energy manipulated the power market in theMidcontinent Independent System Operator (MISO) system fromNovember 2009 through February 2010.

The MISO operates the power grid in 15 U.S. Midwest and GulfCoast states and the Canadian province of Manitoba.

At the time, Louis Dreyfus Energy was part of a jointventure between privately held trader Louis Dreyfus and JPMorganChase & Co hedge fund Highbridge Capital Management LLC.

Highbridge and Dreyfus sold the energy trading firm in 2012to a group of investors who renamed it Castleton CommoditiesInternational.

Specifically, FERC's enforcement office questioned some ofLouis Dreyfus Energy's virtual trading activities.

Virtual trades are a form of financial transaction in thecash electricity market that do not involve any actual supply orpurchase of power.

Louis Dreyfus Energy did not admit nor deny the violations,FERC said.

In addition, one of Louis Dreyfus Energy's traders, XuCheng, will pay a civil penalty of $310,000, FERC said.

Over the past two years, FERC has rattled the U.S. powerindustry with a series of allegations and charges related tomarket manipulation. Experts say several of these casesrepresent a significantly tougher approach on gray-area tradingactivities such as physical versus financial deals.

FERC has issued more than $1 billion in fines since theEnergy Policy Act of 2005 significantly increased the penaltythe commission can impose, hiking it to $1 million per day perviolation from the prior cap of $10,000 a day.

Over the summer, the agency approved a record $410 millionpenalty against JPMorgan in combined civil penalties as well asthe disgorgement of unjust profits for alleged power marketmanipulation.

FERC is also poised for a legal battle with Barclays Plc amid other charges that the UK-based bank denies.

Its enforcement office staff opened 24 investigations in the2013 fiscal year, up sharply from 16 in fiscal 2012, FERC saidin November. Of the investigations opened in fiscal 2013, thecommission said 11 involve market manipulation or falsestatements.