Friday, July 20, 2012

Enron-ed Again

What is it that makes California such a prime target for monkeying with the power supply? It's size? It's large population? It's lax regulatory agencies? It wasn't all that long ago that Enron manipulated our power, leading not only to power outages but the recall of a governor. Now, according to Michael Hilzig, it's JP Morgan Chase manipulating our power and its cost.

The next time your electricity bill prompts you to curse your local utility, here's another target where you should direct your anger: JPMorgan Chase & Co., which has manipulated the California energy market for its own profit and at a cost to residents and businesses in the state that could be $100 million, $200 million or much more.

That's the accusation leveled by the California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission. The ISO, a nonprofit corporation controlled by the state government, estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.

But that could be just the tip of the iceberg: The bank continued its activities past that time frame, according to the ISO. It also says JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.

And, sad to say, it's possible that the manipulation was done legally because of the rules in place.

Here's how the game worked:

The alleged scheme involves two related wholesale electricity markets maintained by the ISO. There's the day-ahead market, in which power plant owners place bids to provide power for the California electricity grid in the future; and the real-time market, an auction market through which ISO buys electricity for immediate distribution to homes and businesses.

To give plant owners an incentive to participate in these auctions, ISO guarantees to cover their costs for starting up or running their plants at a minimal level, even if their bids aren't accepted. This is known as "bid cost recovery." ISO rules allow bidders to claim payments of up to twice their real costs.

In simplest terms, JPMorgan submitted bids in the day-ahead market that were so low the firm was certain to be accepted onto ISO's roster of potential electricity suppliers — in fact, they were negative bids, essentially offering to pay ISO to take their electricity. The bidding is overseen by software, not human beings, and the automated program isn't smart enough to distinguish a real bid from a potentially fake one. (Implausible as it may seem, there can be legitimate reasons for a power generator to submit a negative bid, but they don't apply to JPMorgan.) ISO believes that JPMorgan never intended to make that sale, but the beauty of its low bids was that they made it eligible to collect bid cost recovery payments.

The next step was for JPMorgan to make sure that ISO didn't actually buy its electricity, presumably because the profit margin from the bid cost recovery claim was greater than from actually selling energy. So in the real-time market, it priced its electricity so high that ISO wouldn't buy it.

The bottom line, the ISO says, is that JPMorgan's traders never intended to sell it electricity via these bids. The scheme, it says, seems to have been designed purely to capture a bid cost recovery payment the bank didn't deserve, at a rate that was inflated anyway.
[Emphasis added]

The game worked for as long as it did because the computer wasn't designed to catch that kind of behavior. It might have worked even longer if JP Morgan hadn't gotten greedy and got the kind of returns that a human finally noticed. The state ISO changed the rule involved, but the brains at the bank found yet another loophole to take advantage of. And a new game ensued just a few days later.

All of this might have been avoided if Glass Stiegel hadn't been repealed. Banks would be in the banking business, not the power business. And the banks have no reason to back out now because they know the feds will fine them far, far less than they made in the scam.

It makes me want to scream.

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Blogger ifthethunderdontgetya™³²®© said...

And yet neither of our Presidential candidates is interested in bringing back Glass Steagall.

It's another reason why I am voting for Jill Stein.

3:16 PM  
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