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Tags: Traders | Bet | Power Overloads | Energy

Traders Lured to Bet on Power Overloads Worth Billions

Friday, 15 August 2014 08:07 AM EDT

Payouts that reached almost $2 billion in the first quarter are attracting traders to the transmission-rights markets run by regional U.S. power-grid operators.

The rights are wagers on where power lines may overload, choking the flow and forcing higher-cost electricity to be substituted. They generated $1.12 billion in profits for traders within PJM Interconnection LLC’s market in the mid-Atlantic and Midwest, more than triple 2013’s total, according to the operator. Payments were $462 million in New York, $109.6 million in California and $103.2 million in Texas, reports from the grids show.

The markets are dominated by financial institutions, who hold more than two-thirds of the rights in PJM. Goldman Sachs Group Inc.’s J. Aron & Co. commodities unit registered on Aug. 12 to buy contracts in California and already trades in PJM. Others include Barclays Bank Plc and Morgan Stanley Capital Group Inc. Merchants Freepoint Commodities LLC, Vitol Inc. and Castleton Commodities International LLC, backed by hedge fund billionaire Paul Tudor Jones, own rights in California where they didn’t have holdings two years ago, the grid operator’s reports show.

“It’s really a big boys’ game,” Karl Simmons, chief executive officer of data analytics company GridSpeak Corp. in Oakland, California, said by telephone yesterday. “You can lose your shirt and then some. But I think it’s a great market in terms of being able to turn a few dollars into a lot in a short period of time.”

Utility Hedging

Transmission-rights markets were born almost two decades ago with the deregulation of the U.S. power markets as a way for utilities to hedge against the limits of the regional grids. Bottlenecks often result in differing power prices across a grid, creating what’s known as congestion costs at delivery points.

In June, the Texas grid operator, Electric Reliability Council of Texas Inc., redirected power for 11 days to avoid an overload on a line in east Texas, resulting in an estimated $2.81 million in congestion costs.

Rights, bought at auction from grid operators or traded between companies, entitle holders to the difference between congestion prices at two points of the traders’ choosing, known as the “source” and “sink.”

Growing Interest

Interest has grown as the 2010 Dodd-Frank Act and the Volcker Rule strengthen federal oversight of exchange-traded commodity derivatives and restrict the type of trades that deposit-taking banks are allowed to make. In California, bids doubled this year for transmission rights, which were granted an exemption from Dodd-Frank rules by federal regulators and are overseen by the Federal Energy Regulatory Commission.

Financial entities owned 68 percent of PJM’s transmission rights in the first quarter, up from 63 percent in 2012, reports from the grid operator’s independent market monitor show. The number of participants in California Independent System Operator Corp.’s congestion revenue rights, or CRR, market has risen by about 10 companies to about 90 in two years.

Vitol has been increasing trading in North American power markets and is now active in 10 regional systems, Fabian Gmuender, a company spokesman, said by e-mail from London Aug. 12. “California is a promising region and participating in its CRR market is a natural component of our power business,” he said.

Client Interest

Julia Sullivan, a Washington-based co-head of the energy regulation, markets and enforcement practice at law firm Akin Gump Strauss Hauer & Feld LLP, said by telephone Aug. 13 that the firm has seen a “pretty steady drumbeat of clients” interested in joining the markets.

“Under Dodd-Frank if you are a swap dealer or a major swap merchant you are subject to extensive regulation, and there are thresholds for how much swap activity will trigger those requirements,” Sullivan said. Transmission rights trading wouldn’t count toward those thresholds, she said.

Morgan Stanley, which has long-term contracts to move power in the western U.S., described California’s market as critical. The company indirectly owns interest in power generation, including a 240-megawatt peaking plant in McCarren, Nevada, a June 27 federal regulatory filing shows.

Spot wholesale electricity in PJM Interconnection’s benchmark Western hub, which includes deliveries to Washington, dropped $3.26, or 9 percent, to average $33.19 a megawatt-hour during the hour ended at 4 p.m. New York time yesterday, grid data compiled by Bloomberg showed. In the Eastern hub, which includes New Jersey, eastern Pennsylvania, Maryland and Virginia, power fell $14.06, or 36 percent, to average $25.54.

Hedging Tool

“We really look at it as a hedging tool to fix our transmission expenses,” Ali Yazdi, executive director in the commodities division of Morgan Stanley Capital Group, said by phone Aug. 12 from Vancouver.

Spokesmen for Goldman Sachs and Freepoint declined to comment. A spokeswoman for Castleton Commodities didn’t immediately respond to requests for comment.

Barclays is managing some legacy positions after closing U.S. power-markets trading operations in February, Marc Hazelton, a spokesman for the London-based bank, said yesterday by telephone from New York.

FERC has investigated companies including Deutsche Bank AG and Louis Dreyfus Energy Services LP for manipulating transmission rights markets.

Deutsche Bank allegedly attempted to increase the value of its California rights between Jan. 29, 2010, and March 24, 2010, by manipulating prices at a point between California and Nevada known as Silver Peak, a Jan. 22, 2013, FERC filings show.

Louis Dreyfus

A trader at Louis Dreyfus Energy Services, a former unit of what’s now Castleton Commodities, was accused of manipulating congestion prices to inflate the value of its rights in the Midwest between November 2009 and February 2010, a Feb. 7 FERC filing shows.

Deutsche Bank agreed last year to a $1.5 million civil penalty after contesting the agency’s findings. Renee Calabro, a bank spokeswoman in New York, declined by telephone to comment yesterday, referring to a statement the company made in January 2013 saying it was “pleased to have reached a settlement and put this matter behind us.”

FERC reached an $8.1 million settlement with Louis Dreyfus Energy Services and one of its traders in February. The company “neither admits nor denies the violations,” the agency said in a Feb. 7 settlement order. A spokeswoman for Castleton Commodities didn’t immediately respond to requests for comment on the case.

FERC commissioner John Norris described the transmission markets as “one of the most vulnerable” to being gamed.

“People will look for vulnerabilities,” Norris said by e- mail from Washington on Aug. 13. “We need to watch them closely, and we need to send a clear signal that we are watching.”

© Copyright 2023 Bloomberg News. All rights reserved.

Payouts that reached almost $2 billion in the first quarter are attracting traders to the transmission-rights markets run by regional U.S. power-grid operators.
Traders, Bet, Power Overloads, Energy
Friday, 15 August 2014 08:07 AM
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