
Traders Profit as Power Grid Is Overworked - wallflower
http://www.nytimes.com/2014/08/15/business/energy-environment/traders-profit-as-power-grid-is-overworked.html
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jjoonathan
This is how I understand the stakes at the point immediately preceding the
grid hiccup:

DC Energy Trading Firm: Out a sizable chunk of money. Incentive to stir
trouble in the energy grid. No evidence that they did.

Power company: Has extra money from selling the contract and double incentive
to spend that money in a manner that would prevent price differences between
Northport and Port Jefferson.

\----------------------------

CMV, but it sounds like the market is doing exactly what it is supposed to be
doing. DC Energy placed a bet that others were underestimating the probability
of trouble between Northport and Port Jefferson. They created an incentive for
other market players (especially power companies) to take action against this
possibility and install backup capacity, perform preventative maintenance, or
generally to do whatever a power company can do to prevent problems like the
one that happened. Since these measures weren't taken DC energy now gets their
payout for having "told them so." At least, that's how I understand it. If my
understanding is correct it seems like everything is on the up-and-up.
Consumers were victims of power companies that not only failed to anticipate
the problem but didn't take the hint when trading firms offered to bet that
there _would_ be a problem.

The thing that would make this a scandal would be if it were discovered that
DC Energy had, say, payed someone at the power company to "pull an Enron" and
sabotage maintenance. The danger of this kind of scheme is obviously real
(see: the audio clips of Enron traders giggling like kids stealing cookies
(yes, really) as they ordered power plants offline in California, driving up
prices by creating an artificial shortage that eventually became known as the
infamous rolling blackouts). However, it doesn't look like there is any
evidence that the same conflict of interest is happening here.

Is the article arguing that these markets shouldn't exist because this kind of
behavior would be nearly impossible to detect, making for tremendous moral
hazard? That's the only "point" I can extrapolate from its discussion. It's
not an unreasonable question. I could forgive its clickbaity title if only the
article itself had been clearer about its own purpose.

~~~
disjointrevelry
> Consumers were victims of power companies that ignored market signals, not a
> crafty scheme to leverage them out of their money.

DC Energy didn't exactly go to the power companies and say, "Hey guys, when I
bet against your power capacity, it means put more money in it so I can lose
my investment!" That's just completely absurd.

From the article: > The contracts were intended to protect the electricity
producers, utilities and industries that need to buy power. The thinking was
that the contracts would help them hedge against sharp price swings caused by
competition as well as the weather, plant failures or equipment problems.
Those lower costs could reduce consumers’ bills.

> But Wall Street banks and other investors have stepped in, siphoning off
> much of the money. In New York, DC Energy accounted for more than a quarter
> of the total $639 million in profits in the congestion markets between 2003
> and 2013, The Times found. Some of DC Energy’s biggest paydays involved Port
> Jefferson, a village 60 miles east of Manhattan. Because of the geography of
> the grid, moving power from one point to another means demand often briefly
> outstrips supply here.

It's exploitation by DC Energy pure and simple. Exploitation is a foundation
of Capitalism. What occurred is inadequate protections, whether intentional or
not. The lack of a working strategy to protect electric producers is the true
'signal' that DC Energy conveyed.

~~~
thrill
_" Exploitation is a foundation of Capitalism"_

For every voluntary buyer in capitalism there is a voluntary seller. The NY
Times presents this as exploitation.

~~~
Spooky23
Most people accept the notion that access to things like electricity, road
capacity, heating gas and similar commodities are different than other
commodities.

It's ridiculous that it is acceptable for the owners of critical
infrastructure to stand back and allow easily foreseeable market disruptions
to take place. In businesses where meaningful competition exists, doing so
puts you out of business. Peak energy demand is very easy to project with
great accuracy, there is no excuse for a saturated/failed electrical grid.

Government isn't here to promote capitalism -- it's broad charter is to
promote the general welfare if its citizens. Unstable market prices for
electricity is a market and governance failure, period.

~~~
thrill
The quality of the decision made by either party does not invalidate that
capitalism is a collection of voluntary activity. It's when government is
involved that there is restriction on that activity, which frequently has
unintended effects. If there is inadequate planning for future demand then
prices may certainly vary more than is considered acceptable. Poor planning on
a utility's part is not the fault of capitalism, but which seems to be the
major point of the article and the original poster. Indeed, selling future
contracts is generally viewed as a good way to stabilize future prices as it
gives a signal as to general (market) consensus - if insurance for some
activity is considered expensive then it should tell even the minimal of
planners that an activity has unevaluated risk. An inability to act properly
on such signals does indeed indicate poor planning on one party's part.

~~~
Spooky23
That's a very sophisticated way of saying that utility companies have some
magical entitlement to say "Fuck you, pay me".

There's another answer that that a 5 year old could come up with, and happened
to work very effectively for 75+ years: when the electrical grid is out of
electrical transmission capacity, add more capacity.

Writing future contracts doesn't accomplish much, other than create jobs
trading electricity, because the supply problem isn't generation, it's
distribution. There is no market for electrical infrastructure.

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bk_geek
From reading this article, it appears that these are not Over The Counter bets
that are placed between one Investment bank with another. Rather this is a
product created and sold by the grid operator NYISO in order to hedge price
volatility and collect a fee.

While there is a mention of price manipulation, the article fails to clarify
exactly how the prices are "manipulated" in order to favor the banks. The
focus seems to be more on "bad banks" making money.

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jdminhbg
This article could've stood to have fewer empty quotes from a podunk mayor and
some kind of an explanation of the contracts themselves instead. There's just
"congestion = profit" repeated over and over again, presumably as some kind of
dog whistle to the average NYT reader.

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adventured
The results of decades of the government failing to properly invest into power
generation + grid:

[http://i.imgur.com/L6adSdy.jpg](http://i.imgur.com/L6adSdy.jpg)

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jgalt212
The price volatility in the power market makes bitcoin seem downright boring.

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selimthegrim
[http://www.dc-energy.com/careers/who-we-are/people-
profiles/...](http://www.dc-energy.com/careers/who-we-are/people-
profiles/carson)

It boggles my mind to think they're writing their systems in PHP.

~~~
collyw
Looking at job ads I would guess that PHP is the most popular / common
language for writing web pages theses days.

~~~
selimthegrim
Well yeah but they're hiring PHDs to write PHP? I would think their
proprietary trading algorithms (which I was talking about) would be...not
written in that.

