This is a bit of a complex story here and best off to read all of it at the New York Times to understand what’s going on fully and how this works. When the demand for electricity rises and the immediate supply is out done, regional grid operators auction off what is called a Congestion models which are derivatives linked to thousands of locations that are not on the grid. When electricity prices spike up, the contract holders collect the difference in price between grid operators, and likewise if it goes down, they pay. The contracts were created to help utilities hedge against sharp price swings caused by weather, failures
or plant equipment problems and those lower costs were supposed to reduce consumer bills but that’s not exactly what’s going on here.
Other investors outside the grid are cashing in with Wall Street banks and they siphon off the money and one particular firm here is discussed in detail as they seem to be the winning party about 99% of the time. The port officials in this area of New York would like to have that money of course. Again the idea here was to eliminate monopolies and create competitive investment opportunities and lower rates for consumers, but it’s not happening. Wall Street firms have stepped in with their quant created math models and figure out how to profit yet in one more way. It’s big money as well.
“Power companies that buy or sell in the wholesale market can get hurt by sudden price spikes, but they can buy a financial instrument known as a congestion contract, which acts as a hedge against losses. Financial firms can also buy these contracts, and one of the most successful in New York is DC Energy, a Virginia-based trading firm that made $1.5 million on contracts between Northport and other points on Long Island over a 48-hour period.”
“The utilities and power companies suggest they cannot win against trading outfits that employ math specialists, often called “quants,” to spot lucrative opportunities. With transmission contracts, there are tens of thousands of tradable combinations.”
The utilities companies can’t win due to the mathematical formulas used by investors. Here’s the background on the quants from the firm DC Energy who develops the models, one from Harvard with a master’s degree in artificial intelligence , a physicist from MIT for a couple examples so you can see where the folks are not working their fields but rather in financial models. The trading market on electricity is yet one more example to where the technology is over the heads of regulators, just like high frequency trading, back to the same thing again and consumers lose once again. We can barely expect any regulators to do squat anymore as the government won’t hire folks in that capacity to understand “what’s really going on with math”.
Again too we are seeing the same thing in healthcare to where Quant models are able to run circles around the regulators and that was my big fear in 2009 with Sebelius running HHS and for good reason, they walked all over here and you can review this article if you like to where the insurers just wrote themselves a raise with math models and collected over $70 billions over 5-6 years with complex formulas that on auto pilot just raised up risk with proprietary formulas. An audit recently found this and so now what do they do? HHS doesn’t look too sharp and again what I said would happen in 2009 as Sebelius absolutely had no data mechanics logic and we have same thing with Mary Jo at the SEC, this is way over their heads and there’s no way they can function and always, we loose as consumers.
I know this is a little off the beaten path here with my blog but felt it was important as this is what you are seeing today with health insurers as well. As you have read MDs in many states are being fired by United Healthcare and given no reason, well they are working a model, using their math and doing it because they can, and it’s darn scary that there’s nobody around asking to see their models. BD
Health Insurer Actuary Jobs Becoming More Difficult In the Era of Killer Algorithms, Can’t Function Like They Used To As Information Changes Take Place Daily And Hourly, More Insurance Companies Are Seeking Quants to Create New Math Models, The Next Level Up From Actuary Calculations
PORT JEFFERSON, N.Y. — By 10 a.m. the heat was closing in on the North Shore of Long Island. But 300 miles down the seaboard, at an obscure investment company near Washington, the forecast pointed to something else: profit.
As the temperatures climbed toward the 90s here and air-conditioners turned on, the electric grid struggled to meet the demand. By midafternoon, the wholesale price of electricity had jumped nearly 550 percent.
What no one here knew that day, May 30, 2013, was that the investment company, DC Energy, was reaping rewards from the swelter. Within 48 hours the firm, based in Vienna, Va., had made more than $1.5 million by cashing in on so-called congestion contracts, complex financial instruments that gain value when the grid becomes overburdened, according to an analysis of trading data by The New York Times.
Those profits are a small fraction of the fortune that traders at DC Energy and elsewhere have pocketed because of maneuvers involving the nation’s congested grid. Over the last decade, DC Energy has made about $180 million in New York State alone, The Times found.
The Times examined 150,000 congestion contracts that have been auctioned since 2003 by the New York Independent System Operator, a nonprofit company that oversees the state’s transmission network. Under deregulation, system operators manage the nation’s transmission lines and run wholesale power markets where utilities like PSEG Long Island acquire power to sell to their customers. Using data made public by the company, The Times cataloged who bought the contracts and at what prices, and how much money was subsequently won or lost.
“If traders are making money, then consumers are paying more,” Mr. Wolak said. “The money that these guys are making has to come from somewhere.”
Inside DC Energy, teams of six to eight analysts search through data for trends or disruptions before bidding on contracts through auctions held by the New York Independent System Operator and its counterparts elsewhere in the country.
“The message that was portrayed was, by doing this trading, we are making the markets more efficient,” said a former employee. “But there were people who got disillusioned and left because many of them aren’t finance people to begin with, and the focus is on making money and boosting the company’s bottom line.”
DC Energy goes to great lengths to protect its winning formula. After one of its top traders, Jason Miller, left for Saracen Energy, another trading firm, DC Energy sued. The reason was that Saracen, based in Houston, had begun playing the New York congestion market, just like DC Energy. DC Energy said Mr. Miller violated confidentiality and noncompete agreements he had signed, and misappropriated trade secrets.
Why aren't the utility companies hiring staff who can handle these derivative auctions? The congestion contracts require someone to actually work on them in order to take advantage of them. Sounds like to utilities just can't be bothered. They want the contracts handed to them on a silver platter.
ReplyDeleteWhy does the title contain "manipulating the electricity markets"?
ReplyDeleteThis story has nothing to do with market manipulation. It has to do with the smartest being the most profitable. Good luck trying to change that.