Gridlock on the Grid

FERC enforcer Norman Bay
People wonder why the power grid goes down, causing massive outages with tens of millions of homes cut off.

Is it the antiquated generating systems, or the inadequate transmission systems? No to both of those.

Its the trading in energy that is causing gridlock on the grid. Huge amounts of futures contracts cause energy to be switched this way and that, not because it is needed by consumers, but because it is being bought and sold many times over.

As I explain in my book Off the Grid: Inside the Movement for More Space, Less Government, and True Independence in Modern America like any gridlock, the problem is too much traffic. The power industry lobbyists have been contemptuous of my arguments ever since the book was published, refusing to debate the accusations in public, and warning that if they withdraw from the market, the consumer will suffer. Ever since Enron, the US Grid has been hijacked by the banks and big money. Now their lobbyists are fighting hard for the Smart Grid which will cement into place this conspiracy against the interests of ordinary consumers.Also, by the way, against the interests of many corporate customers, although not the biggest users who cut their own sweetheart deals.

In the book I criticised FERC, the little-known Federal Energy Regulatory Commission, which was acting like a cheer-leader for the big power companies and the money behind it. But FERC has belatedly cracked down on the banks which are the biggest culprits in this trading bonanza, issuing huge fines against banks attempting to rig the market.

This new found energy is thanks to their Director of Enforcement, former US Attorney Norman Bay who took over about two years ago. But the banks are contesting the criticism, and a power struggle is developing.

JPMorgan was America’s fifth-biggest power wholesaler in the third quarter of 2012 with sales of 36.6m megawatt hours, according to Platts Megawatt Daily. Five years ago the industry publication ranked it 49th.
Bank of America-Merrill Lynch, Deutsche Bank, Morgan Stanley and Citigroup are among the 25 top sellers. The ranking covers sales of physical megawatts powering homes and businesses.
Barclays, 68th in the ranking, is fighting FERC’s proposed record penalty of $435m and $34.9m in disgorgement over alleged attempts to boost the value of its financial positions by suffering losses in California’s physical electricity markets.
In a formal response, Barclays rebutted FERC’s case as based on an “economically irrational theory of alleged manipulation”.

At their height in 2008, banks sold $46.2 billion worth of electricity across all products, or about 15 per cent of the US physical power market. In 2011, they sold $17.5 billion, or about 9 per cent. In the first quarter of this year, their share was down to just under 7 per cent, FERC data show.

“The pie is definitely shrinking and has been for a few years,” said the global head of one bank’s power operations. “Our hope is that we are nearing the bottom.”

Some of that gap has been filled by hedge funds or merchant traders not facing the same limitations as banks; but, say traders, some of that liquidity has simply evaporated..

In November, FERC imposed the temporary ban on JPMorgan’s physical power trading – over no more than a document discovery dispute in an investigation that is not yet finished. The ban will limit JPMorgan’s ability to sell power at profitable rates for six months starting in April 2013.

Several customers of the bank — which includes a range of local utilities from Palo Alto to Seattle — expressed worries about the impact on their routine power purchases.

“I don’t think we are going to get any bid (from JP Morgan) because it takes away their vested interest in getting into these trades,” said Yakov Levin, manager of the power department for the Town of Hudson, Massachusetts, which has bought power from the bank.

The California city of Palo Alto “took steps immediately to ensure we wouldn’t set up any more deals with (JPMorgan) during the ban,” said Debra Katz, who handles communications for the city’s utility. It wasn’t ideal since “we’ve been very happy with our transactions with JPMorgan in the past.”

JPMorgan spokeswoman Jennifer Zuccarelli said the bank has been in contact with its clients regarding the ban and sought clarification from FERC to make sure it will not impact pre-existing contracts.

The bank’s trading counterparties are also taking notice. One trader who has bought power from JPMorgan said any future deals with the bank must be “reviewed by our legal and regulatory departments”.

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