Three weeks ago, I posted about initial reports on a FERC investigation into theft from rate payers through manipulation of electricity markets by our criminal investment banks.
Here is an update on that story. It seems that California ISO, the state’s equivalent of PJM Interconnection, is also investigating this manipulation, specifically by JP Morgan Chase. You may know the bank from recent stories linking it to the $8 billion losses from their London Whale speculations and their involvement in the recent Libor scandal.
LA Times reporter Michael Hiltzik got an expert to help him sort out the description of the case by CA ISO officials. It turns out that JP Morgan Chase was ripping off electricity rate payers through the power capacity markets, just like the one that PJM Interconnection runs in our region. Here is Hiltzik’s description of the scheme:
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 belegitimate 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.
This is exactly the kind of “market mechanism” that PJM’s independent market monitor described as “gameable” just a few months ago.
The big investment banks that trade on electricity markets want a bigger interstate transmission system to handle more and more of their trading on the new deregulated electricity markets. They want a bigger and bigger playground for their “games.”
The JP Morgan Chase gangsters would be very happy for you to believe all the media propaganda about our falling apart electric grid and the need to build new transmission lines for renewable power, or bogus claims about improving reliability. Because all the while, they will be playing their games and picking your pocket.