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Traders Profit as Power Grid Is Overworked

39 points by wallflower 12y ago

jgalt212 12y ago
The price volatility in the power market makes bitcoin seem downright boring.
jdminhbg 12y ago
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.
adventured 12y ago
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
jjoonathan 12y ago
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 12y ago
  > 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.
  - jjoonathan 12y ago
    > 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. That's exactly what they did, although they used money instead of words to send the message. If you bet your buddy that he can't handle 10 shots of Tequila without throwing up, you have provided him with incentive to handle 10 shots of Tequila without throwing up. If DC Energy bets PowerCo lots of money that price differences are small, DC Energy has provided PowerCo with incentive to keep differences small (e.g. by performing preemptive maintenance). > It's exploitation by DC Energy pure and simple. Exploitation is a foundation of Capitalism. Yes. The method to the madness of capitalism is the idea of giving up compensatory justice in exchange for having correct marginal incentives. If you could sum up the capitalist hypothesis in a sentence it would be "correct marginal incentives are more important than compensatory justice." It's a sad hypothesis but IMO probably a true one. > What occurred is inadequate protections You say it with hindsight. DC $aid the same thing but with foresight. > The lack of a working strategy to protect electric producers is the true 'signal' that DC Energy conveyed. You make it sound like a trivial observation. Remember that someone else was willing to bet against them. This transaction did three things: 1. It punished that party that incorrectly believed the grid would be functional when it wasn't. 2. It provided a market signal predicting a problem before the problem happened, while there was still time to fix it. 3. Assuming the power company was on the other side of the transaction, it provided incentive for the power company to fix the problem (again, before the problem happened).
bk_geek 12y ago
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.
selimthegrim 12y ago
http://www.dc-energy.com/careers/who-we-are/people-profiles/carson http://www.dc-energy.com/careers/who-we-are/people-profiles/... It boggles my mind to think they're writing their systems in PHP.
- deleted 12y ago
  [deleted]
- collyw 12y ago
  Looking at job ads I would guess that PHP is the most popular / common language for writing web pages theses days.
  - selimthegrim 12y ago
    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.

39 points by wallflower 12y ago

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

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.

adventured 12y ago

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

jjoonathan 12y ago

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 12y ago
> 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.
- jjoonathan 12y ago
  > 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. That's exactly what they did, although they used money instead of words to send the message. If you bet your buddy that he can't handle 10 shots of Tequila without throwing up, you have provided him with incentive to handle 10 shots of Tequila without throwing up. If DC Energy bets PowerCo lots of money that price differences are small, DC Energy has provided PowerCo with incentive to keep differences small (e.g. by performing preemptive maintenance). > It's exploitation by DC Energy pure and simple. Exploitation is a foundation of Capitalism. Yes. The method to the madness of capitalism is the idea of giving up compensatory justice in exchange for having correct marginal incentives. If you could sum up the capitalist hypothesis in a sentence it would be "correct marginal incentives are more important than compensatory justice." It's a sad hypothesis but IMO probably a true one. > What occurred is inadequate protections You say it with hindsight. DC $aid the same thing but with foresight. > The lack of a working strategy to protect electric producers is the true 'signal' that DC Energy conveyed. You make it sound like a trivial observation. Remember that someone else was willing to bet against them. This transaction did three things: 1. It punished that party that incorrectly believed the grid would be functional when it wasn't. 2. It provided a market signal predicting a problem before the problem happened, while there was still time to fix it. 3. Assuming the power company was on the other side of the transaction, it provided incentive for the power company to fix the problem (again, before the problem happened).

bk_geek 12y ago

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.

selimthegrim 12y ago

http://www.dc-energy.com/careers/who-we-are/people-profiles/carson http://www.dc-energy.com/careers/who-we-are/people-profiles/... It boggles my mind to think they're writing their systems in PHP.

deleted 12y ago
[deleted]
collyw 12y ago
Looking at job ads I would guess that PHP is the most popular / common language for writing web pages theses days.
- selimthegrim 12y ago
  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.