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> 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 t

> 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).
- disjointrevelry 12y ago
  Quote again from the article, did you read it? > What no one here knew that day, May 30, 2013, was that the investment company, DC Energy, was reaping rewards from the swelter Price offset gained was greater 1.5 million (* this is on one occurence of a grid overburden. The wholesale price jump was 550%, which is somewhat of a hint to the initial investment). > 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. Key term here is 'maneuvers'. They don't plot down a one big bet scheme. How sophisticated? Here, let's look at the article: > Across the nation, investment funds and major banks are wagering billions on similar trades using computer algorithms and teams of Ph.D.s, as they chase profits in an arcane arena that rarely attracts attention. Their _intent is to ensure they are not signalling_. (editted: *)
  - jjoonathan 12y ago
    > Quote again from the article, did you read it? Yes, I saw the "shock and awe" soundbytes too. I ignored them. They are irrelevant to the question of whether what is happening is good or whether it should be stopped. > Price offset gained was greater 1.5 million What does the scale have to do with any of this? > Key term here is 'maneuvers' I'm not interested in who used which loaded term. I am interested in the marginal incentives provided by these trades. Do they point in a direction that benefits society or in a direction that hurts society? > Their _intent is to ensure they are not signalling_. If their teams of Ph.Ds had figured out a way to avoid the signaling inherent in the price changes due to supply/demand swings, they wouldn't be wasting their time in a specialized energy firm. Instead, they would be making trillions of dollars by robbing blind every financial institution in the world. Here's what it looks like to me: The smart PhDs figured out that the energy firm was performing too little maintenance. The energy firm was not willing to employ them to learn this for itself but it was willing to bet against them. The PhDs won and the power company lost. Justice was not served: although it is good that the PhDs got paid for predicting a problem, it is bad that consumers wound up paying double for the problem. HOWEVER, marginal incentives were corrected. If the trend continues, the incentives will continue to be correct tomorrow, and hopefully the power company will wake up and start paying attention to the predictions so that it can head off problem before they occur. The hypothesis of capitalism is that these incentives to fix the actual physical transmission line problem are more important than the unjust costs conveyed to consumers.
thrill 12y ago
"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 12y ago
  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 12y ago
    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 12y ago
      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.

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).

disjointrevelry 12y ago
Quote again from the article, did you read it? > What no one here knew that day, May 30, 2013, was that the investment company, DC Energy, was reaping rewards from the swelter Price offset gained was greater 1.5 million (* this is on one occurence of a grid overburden. The wholesale price jump was 550%, which is somewhat of a hint to the initial investment). > 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. Key term here is 'maneuvers'. They don't plot down a one big bet scheme. How sophisticated? Here, let's look at the article: > Across the nation, investment funds and major banks are wagering billions on similar trades using computer algorithms and teams of Ph.D.s, as they chase profits in an arcane arena that rarely attracts attention. Their _intent is to ensure they are not signalling_. (editted: *)
- jjoonathan 12y ago
  > Quote again from the article, did you read it? Yes, I saw the "shock and awe" soundbytes too. I ignored them. They are irrelevant to the question of whether what is happening is good or whether it should be stopped. > Price offset gained was greater 1.5 million What does the scale have to do with any of this? > Key term here is 'maneuvers' I'm not interested in who used which loaded term. I am interested in the marginal incentives provided by these trades. Do they point in a direction that benefits society or in a direction that hurts society? > Their _intent is to ensure they are not signalling_. If their teams of Ph.Ds had figured out a way to avoid the signaling inherent in the price changes due to supply/demand swings, they wouldn't be wasting their time in a specialized energy firm. Instead, they would be making trillions of dollars by robbing blind every financial institution in the world. Here's what it looks like to me: The smart PhDs figured out that the energy firm was performing too little maintenance. The energy firm was not willing to employ them to learn this for itself but it was willing to bet against them. The PhDs won and the power company lost. Justice was not served: although it is good that the PhDs got paid for predicting a problem, it is bad that consumers wound up paying double for the problem. HOWEVER, marginal incentives were corrected. If the trend continues, the incentives will continue to be correct tomorrow, and hopefully the power company will wake up and start paying attention to the predictions so that it can head off problem before they occur. The hypothesis of capitalism is that these incentives to fix the actual physical transmission line problem are more important than the unjust costs conveyed to consumers.

thrill 12y ago

"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 12y ago
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 12y ago
  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 12y ago
    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.