JPMorgan Chase and California's Wild West Energy Markets

JPMorgan Chase bank in Palm Springs | Photo: Joe Wolf/Flickr/Creative Commons License

If you feel like California's system for regulating and distributing electrical power is mind-numbingly complex, you're not alone: the system is almost deliberately opaque, and there's a lot of money to be made by familiarizing yourself with its hidden intricacies. That's the take-away from Michael Hiltzik's must-read Wednesday column in the Los Angeles Times detailing how finance giant JPMorgan Chase & Co. may have gamed the California Independent System Operator (CaISO) in 2010 and 2011, to the tune of at least $57 million. The firm conducted similar alleged gaming with an ISO in the Midwest.

If you pay electric bills in the state of California, that money came out of your pocket, as well as what Hiltzik calls the possibly "incalculable costs" of Chase's market manipulation. Though CaISO and the Federal Energy Regulatory Commission (FERC) have launched complaints against JPMorgan Chase, there's some question as to whether the bank actually broke any laws. It may not have had to: the laws in question were more or less written by Enron.

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The ghost of Enron looms large over this story. Enron, along with California's three largest investor-owned utilities Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E), heavily lobbied former governor Pete Wilson and the state legislature to deregulate electrical power production in California. Wilson signed a deregulation bill in 1996.


What is...? The Grid
The new law, which took effect two years later, forced utilities to hand over control of their transmission lines to CaISO and created huge incentives for them to sell off their power plants to third parties, and created a complex market in which the utilities would buy power from those third parties. Within two years, Enron and a few other companies were gaming that market with famously catastrophic results. Enron manipulated the market by shutting down its power plants, "megawatt laundering" its California-produced power as more expensive out-of-state power, and other techniques which FERC later described as having been made possible only due to the state's Byzantine electricity deregulation law.

JPMorgan is alleged to have played one of CaISO's market bidding processes off against another. They involved the "day-ahead" market, in which companies offer energy for sale in the future, and the "real-time" market, in which the ISO buys power for immediate distribution. As Hiltzik explains, JPMorgan submitted bids to the day-ahead market that were so low they would have lost the company money, so that the ISO would be sure to snap them up. When it came time to actually deliver the power, JPMorgan set its asking price in the real-time market so high that the ISO looked elsewhere.

The thing that made this profitable for JPMorgan is that the CaISO guarantees to cover bid costs for bidders in the day-ahead market, and even though JPMorgan was offering bids on energy it never intended to sell, it qualified for this bid cost recovery -- to the tune of about $4 million a month, at least until CaISO asked for, and got, an emergency rule change from FERC that blocked the loophole.

For perspective, $4 million a month in 2011 out of CaISO's budget could have installed 837 kilowatts of rooftop solar in Los Angeles each month at retail prices, not counting the bulk discount CaISO would probably have gotten. That's equivalent to about 200 average-sized residential rooftop solar installations.

Instead, for that money, we got no power whatsoever, and JPMorgan Chase was rewarded for finding a loophole in the system. And as a result of diverting buyers from legitimate low bids in the day-ahead market to the more expensive real-time market, JPMorgan likely raised the costs of electrical power across the board, wasting funds that could have been used to accelerate the state's move to renewables.

There's another recent case involving a party who intervened in a federally-regulated energy resources bidding process, and it's interesting to compare his case to JPMorgan's. In 2008, Tim DeChristopher entered bids on oil and gas leases on 14 parcels of Utah's redrock country in an attempt to prevent those parcels from being drilled. Next week marks the halfway point of the two-year prison sentence DeChristopher obtained as a consequence. If the JPMorgan staff allegedly responsible for gaming the CaISO bidding process are indeed found to have done so, comparing their fate with DeChristopher's should prove interesting.

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