Posts Tagged ‘grid electricity’

On Thursday, October 10, 2013, we argued ComEd’s motion to dismiss the smart meter class action lawsuit before Judge Mary L. Mikva. The court focused on the issue of whether it had jurisdiction over the plaintiffs’ claim that ComEd damaged consumers in the amount of $182 million by delaying smart meter deployment in violation of a June 2012 ICC order.

ComEd claimed that the ICC had exclusive jurisdiction of the matter. Paul Neilan and co-counsel Stuart Chanen, attorneys for the plaintiff class, argued that the ICC already exercised its jurisdiction when it ordered ComEd to start smart meter installations in September 2012, and that the circuit court now has jurisdiction to award damages caused by ComEd’s violation of the June 2012 order. Plaintiffs’ attorneys stressed that ComEd had requested the ICC to stay enforcement of that order, a request the ICC denied. The plaintiffs therefore urged the Court to retain jurisdiction and move on to the issue of the substantive damage that ComEd had caused through its smart meter delay. Mr. Neilan added that ComEd’s customers can’t recover these damages at the ICC.

Judge Mikva took the case under advisement and stated that she would issue a written ruling prior to a November 6 status.


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You may have thought that Enron was dead and buried, but that would not be quite right. FERC’s levy of a $1.5 million fine on Deutsche Bank Energy Trading, LLC for manipulating the California wholesale electricity market  shows not only that hair and nails continue to sprout on Enron’s putrescent corpse, but that Deutsche Bank is not above raiding the tomb and scurrying off with a few clippings. After all, if you can no longer rig LIBOR, you may as well see what you can do in the energy markets.

First off, electricity is not the only commodity traded on an electricity market. In addition to the market for commodity electricy supply, an independent system operator like PJM Interconnection or the California Independent System Operator (CAISO), where Deutsche Bank was a player, also runs markets for capacity, ancillary services, and financial transmission rights (FTRs), which are rights to use the transmission system on which that electricity flows.

Just like a highway, every transmission path has a certain capacity, a limit on how much electricity it can carry before it becomes overloaded. And, just like a highway during rush hour, there are peak times when many generators and power marketers are trying to send electricity to serve their customers. Things get backed up, a condition referred to as congestion. During these peak times, FTRs are like passes to the express lane. In the CAISO market, they’re called Congestion Revenue Rights, or CRRs.

Every day, CAISO schedules the delivery of electricity to serve the load in its control area (native load). If CAISO schedules power from outside its control area to serve its native load, that’s an import. Conversely, if CAISO schedules power from generation within its control area to serve load outside, that’s an export. Congestion can occur in one direction but not the other at a given interface between two control areas (an intertie or flowgate). Imports may be congested while exports may not be, just like the north- and southbound lanes of a highway. If imports are congested but exports aren’t, scheduling an export at that intertie (a counterflow) will relieve some of that congestion and would entitle the scheduler to be paid for doing so.

If a transmission path is congested, like any other commodity for which demand increases when supply is unchanged, the price goes up. To protect itself against such unpredictable price increases, a generator may purchase FTR’s or CRR’s for certain hours (e.g., peak or off-peak), and a transmission system operator like CAISO may hold auctions for just this purpose. A CRR may be purchased by a generator or power marketer as a hedge, or even by a purely financial player as a speculative investment. The owner of the CRR at a congested intertie can make a profit by selling it to another market participant.

During the California energy crisis of 2000-2001, Enron ran a scam called “Death Star” based on an abuse of the electricity trading rules of CAISO. (Enron’s traders had other electricity trading scams with equally sophomoric names like “Get Shorty” and “Fat Boy.”) Enron’s goal was to get paid for appearing to have relieved congestion at an intertie by scheduling electricity in a direction opposite that of the congestion. However, it was nothing more than an appearance: Under Death Star, Enron neither put power into the grid nor took it off. To pull this trick off, Enron would arrange for transmission of power in the same direction as the congestion, but along a transmission path not controlled by CAISO. Like paired long and short futures contracts, the two transactions would offset each other, meaning that Enron never had to put a single kilowatt of power into the system. But because CAISO was not aware of the offsetting transmission outside its control area, it couldn’t see the scam in Enron’s scheduling. Enron’s trades existed only on paper, but its impact on the California electrical system was real enough. It raised the costs paid by other market participants, and trades such as this caused CAISO to call a Stage 2 Emergency in December 2000.

Back to Deutsche Bank in 2012. Deutsche Bank’s traders determined that CAISO’s intertie at Silver Peak, California, which connected to another transmission system run by Sierra Pacific Power (SPPC), was historically congested in the export direction, so they built up a position in export CRRs at Silver Peak. This meant that if Silver Peak continued to experience export congestion, Deutsche Bank’s export CRRs (the right to use export transmission at a fixed price that was much lower than the congested price) would become much more valuable. However, if Silver Peak became import, rather than export congested, those export CRR’s would decline in value. For most of 2009, they guessed right and made about $5 million in profits on CRRs. So far, so good.

Then CAISO “derated” (i.e., partially shut down,) flows in the import direction at Silver Peak for substation maintenance, and reduced export flows. This caused import congestion, and Deutsche Bank started to lose money on its CRR’s.

Deutsche Bank decided to solve this problem on its own by exporting power from Silver Peak to the SPPC system in order to reduce the import congestion. However, Deutsche Bank didn’t have a customer to export the power to. Not to worry. Borrowing the Death Star strategy from Enron, Deutsche Bank just scheduled an equivalent amount of power from SPPC’s control area into CAISO at a different intertie called Summit. Deutsche Bank lost money on every one of these trades, but that didn’t matter because its purpose was to neither serve load nor make a profit. Its only goal was to preserve the value of its CRRs by making it look like congestion had been relieved at Silver Peak.

Deutsche Bank’s ploy to preserve the value of its Silver Peak CRRs was so successful that it started to make a real profit on them. In fact, its paired, imaginary export-import trades were so lucrative that it increased its Silver Peak export CRR exposure, even though that intertie was still derated. Deutsche Bank only stopped when the CAISO market monitor finally learned what was going on and confronted them.

Ultimately, FERC imposed a civil penalty of $1.5 million plus disgorgement of profits for this market manipulation. That might sound like a lot, but Deutsche Bank’s 2011 net revenue was Euro4.326 Bn (USD5.883 Bn, based on a $1.36 exchange rate). FERC’s fine is about 0.00025 of what Deutsche Bank made that year, net. So, while FERC may view its fine as a deterrent, Deutsche Bank more likely views it as a rounding error.

What’s also striking is the utter lack of originality of Deutsche Bank’s scheme. If you’re going to manipulate a market, at least be innovative about it, especially if you bill yourself as a high-flying financier that purports to offer “unparalleled financial services throughout the world.”

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In an earlier post, we noted that the explosions at the Fukushima reactors that caused plumes of radioactive material to spread over parts of Japan were caused not by a breach of the reactor’s core, but rather by loss of the heat sink, or pool, in which spent fuel is stored. To maintain the heat sink, large quantities of water have to be continuously pumped through the spent fuel pool. When Fukushima’s backup generator failed because of flood damage, that heat sink was lost and hydrogen explosions soon followed.

Hurricane Sandy caused Exelon’s Oyster Creek (NJ) nuclear station, the oldest operating nuke station in the United States, to lose grid electricity, compelling Exelon to rely on a backup generator. And elsewhere in New Jersey, the pumps at PSEG’s Salem nuclear station (also partly owned by Exelon) were damaged by the storm surge. The station was shut down but suffered a release of steam with “trace elements of tritium.”

“No cause for concern by the public,” a spokesman for the plant said.


Remember that for several days after the Three Mile Island partial meltdown in 1979, officials had no idea of the extent of the danger. After Fukushima, Japanese authorities implemented a 10 mile evacuation zone, while U. S. authorities halfway around the globe recommended that Americans in Japan evacuate beyond a radius of 50 miles. Indeed, in the immediate aftermath of Fukushima, some leading nuclear experts averred that Fukushima would not be another Chernobyl. A few weeks later, it was ranked second only to that Russian nuclear disaster.

The media even reported that Oyster Creek was at a lower risk of a serious incident because it was undergoing refueling.

Again, really?

When they remove the fuel rods from the reactor core, they don’t put them in FedEx boxes and ship them to Yucca Mountain. Those rods go to the spent fuel pool on site, which, as we’ve seen is a much more dangerous situation if there is a site blackout compounded by a problem with backup power.
The truth is that utilities and regulators often do not know the full extent of the damage or danger within the first hours and days after a nuclear accident. What they do know is that they want to avoid at all costs a panic among the public in the surrounding area. Panic is never a good thing, but the public does need to know what’s going on.

We may not know for a while how close Oyster Creek and Salem came to Fukushima. From appearances, they made it through the night, but not by much. As Wellington said of Waterloo, “It was a damn close-run thing.” The need for continuous cooling dictates that nuclear plants always be located near some body of water, and the failure to plan for extraordinary weather events, including storm surges, is something that cannot be allowed to continue. Nuclear power should be part of the United States generation portfolio, but the continuing occurrence of events such as Fukushima, Oyster Creek and Salem risks the loss of public trust, which will ultimately foreclose any prospect of a nuclear renaissance.

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