Original post:
Although it was all the way back in 2008 when then-candidate Obama told the San Francisco Chronicle's editors “Under my plan … electricity rates would necessarily skyrocket.”* it took until 2013 for a couple guys to take the "shut the plant and gun the price" model and make it work.
From Pulitzer Prize winner David Cay Johnston writing at al-Jazeera:
Enron-style price gouging is making a comeback
Wall Street makes naked attempt to jack up electricity prices in New England
The price of electricity would soar under the latest scheme by Wall Street financial engineers to game the electricity markets.
If regulators side with Wall Street — and indications are that they will — expect the cost of electricity to rise from Maine to California as others duplicate this scheme to manipulate the markets, as Enron did on the West Coast 14 years ago, before the electricity-trading company collapsed under allegations of accounting fraud and corruption.
The test case is playing out in New England. Energy Capital Partners, an investment group that uses tax-avoiding offshore investing techniques and has deep ties to Goldman Sachs, paid $650 million last year to acquire three generating plant complexes, including the second largest electric power plant in New England, Brayton Point in Massachusetts.
Five weeks after the deal closed, Energy partners moved to shutter Brayton Point. Why would anyone spend hundreds of millions of dollars to buy the second largest electric power plant in New England and then quickly take steps to shut it down?
Energy partners says in regulatory filings that the plant is so old and prone to breakdowns that it is not worth operating, raising the question of why such sophisticated energy-industry investors bought it.
The real answer is simple: Under the rules of the electricity markets, the best way to earn huge profits is by reducing the supply of power. That creates a shortage during peak demand periods, such as hot summer evenings and cold winter days, causing prices to rise. Under the rules of the electricity markets, even a tiny shortfall between the available supply of electricity and the demand from customers results in enormous price spikes.
With Brayton Point closed, New England consumers and businesses will spend as much as $2.6 billion more per year for electricity, critics of the deal suggest in documents filed with the Federal Energy Regulatory Commission.
That estimate will turn out to be conservative, I expect, based on what Enron traders did to California, Oregon and Washington electricity customers starting in 2000. In California alone the short-term market manipulations cost each resident more than $1,300, a total burden of about $45 billion.HT: The Big Picture
Clearance pricingElectricity is sold in what are known as clearance price auctions, in which all sellers get the price of the highest winning bid. Imagine 10 suppliers, each owning an identically sized power plant for a total of 10 plants. Now imagine that demand in the next hour will require power from nine of these plants, and that bids range from one penny to $100.
If the plant offering the ninth greatest price — i.e. the second highest price — bids $95, that becomes the clearance price. Under this scenario — and this is the key point with clearance price auctions — every plant that bid $95 or below wins the auction, and each of them gets $95, even if some offered to sell power for a penny and even if the average price was $20.
Electricity market trading records in Texas have shown that under these rules, prices have spiked to more than $3 million per hour above the average price offered. Revenue above the average price is virtually pure profit.
Trading records and experiments conducted by Professor Sarosh Talukdar at Carnegie Mellon University and others show that the electricity auction rules tend to drive prices up, not down, until they approach the level that an unregulated monopolist could charge....MORE
*Q&A with the editorial board of the San Francisco Chronicle, January 21, 2008
