From Bloomberg:
Traders Lured to Bet on Power Overloads Worth Billions
Payouts that reached almost $2 billion in the first quarter are attracting traders to the transmission-rights markets run by regional U.S. power-grid operators.
The rights are wagers on where power lines may overload, choking the flow and forcing higher-cost electricity to be substituted. They generated $1.12 billion in profits for traders within PJM Interconnection LLC’s market in the mid-Atlantic and Midwest, more than triple 2013’s total, according to the operator. Payments were $462 million in New York, $109.6 million in California and $103.2 million in Texas, reports from the grids show.
The markets are dominated by financial institutions, who hold more than two-thirds of the rights in PJM. Goldman Sachs Group Inc.’s J. Aron & Co. commodities unit registered on Aug. 12 to buy contracts in California and already trades in PJM. Others include Barclays Bank Plc and Morgan Stanley Capital Group Inc. Merchants Freepoint Commodities LLC, Vitol Inc. and Castleton Commodities International LLC, backed by hedge fund billionaire Paul Tudor Jones, own rights in California where they didn’t have holdings two years ago, the grid operator’s reports show.
“It’s really a big boys’ game,” Karl Simmons, chief executive officer of data analytics company GridSpeak Corp. in Oakland, California, said by telephone yesterday. “You can lose your shirt and then some. But I think it’s a great market in terms of being able to turn a few dollars into a lot in a short period of time.”
Utility Hedging
Transmission-rights markets were born almost two decades ago with the deregulation of the U.S. power markets as a way for utilities to hedge against the limits of the regional grids. Bottlenecks often result in differing power prices across a grid, creating what’s known as congestion costs at delivery points.
In June, the Texas grid operator, Electric Reliability Council of Texas Inc., redirected power for 11 days to avoid an overload on a line in east Texas, resulting in an estimated $2.81 million in congestion costs.
Rights, bought at auction from grid operators or traded between companies, entitle holders to the difference between congestion prices at two points of the traders’ choosing, known as the “source” and “sink.”
Growing Interest Interest has grown as the 2010 Dodd-Frank Act and the Volcker Rule strengthen federal oversight of exchange-traded commodity derivatives and restrict the type of trades that deposit-taking banks are allowed to make. In California, bids doubled this year for transmission rights, which were granted an exemption from Dodd-Frank rules by federal regulators and are overseen by the Federal Energy Regulatory Commission.
Financial entities owned 68 percent of PJM’s transmission rights in the first quarter, up from 63 percent in 2012, reports from the grid operator’s independent market monitor show. The number of participants in California Independent System Operator Corp.’s congestion revenue rights, or CRR, market has risen by about 10 companies to about 90 in two years....MORE
