Overloaded power lines mean profits for traders

Source: Doan/Crawford, Bloomberg • Posted: Tuesday, August 19, 2014

Traders betting on electric transmission constraints netted nearly $2 billion in the first quarter of this year.

PJM Interconnection LLC’s market alone yielded $1.1 billion in profits for traders — three times last year’s total, the operator said. Other big payouts were in New York, California and Texas.

More traders are looking to the grid operator-run transmission-rights markets, which power market deregulation created. Julia Sullivan, co-head of the energy regulation and enforcement practice at law firm Akin Gump Strauss Hauer & Feld LLP, said the firm has seen a “pretty steady drumbeat of clients” interested in jumping into those markets.

The wagers become profitable when there are “congestion costs,” when pricier electricity is needed to sub in during bottlenecks. Traders can buy rights at auction, which will pay them the difference between prices at two locations the trader picks.

Units of institutions like the Goldman Sachs Group Inc., Barclays PLC and Morgan Stanley control more than two-thirds of PJM rights.

“It’s really a big boys’ game,” said Karl Simmons, chief executive officer of data analytics company GridSpeak Corp. in Oakland, Calif. “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.”

Both Deutsche Bank AG and Louis Dreyfus Energy Services LP have been investigated by the Federal Energy Regulatory Commission for manipulation of these markets.

“People will look for vulnerabilities,” said FERC Commissioner John Norris. “We need to watch them closely, and we need to send a clear signal that we are watching” (Doan/Crawford, Bloomberg, Aug. 15).