Modern Energy Market Manipulation by Kleit Andrew N.;

Author:Kleit, Andrew N.;
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2018-10-23T00:00:00+00:00

I. Introduction

We have seen Financial Transmission Rights (FTRs) before. In Chapter 5, these were introduced as a method of hedging financial risk for suppliers of power to nodes that did not have their own trading prices. In Chapter 6, FTRs returned as an asset that could be manipulated to increase the value of, related positions through the “load shifting” strategy of ENRON and other firms. This chapter discusses a proceeding brought by Federal Energy Regulatory Commission (FERC) staff against a firm, Deutsche Bank that traded electricity to increase the value of its related FTRs, where FERC staff requested a penalty of $1.6 million. It turns out that whether or not the actions of Deutsche Bank should be considered “manipulation” depends in very large part on what is considered an “artificial” price, the interpretation of the relevant law, and which interpretation is likely to be the best for society. An additional topic involves the incentives of an agency to bring, and the defendants to actively defend, a case involving a relatively small fine.

Unfortunately for our purposes, Deutsche Bank settled with FERC staff before the trial began, precluding a complete discussion on the issues. Despite this, there are plenty of lessons to be learned from this matter, or at least questions to be raised.

Section II of this chapter reviews the basic properties of FTRs and describes FERC staff’s theory of how Deutsche Bank harmed a well-functioning market. Section III examines Deutsche Bank’s defense, in which they claimed they created a well-functioning market. Section IV reviews the economics of the potential legal standards that arose from this case. Section V examines the incentives of FERC to bring a case where such a small amount of money was requested in penalties, and Deutsche Bank’s incentives to oppose such a case. Section VI contains conclusions, both legal and economic.

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