Financial players in the market.
Wholesale energy comes in 2 forms – physical, the actual delivered power that turns motors and financial, a contract for that physical power for a specific amount of power and at a specific time.
In the pool markets pre-1990, there were no financial instruments that could be traded, yet you could have a Power Purchase Agreement (PPA), but most contracts were for mega-watthours (MWH) delivered to a point on the grid to support the expected load. They were to a very large extent traded from one utility to another, and in most cases within a couple of hours of delivery. In a lot of cases, they were bartered “I will give you 100 MWH at a day of your choosing, if you will provide me with 80 MWH at 3PM today a Williams Point substation. No money changed hands, but the senior operator had a book at their desk that had a list of who owed who how much power. There were millions of dollars of power in some of those books, not on the official financial records of the utility.
When the markets were created (PJM, NETA, etc.) there was worry about those markets being very rigid and illiquid. The idea of trading financial instruments around the physical power was created, where traders could buy and sell the power and the right to use the transmission path. This created the opportunity to trade on the same block of power several times before delivery and establish a value for the power.
It was a great idea, and it established prices for both wholesale power and rights to transmission paths, but it also created opportunities to game the system. The story is long and twisted, but it runs through ENRON, in total ENRON’s bankruptcy was more than $74 billion dollars. California was left with more than $40 billion bills and the payoff from the capped retail prices took more than a decade to pay off, from a surcharge on electric bills.
It is not that all financial players are evil, most are not, but bad laws and regulations allowed the market to be manipulated. Financial trading has dropped from its high in the late 1990s and early 2000s, but 5 or 6 tags on transmission rights are a regular occurrence today (meaning that the rights to that path for that hour had been bought and sold 5 or 6 times). Each tag added to the cost of that transaction, because each seller needed to make something on the transaction.
Financial traders operate under GAAP accounting and are lightly regulated by FERC. State regulatory commissions do not regulate these companies.
Part #2 - Distribution Cooperatives
Part #3 - Generation and Transmission Cooperatives (G&T)
Part#4 - Federal power districts
Part #5 - Salt River Project (SRP)
Part #6 - Independent System Operators (ISO) and Regional Transmission Operators (RTO)
Part #7 - IPP and Merchant Transmission
Next post: vertically regulated investor owned Utilities – what are they