The Los Angeles Times has a damning piece explaining how our good pals at JPMorgan & Chase have allegedly manipulated the electricity market in California and perhaps in the Midwest as well, stealing hundreds of millions of dollars from consumers and businesses and depositing it in the accounts of JPMorgan, pretty much risk free.
The focus of the alleged scam is the California Independent System Operator, which fulfills the state’s energy needs by taking bids from private power marketers to provide electricity to the state.
Here’s how the Times explains it (and don’t worry, it’s not as complicated as it may seem):
“The alleged scheme involves two related wholesale electricity markets maintained by the ISO. There’s the day-ahead market, in which power plant owners place bids to provide power for the California electricity grid in the future; and the real-time market, an auction market through which ISO buys electricity for immediate distribution to homes and businesses.
To give plant owners an incentive to participate in these auctions, ISO guarantees to cover their costs for starting up or running their plants at a minimal level, even if their bids aren’t accepted. This is known as “bid cost recovery.” ISO rules allow bidders to claim payments of up to twice their real costs.
In simplest terms, JPMorgan submitted bids in the day-ahead market that were so low the firm was certain to be accepted onto ISO’s roster of potential electricity suppliers — in fact, they were negative bids, essentially offering to pay ISO to take their electricity…. ISO believes that JPMorgan never intended to make that sale, but the beauty of its low bids was that they made it eligible to collect bid cost recovery payments.
The next step was for JPMorgan to make sure that ISO didn’t actually buy its electricity, presumably because the profit margin from the bid cost recovery claim was greater than from actually selling energy. So in the real-time market, it priced its electricity so high that ISO wouldn’t buy it.
The bottom line, the ISO says, is that JPMorgan’s traders never intended to sell it electricity via these bids. The scheme, it says, seems to have been designed purely to capture a bid cost recovery payment the bank didn’t deserve, at a rate that was inflated anyway.”
In other words, pretend that you’re ready to sell electricity at a low rate; collect a handsome fee for pretending to sell electricity at a low rate; then bid high to ensure that you never have to actually provide that electricity.
Repeat, day after day, collecting some $57 million in improper payments in just six months between 2010 and 2011, with more such payments perhaps yet to be discovered. Free money!!!
But of course, it’s impolite to even notice that Wall Street continues to rip us off in a seemingly endless series of scams. To do so is to be anti-capitalist, even socialist. So forget I said anything, will ya?
– Jay Bookman