Power Edge is one of several Tower affiliates set up to speculate on electricity, according to a piece last year in Power Markets Week. The entities buy "financial transmission rights," which are bets on whether or not congestion will increase costs on certain parts of the grid at certain times.
Making money in PJM's illiquid and inefficient FTR market was probably kindergarten for these guys. But while the geniuses got the trading algorithms just right, they apparently forgot to check the maintenance schedule on PJM's Web site. A planned transmission outage in New Jersey caused the Power Edge position to go badly wrong, leading to the default.
When the bet went bust, the company owed other grid participants an estimated $80 million that it couldn't pay because it didn't post enough collateral. Under PJM rules, when one member defaults, everybody else covers the shortfall.
"We're not commenting on this," said Nick Underwood, Tower's director of investor relations.
PJM is again asking FERC for permission to toughen collateral requirements. The nonprofit grid manager, based in Norristown, Pa., is also "assessing the appropriate legal steps" related to the Power Edge blowup and another, much smaller default by another player, spokesman Terry Williamson says.
Asked whether FERC made the right decision in October, an agency spokeswoman referred me to an order stating that PJM didn't demonstrate an urgent need for new rules because, "with the passage of the summer congestion period, the credit risk identified by PJM for this year has essentially passed."
Oops. Power Edge defaulted in November.
Because financial players such as Tower suck millions from wholesale electricity markets that will never be invested in a single generation plant or transmission line, some users claim they hurt the system even when their bets are successful.
"For every dollar in profits that a financial arbitrageur extracts from the market, that's one less dollar in savings that's going to go to customers," says Kevin Murray, an engineer who works on energy issues for the McNees, Wallace & Nurick law firm in Columbus, Ohio. "It ends up being basically a wealth transfer from one segment of the population to another."
On the Midwestern grid, investors in financial transmission rights with no stake in electricity hardware have taken about $100 million a year from the system for the last three years, estimates Mike Stuart, senior vice president of policy at Wisconsin Public Power.
