In Texas, they’re called “Congestion Revenue Rights.” Think of them as financial instruments — except they exist not in the world of investment banking, but rather in the world of wholesale electricity.
What do you get when you buy one of these financial instruments? Holders of Congestion Revenue Rights may receive payments when certain wholesale energy prices spike due to congestion on the grid. In this sense, they’re like insurance policies. They help to hedge risk. Importantly, CRRs also are seen as providing downstream benefit for end-use consumers.
But as The New York Times has found in a recent investigation, these complex financial instruments also have come to the attention of Wall Street speculators. The newspaper reports that investors with no intrinsic stake in energy markets — they are neither generators, nor industrial users, nor consumers of electricity — are reaping millions in the New York congestion market.
The Times found nothing illegal about these speculative practices, although it does question whether the public is harmed by the extraction of millions of dollars from a market designed to protect electricity producers, utilities and industries that consume power.
“Across the nation, investment funds and major banks are wagering billions … using computer algorithms and teams of Ph.D.s, as they chase profits in an arcane arena that rarely attracts attention,” the newspaper reported in its Aug. 14th edition. “The thinking was that the contracts would help (those operating within the energy market) to hedge against sharp price swings caused by competition as well as the weather, plant failures or equipment problems. Those lower costs could reduce consumers’ bills.
“But Wall Street banks and other investors have stepped in, siphoning off much of the money,” the newspaper reported.
The Times piece focused on the wholesale power market in New York and examined financial instruments there similar to those available in Texas. These financial instruments derive from what otherwise is mostly just an ongoing headache for regional grid operators: power line congestion.
Power line congestion can occur when demand for electricity at a distinct geographical point on a regional grid outstrips supply at that point. This, in turn, puts an additional burden on the transmission lines serving that point, and can lead to an uptick in the price of power there. There are thousands of such points on regional grids, including the grid operated by the Electric Reliability Council of Texas. The owners of congestion contracts in Texas and elsewhere speculate on wholesale prices at various points, and then collect extra revenue when those prices spike.
In Texas, money generated by the auction of congestion contracts flows back to wholesale energy consumers and those who serve them. This should tend to help consumers generally, even home consumers who do not trade in the wholesale market. The financial instruments also would tend to stabilize the price of fixed-rate electricity costs. Think of it this way: in the absence of such insurance-like instruments, retail electric providers might be more inclined to hedge risks by jacking up prices.
But The Times found that outside investment firms also were extracting millions of dollars from the New York markets. The newspaper analyzed approximately 150,000 congestion contracts auctioned by the New York grid and found that certain speculators were repeatedly and consistently striking gold. One company collected about $180 million over a decade, The Times found.
“If traders are making money, then consumers are paying more — the money that these guys are making has to come from somewhere,” Stanford economics professor Frank A. Wolak told the newspaper.
It unclear whether the sort of excesses described in The Times piece exist here. Although many of the same players operate within the ERCOT grid, the rules here are different. Neither has the independent monitor of the Texas wholesale power market — a position created by the Texas Legislature in 2005 — ever publicly raised objections about improper or questionable CRR trading.