California, Manipulation, and Learning

I’m not going to get into the California market manipulation fray any further for now, beyond providing links to stories summarizing the issues and commenting on the continuing vituperative rhetoric of politicians in California, without any willingness to acknowledge that the rules of their dysfunctional “market” did not forbid any of these trades. At the big picture level, I truly think this is part of the learning process. We’ve only been trading natural gas as a commodity since 1989 and electricity since 1992 (and not in any serious volumes until 1996, really), so our experience of dealing with the financial transactions of electricity and gas is pretty short. We’ve been trading all sorts of other commodities using financial instruments for over 400 years, from tulips in Dutch markets in the 1600s to shares in insurance annuities of young French girls in the 1700s to modern trading of wheat and pork bellies. The SEC is now going to have to think more carefully about how it should treat energy commodity trades to ensure market transparency, and to make the rules for trading energy consistent with the rules for trading other commodities. One complicating factor, though, will be some of the physical characteristics of electricity that could keep it from being a really good tradeable commodity, such as the fact that it cannot be stored given current technology. Anyway … some good stories on what’s going on are here and here. This is a commentary I wrote a month ago about the trading strategies detailed in the Enron memos that FERC released.