DON’T LET COMPLEX REALITY INTERFERE WITH WHAT I WANT

California politicians, and others who want a clear, black-and-white, well-controlled, orderly world for electricity markets, are not going to like this. Federal Energy Regulatory Commission Pat Wood pointed out today that some wash trades might be legitimate. Electricity generators operate with pretty stringent delivery commitments because of the nature of electricity — it can’t be stored, and with an alternating current system like we have, system balance is crucial to the reliability of the grid. What that means is that to achieve system balance, which is done with transactions occurring every ten minutes, sometimes generators may have to buy and sell electricity simultaneously with another party. That’s a wash trade of the type that got the CEOs of CMS and Dynegy to resign last month. Other energy companies also used wash trades as a price hedge, which is another volatility-reducing benefit that wash trades can serve when used responsibly. Boy, it sure messes up a neat, pat concept of regulation of electricity markets to have something that can be abused be an essential part of keeping the juice coursing through the grid at more stable prices …