Let me start with a confession. I do not fully understand what the Federal Energy Regulatory Commission says Barclays did wrong in the U.S. electricity market, and I am not entirely sure about the claimed misdeeds of JPMorgan. But my inability may well have less to do with my inadequacies than with the fundamental futility of trying to use financial markets to set the price of electricity.
Very approximately, FERC says Barclays sold electricity in order to manipulate a price index in ways that created profit on related positions in a related financial market. The UK bank plans to contest the $453 million judgment. According to news reports, JPMorgan is about to agree to pay almost as much to settle charges that it unfairly solicited “make whole” payments, which compensate utilities for setting up but not actually running power plants on a particular day.
I am not competent to judge the banks’ legal and moral culpability, because the details are little short of diabolical. The jargon includes the “volume-weighted average price of the dailies’ trading”, not to mention spot markets, day ahead markets, physical positions, fixed-to-floating contracts and nodes. Still, FERC’s summary of electricity trading in its latest annual review suggests there is problem. Purely financial strategies can easily play an unhealthily large role in a market where, according to the watchdog, financial volumes represented about 100 times the physical volumes.
These bank-regulator disputes are arcane, but they are evidence in a basic debate about whether market thinking is appropriate for electricity. The argument has been going on for several decades. On the winning side are the enthusiasts for competition, liberalisation and the use of supply and demand to set prices. On the other side, in my view, are almost all the facts.
Competition makes little sense in electricity. The transmission and distribution of power are what economists call “natural monopolies” – it is ridiculously expensive to have more than one set of power lines. It is less ridiculous to consider different power plants as competitors, but it is much more sensible to think of an integrated system which includes everything from huge nuclear facilities down to rooftop solar units.