“Free Market” is an Oxymoron Pt. 2: Evil Exists

If you’ve been following the past few posts about how energy markets work, you’re probably asking the following Deep Question: So what? If it’s true that markets are a complex information-gathering system, and that information is key to accurate price discovery for energy… what does that mean for you, Average Energy Consumer?

One thing this means for you is that market-reform policy is something that should now capture your interest, both as a consumer and as a citizen. It’s never interesting when things go right, though, is it? Just ask Amanda Bynes, the poor creature. So, today, we’ll look at a case where things went terribly wrong, so that we may better understand our situation.

One major train wreck is Barclays plc, a gigantic British banking and financial services company.

You may remember Barclays from such scandals as its support of the South African government under the apartheid regime. No? Maybe you remember Barclays from funding Mugabe’s move to kick hundreds of workers out of their homes in Zimbabwe? Not ringing a bell? How about when they participated in a scheme to fix the Libor? Well, you get the idea. Classic evil, right?

The tears of the poor are the sweetest ambrosia! And the most plentiful!

Recently, several Barclays traders were accused of manipulating electricity prices in the US, driving cash prices of electricity up and down at the Palo Verde hub artificially, in order to benefit from derivatives markets. One of the traders boasted in an email that he had “fucked with the palo market;” another, in an IM, said he’d “just started lifting the piss out of the palo market,” and that it was “fun.”

Since you know a little about cash markets versus derivatives markets, you can see how this might be accomplished. What the Barclays’ representatives’ shenanigans meant to energy consumers is that electricity prices were anything but accurate representations of the cost of electricity during that time. You paid something other than what you should have. When prices of existing sources of electricity are manipulated, investment in new sources is affected, which distorts the market for renewables, which results in political rhetoric about the non-competitiveness of renewables versus existing electricity sources.

This pisses me off.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, addressed such market manipulations, but action hasn’t been taken yet. There are two major regulatory agencies for energy markets: the Federal Energy Regulatory Commission (FERC), which is in charge of the cash markets for energy commodities; and the Commodity Futures Trading Commission (CFTC), which is in charge of the derivatives markets for energy commodities. They’re supposed to have a “Memorandum of Understanding” (MOU) that guides how they’ll regulate the area in between cash and futures markets, which is where the Barclays violations took place. But they haven’t drafted an MOU yet–at least, not a good one. Some senators have pointed this out, and are calling on the two commissions to get their shit together.

The two commissions don’t share data, unless there’s a specific request or report. Which means we find out about market manipulations only after the fact, and only if someone notices. Apparently, “someone” is chatting up the admin staff at the water cooler. There isn’t a mechanism for catching everyday manipulations, let alone big ones. The markets are not only vulnerable to such manipulation, they’re set up for it. There is ample opportunity for everyday evil, and it’s taken advantage of every day. And that’s yet another way we know the “free market” is an oxymoron.

My first instinct is to say that the system of derivatives markets is unjust on its face, and therefore no amount of jiggering the rules will yield an unmanipulable market. But I’m not sure. I’ll keep thinking about that.

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