Members examined the effects of financial trading in wholesale electricity markets
WASHINGTON, DC – The Energy Subcommittee, chaired by Rep. Fred Upton (R-MI), today held its eighth hearing as part of the committee’s ongoing ‘Powering America’ series. #SubEnergy examined the role and effects financial trading has in the nation’s wholesale electricity markets and whether market design changes are necessary to ensure the efficiency of financial transactions and to protect against improper trading activity.
“Financial market participants are playing an increasingly visible role in the organized wholesale electricity markets,” said Chairman Upton. “It’s claimed that financial transactions can improve the efficiency of the physical electricity markets by providing increased liquidity, mitigating market power, and improving price formation. The most commonly traded financial products are known as ‘Financial Transmission Rights’ or ‘FTRs’ and ‘Virtual Transactions.’ While these products can be used by traditional utilities to hedge themselves against volatile price fluctuations, these products are also bought and sold by financial traders such as banks, investors, and other speculators.”
Witnesses listen to member opening statements
Noha Sidhom, CEO, TPC Energy, testifying on behalf of Power Trading Institute, spoke to the importance of FTRs in protecting consumers from volatile pricing and their role in delivering power to customers, commenting, “In short, FTR auctions save consumers money in three key ways: They provide an accurate price for the contracts that are allocated to transmission customers representing consumers. They provide a price for the congestion on the grid to determine whether or not the cost of congestion is a more appropriate investment than the build out of additional infrastructure. They provide a price signal to lenders financing infrastructure development and thus reduce the cost of financing.”
Max Minzner, Partner, Jenner & Block LLP, discussed the delicate balance between financial trading in markets and the appropriate level of regulation, stating, “Financial transactions are a valuable component of today’s markets and appropriate regulatory scrutiny is important to ensure a level playing field and the integrity of the markets. … Financial products should exist within FERC markets to the extent that they are helpful to improve the functioning of the physical energy markets. They should not be created or expanded past the point at which they are needed to ensure that the physical markets work efficiently and deliver value to consumers.”
Vince Duane, Sr. Vice President and General Counsel, PJM Interconnection, recognized the value of financial trading while offering a sense of caution, commenting, “Financial trading in the PJM markets is a ‘good thing.’ But financial trading in PJM’s markets cannot be presumed beneficial in all circumstances. Unique design aspects attendant to RTO electricity markets can work to prevent realizing the theoretical efficiency expected from trading. In these instances, RTOs and FERC must work to preclude those trades, which, if allowed to continue, would only leak revenue from sellers or savings from buyers of physical electricity – offering no commensurate efficiency benefit to the system. PJM recently filed certain reforms with the FERC for just this purpose: to preserve the value that financial trading can offer to PJM’s markets while minimizing situations where trading siphons off revenues with no corresponding system benefit.”
#SubEnergy Chairman Upton and Ranking Member Bobby Rush (D-IL) listen to witness testimony
#SubEnergy Chairman Upton concluded, “As our Powering America series extends into next year, we’ll continue to tackle some of the most complex and challenging issues concerning both the electricity markets and the energy industry. Along those lines, today, we took a look at whether FTR and virtual trading makes sense and examined the answer to this question: Does financial trading make the electricity markets more efficient, and in turn, result in benefits to consumers?”
For more information on today’s hearing including a background memo, witness testimony, and an archived webcast, click HERE.
For more information on the committee’s ‘Powering America’ series, click HERE.