Friday, November 2, 2012

Confronting the Consolidated Power of Banking and Energy

Yesterday I commented on a Wall Street Journal report that the US energy regulator was planning on filing charges against Barclays for manipulating energy prices

The New York Times also covered this story: FERC Takes Aim at Wall Street By Ben Protess and Michael J. De La Merced

[Excerpted] The Federal Energy Regulatory Commission, the government watchdog overseeing the oil, natural gas and electricity business, has lately taken aim at three major banks suspected of manipulating energy prices. After taking action against JPMorgan Chase and Deutsche Bank, the agency on Wednesday threatened to impose its largest fine ever against Barclays.

The agency — building on a 2005 law, additional resources and a string of personnel moves — is increasingly exercising its new enforcement muscle to pursue not only energy companies but some of the nation’s biggest banks.  

...And it is a regulator that has so far had unusually fierce clashes with Wall Street.

....But Barclays and JPMorgan are mounting counterattacks against the Federal Energy Regulatory Commission, casting the accusations against them as wrongheaded and overreaching. Even Deutsche Bank, which faces a meager $1.5 million fine, has vowed to fight....

...The banks sense that a larger regulatory battle is at stake. Unlike financial regulators, the energy commission can fine firms $1 million a day for every violation. The string of recent cases, banks fear, could lay the groundwork for years of costly litigation.

The agency’s effort is rooted in a 2005 law passed in the aftermath of the Enron fraud. The law created an enforcement unit at the agency and gave it the authority to assess hefty fines....

[read full article at link above]

Majia here: This is an interesting and promising development: A regulatory agency willing and able to confront the banksters on the topic of their market manipulations.

The US energy market is highly consolidated as a result of neoliberal de-regulation. Financial interests are major stock holders. Interlocking ownership of energy and finance affords vast power to these industries.

I recently posted excerpts from some of my research on this subject here

Here is more background on consolidation of the US energy industries and the role of the banksters in centralizing ownership:

Domestic policy within the US has for the last twenty years emphasized de-regulation, a strategy aimed at improving market efficiencies but successful primarily in producing a powerful energy oligarchy whose “market based” rates have pushed up consumer costs across the nation (Slocum, 2007). In the US, deregulation occurred with the Natural Gas Policy Act of 1978, the Public Utility Regulatory Policy Act of 1978 (PURPA), and the National Energy Policy Act of 1992 (Richards 2012). Perhaps the biggest blow to the old model of extensively regulated regional monopolies in electricity generation was the 1992 National Energy Policy Act, which loosened restrictions on imports and exports of natural gas (Section 201), legislated energy reduction mechanisms in government procurement, and facilitated competition among private energy producers, creating a legal environment that subsequently enabled deregulation in U.S. energy production as the old utilities sold off their power plants. Regulatory power shifted from the states to the federal government as ownership became national in scope and “market” rates, rather than operator costs, came to dictate consumer costs (Slocum, 2007). The Commodities Futures Modernization Act of 2000 included a rider that created a special exemption for energy derivative trading that came to be known as the “Enron Loophole,” encouraging speculation in energy markets (Sherman, 2009, p. 11). 2005 marked passage of the US Energy Policy Act of 2005, which further lifted restrictions on ownership by repealing the Public Utility Holding Act of 1935 (Slocum, 2007). The Federal Energy Regulatory Commission (FERC) assumed responsibility for regulating the industry, but refused to review price setting by the increasingly consolidated market players and failed to examine increasing role of speculation in governing pricing.
De-regulation of electricity in the U.S. was promoted extensively by the “Compete Coalition” lobby comprised of Goldman Sachs, Constellation Energy, Exelon, Mirant, PSEG, and Reliant Energy (Slocum, 2007). According to Tyson Slocum’s account of US electricity deregulation, this lobby spent $1.8 million from 2005 to 2007 lobbying for de-regulation and the members of the lobby have paid over 1.83 billion in fines for allegations of market manipulation (p. 7). The de-regulation of electricity generation and the growing clout of financial firms in ownership as a result of consolidated ownership may explain the lack of infrastructural investment in the nation’s electricity generation during this period. According to a market analysis produced by Harris and Williams of The PNC Financial Services, there has been relatively little investment in the nation’s energy infrastructure for the last two decades and infrastructural investments ranging between $1.5 trillion to $2.0 trillion will be required by 2030 in order to meet demand (
Public concern about looming energy shortages may have contributed to support for de-regulation touted as improving efficiencies. The idea that peak oil production had already passed was, by the turn of the new millennium, thoroughly explained and documented by numerous authorities, ranging from insiders such as Matthew Simmons in his 2005 book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy to journalists such as Paul Roberts in his 2005 The End of Oil: On the Edge of a Perilous New World. Fears about looming energy shortages may have prepped publics to respond positively to the deregulatory mantra of improved efficiencies.
Unfortunately for consumers, deregulation led to widespread market manipulation of energy markets, beginning with Enron. Enron is important not simply because it played a role in deregulating energy futures trading through the “Enron Loophole” of the Commodities Futures Modernization Act of 2000. Enron illustrated how deregulation fueled fraud in energy markets and how external auditors, such as Arthur Andersen consulting, failed to perform due diligence. Yet, the lessons of Enron were not learned. In July of 2012, the Federal Energy Regulatory Commission was examining whether JP Morgan Chase had “gamed electricity” markets in California and the Midwest in 2011 by charging manipulating bidding practices so as to charge “above market” prices (Lee, 2012). JP Morgan’s energy group generates $14 billion in profits annually (Richards, 2012). FERC charged that JP Morgan traders were able to manipulate the market price by placing orders that were never intended to be fulfilled:
JPMorgan was able to take advantage of loopholes built into the regulations governing energy and natural gas markets. The ISO takes bids from power plant owners on energy costs in both the future day-ahead and current real-time markets. To encourage plant owner participation in the auction, the ISO provides a “bid cost recovery,” which ensures that the operators receive a guaranteed minimum support for running the plant even if their bid is not accepted. JPMorgan exploited these rules by placing extremely low bids on the day-ahead markets—sometimes negative bids where the bank would be paying the ISO to take its energy—making them eligible for bid cost recovery payments, then charging electricity prices so high on the real-time market that ISO would never purchase the energy. As the Los Angeles Times reports, “JPMorgan’s traders never intended to sell its electricity via these bids. The scheme, [the ISO] says, seems to have been designed purely to capture a bid cost recovery payment the bank didn’t deserve, at a rate that was inflated anyway.” (Richards, 2012)
Deregulation and financialization, or the expanded role of finance in the economy, go hand and hand (see Kotz, 2008).
U.S. Government support for deregulation was ensured by lobbying money and the long standing tradition of close relationships between energy companies and the government policy makers. The U.S. had been acting for decades to ensure energy availability by enabling domestic drilling and by promoting access by the oil majors into undeveloped regions, especially in Africa. Populist demands for energy independence contributed to opening U.S. reserves, even in geologically sensitive areas. Under the Reagan Administration, the Minerals Management Service was established to manage the mineral resources in the Outer Continental Shelf (Romm, 2010). Although management was supposed to proceed in “an environmentally sound and safe manner,” this agency has had a sordid history of fraternizing with oil industry executives, including reports of prostitution at parties involving the agency and oil executives (Romm, 2010). Close, inappropriate relationships between this agency and BP were cited as one of the factors responsible for the chain of events that culminated in the BP oil disaster (Kennedy, 2010).
Concerns about future energy availability also contributed to government support for U.S. nuclear industry, even after the disaster at Three Mile Island solidified public support against nuclear energy. Energy availability was, of course, only part of the appeal of nuclear industry. The industry’s links to the military-industrial complex will be documented at greater length in Chapter Four. Nuclear energy was never a particularly efficient route for energy security given the prohibitive costs associated with the construction and decommission of nuclear plants and the costs and risks associated with the storage of nuclear fuel (see Makhijani & Saleska, 1999). By the early 1990s aging nuclear plants built in the 1960s and early 1970s posed financial challenges because the plants had been designed to last thirty years and the costs for new constructive were simply prohibitive (see Schneider, Froggatt, & Thomas, 2011). Despite the costs associated with nuclear, the US government continued to promote its use in national legislation. For example, The Energy Policy Act of 1992 facilitated consolidation in nuclear plant ownership and operations and included a section on ensuring strategic uranium reserves and revitalization titled: TITLE X--REMEDIAL ACTION AND URANIUM REVITALIZATION. Consolidation in the industry occurred in the late 1990s as independent power producers began buying up nuclear plants (Davis & Wolfram, 2011). Approximately half of U.S. reactors were sold as the producers consolidated ownership. By 2011, more than a third of U.S. nuclear energy production capacity was controlled by three companies. The World Nuclear Association explains that 10 utilities in the US account for more than 70 percent of total nuclear capacity while the number of nuclear plant operators has declined from 45 in 1995 to 25 in 2011. Exelon, created by the merger of Unicom and PECO in 2001, created the world’s third largest operator and first largest US operator. De-regulation of electricity in the US had the effect of monopolizing ownership and operations (The World Nuclear Association Other nations, including Russia and France, also have monopolistic ownership of nuclear energy.[i]
Nuclear would remain a central cornerstone of U.S. and world energy production despite its prohibitive costs and the unresolved issues surrounding storage of nuclear waste. In 2010 Barack Obama promised in his State of the Union speech to build a “new generation of safe, clean nuclear power plants” (cited in “Unexpected” 2010). The 2010 US Nuclear Power Program helped promote nuclear power by coordinating efforts for new plants (“Research,” 2011) . In 2011 the government offered $54 billion in loans guarantees for the construction of new nuclear plants (Unexpected). The global nuclear industry was hoping for a surge in plant production in developing countries, such as Vietnam and Indonesia, built by the big six firms dominating the industry: GE, Westinghouse, Areva, Toshiba, Hitachi, and Mitsubushi. Emerging players include Korean Electric Power Corporation (KEPCO) and Russian and Chinese contractors. Alliances between the big six are common and most nuclear power manufacturers rely on government support at home and abroad to push nuclear energy. Indeed, The Economist notes in 2010 that  American and Japanese nuclear firms' chances of maintaining an edge may depend on how far their governments are willing to push nuclear power at home” (“Unexpected, 2010).
Deregulation of the U.S. domestic energy market is significant for several reasons that have global implications. First, deregulation enabled powerful private consolidation of energy production in the U.S. and abroad, particularly in the area of nuclear power. Second, consolidated ownership of energy production made it easier and more profitable for financial players such as Goldman Sachs to expand their investments in energy, bringing global finance into closer alignment with energy production. Finally, the shift in pricing away from state regulators to a national agency, thereby allowing unsupervised “market based pricing,” made investments in energy conglomerates more profitable for financial industry players. Relatedly, the deregulation of energy futures encouraged unprecedented speculation in the energy futures market, influencing “market” based pricing payed by consumers. The energy industry has increasingly become financialized by these shifts. The tight coupling between national security and energy production further contributes to the monopolistic power enjoyed by the energy conglomerates and seems to have eroded regulatory due diligence.

[i]          See the World Nuclear Association April 2010discussion of consolidation at

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