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Incing, Death Star, Get Shorty and the Fat Boy

The setting was the California electricity markets which consisted of the ‘day ahead market (DAM), the reserve market and the real time market (RTM).

The DAM was then managed by the Power Exchange (CalPX) which solicited hourly bids (from generators) and demands (from utility companies and trading firms like Enron) a day in advance. The bids were accepted in order of price (lowest first) to fill the demands. The highest for a particular hour set the price for all power sold into the market for that hour.

The California Independent System Operator’s (ISO) responsibilities include balancing generation (supply) and loads (demand) on the California transmission system and solicited reserve electricity that would be used if shortage occurred. The RTM (also known as the ‘imbalance energy market’) can be divided into

(a) the supplementary energy (or “instructed deviation” market) and

(b) the ex post market (or “uninstructed deviation” market)

The ISO balanced the supply and demand by paying and charging market participants for increasing and decreasing generation in these markets. Market participants that increased their generation in response to the instructed deviation from the ISO were paid an ‘inc’ price whereas market participants that increased generation without an instruction from the ISO were paid an ex-post ‘dec’ price

The trading strategies identified in the Enron case were basically to exploit the arbitrage opportunity which arose as a result of price differences (in California and outside), transmission congestion as well as the timing of the ISO’s balancing and PX’s auction.

‘Inc-ing’ Load (or the Fat Boy)

This refers to the strategy of increasing load (sometime artificially) into the RTM but only drawing them partially, leaving the generator with an excess amount of generation (according to ISO meter). The generator was then paid a ‘dec’ price for the excess.

This strategy was used when traders believed that the ISO had underestimated load and the market will be short, resulting in an increase in the ex-post prices. Apparently, this strategy was used in response to the independently owned utilities (IOU) strategy of underestimating its load in the DAM. The ‘inc-ing’ to an extent cancelled out the effect of under-scheduling including the lower DAM clearing price.

Death Star

Transmission congestion occurs when the energy scheduled for delivery exceeds the capacity of the transmission grid. The ISO made payments to participants that schedule their transmission in the opposite direction of the congestion (‘counterflow congestion payment’) or lower their generation load schedule. It was possible to sell energy at loss when the counterflow congestion payment was higher than the electricity price. Death Star was one of the strategies that made use of the counterflow congestion payment system (and also matters beyond ISO’s control area).

Load Shift

This is a general term used to describe a variety of scheduling practices and trading strategies in the DAM and hour ahead market (HAM) e.g. scheduling ISO approved counter flows in the ISO DAM, HAM or both.

Where a participant owned transmission right, it was also able to earn congestion payments (or even raising congestion price) by loading one zone and under-scheduling load in another and then shifting those unbalanced loads, giving the appearance of ‘reducing’ congestion.

Get Shorty

This strategy involved the ‘shorting’ in the DAM and then buying the same in the RTM to cover its position (i.e. shorting and then buying them back at a lower price). The purchase was sometimes made before the participant was required to provide the electricity.

Ricochet

Other strategies include the buying the California DAM (at the capped $250/MWH) and exporting outside California where the price was not regulated. The electric power could then be re-imported into California RTM.

selected further reading

 ::  Pricing in the california power exchange electricity market.

Last updated January 2005

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