Prelims

Half Title Page

Modern Energy Market Manipulation

Title Page

Modern Energy Market Manipulation

By

Andrew N. Kleit

Professor of Energy and Environmental Economics

The Pennsylvania State University, University Park, PA, USA

United Kingdom – North America – Japan India – Malaysia – China

Copyright Page

Emerald Publishing Limited

Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2019

Copyright © 2019 Emerald Publishing Limited

Reprints and permissions service

Contact: permissions@emeraldinsight.com

No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-78743-386-1 (Print)

ISBN: 978-1-78743-385-4 (Online)

ISBN: 978-1-78743-919-1 (Epub)

Dedication

To Stuart Kleit, the best friend a son could have

Contents

Acknowledgments

I am very grateful to Stuart Kleit and George Young, who had the misfortune of reading every word of this book’s draft. Their thoughtful comments greatly improved the text. I also thank David Applebaum, John Lopatka, and Robert Zwirb for helpful conversations about legal issues. I also wish to thank Gary Taylor for his gracious discussions with me about the California electricity crisis.

About the Author

Andrew N. Kleit is a Professor of Energy and Environmental Economics and MICASU Faculty Fellow at the Pennsylvania State University. He is the Founding Chair of the Energy Business and Finance Program, the largest undergraduate major in Penn State’s College of Earth and Mineral Sciences. Professor Kleit is the author of over 70 refereed academic articles in the areas of energy, environment, antitrust, regulation, and health care. He is also the author or editor of five books published prior to this work, including Electricity Restructuring: The Texas Story (2009) and Electric Choices: Deregulation and the Future of Electric Power (2006).

Prior to becoming an academic, Professor Kleit was a Staff Economist at the President’s Council of Economic Advisors, Economic Advisor to the Director, Bureau of Competition, Federal Trade Commission, and Senior Economic Adviser to the Director for Investigation and Research, the Chief Antitrust Official of Canada. He has also been a Visiting Scholar at the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission. In addition, he has been a Visiting Scholar at three universities in China. Professor Kleit holds a PhD in Economics from Yale University, and a BA in Mathematics and Political Science from Middlebury College.

Preface

The idea for this book came to me in April 2016 when I was a visiting scholar at the Federal Energy Regulatory Commission (FERC). FERC has an enviable record in the area of restructuring electricity and natural gas markets. It also has a large number of intelligent and motivated staff dedicated to serving the public interest. Unfortunately, I gained the strong impression that FERC’s mission had become so broad and complicated that it was hard for the agency to do anything other than follow previous precedent. In some ways, it appeared that the agency was largely on autopilot, despite the best intentions of all concerned. I also had the opportunity to review some manipulation cases from the inside, an experience I found fascinating.

The motivation for the book came from a large number of sources. The books by Bork (1976) and Posner (1976), using individual cases for motivation, had a large impact on antitrust policy. My own work (e.g., Butz & Kleit, 2001) comes from an interest in exploring important cases and showing what “everyone knows to be true” is not, in fact, true. This applies in particular to the analysis of the Hunt Brothers silver episode in Chapter 3.

I shaped this work based on two other important books. The very successful book edited by Kwoka and White, The Antitrust Revolution, now in its sixth edition, is has been published for over a quarter of a century. These volumes show how to present antitrust case studies from scholars and consultants in a book format. I wish to add to this genre by writing case studies that are in one voice, where the author is in a position to critique both sides of a legal matter.

A recent work by Taylor, Ledgerwood, Broehm, and Fox-Penner (2015) was crucial for this book. Taylor and his colleagues lay out many important theoretical concepts in market manipulation, which I am able to build upon in the introductory chapters here.

This book starts by describing the relevant financial issues and offering a definition of “manipulation.” Chapter 2 introduces the basic economics of manipulation, while Chapter 3 describes historical cases in this area. Chapter 4 presents the relatively simple DiPlacido matter, which was badly argued and decided. Chapter 5 examines the basic structure of restructured electricity markets, whose understanding is critical for understanding the electricity market cases examined in the book. Chapters 6 through 12 examine particular energy manipulation cases in depth, while Chapter 13 contains some conclusions.

I note that in several places the book is critical of FERC. That does not mean, however, that I hold FERC in disrespect. Indeed, my hope is that FERC responds positively to at least some of my critiques. Every government agency needs to have its actions examined closely. This is my attempt to do so with respect to energy market manipulation.

Andrew Kleit

University Park, Pennsylvania

April 2018