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Sophisticated traders draw criticism for profiting off power shortages

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Firms full of PhDs are outsmarting the system and reaping big rewards

Jason Tessmann / Flickr

As summer heat spikes and air conditioning units flip on across New York's Long Island neighborhoods, the aging electrical grid is struggling to handle the demand. To compensate these local power plants reach across the state and the nation, borrowing juice from places with electricity to spare. But a group of sophisticated Washington, DC traders are capitalizing on this exchange, reaping millions in profit off complex financial instruments known as "congestion contracts" that allow private companies to wager on the nation's recently deregulated electrical grid.

Congestion contracts allow private companies to wager on the nation's recently deregulated electrical grid

The New York Times published a lengthy report this morning about DC Energy, a Virginia firm staffed with experts in chemical engineering and artificial intelligence who study the power grid and create complex algorithms that spot trading opportunities. DC Energy makes money when there is a big gap in the price for electricity between two areas that are exchanging supply. "We believe this type of activity should cause prices to better reflect true costs and thus create a more efficient electricity infrastructure that should better serve the retail customer," Andrew J. Stevens, a co-founder of DC Energy, told the New York Times.

But many of the communities that have become the focus of these bets don't have the resources to compete with big firms when it comes to picking out the best congestion contracts. And upgrading infrastructure requires money and political capital that can be difficult to muster. The goal of deregulating the electrical grid was to provide a free market where power companies and transmission firms could hedge against the volatile price swings that come with sudden demand or bad weather. But while DC Energy has made over $180 million in New York State alone, the price consumers pay for their electricity has risen in most communities.

Profits have increased, but consumer prices haven't fallen

And while the energy speculators argue that they play a key role in the market, taking one side of the congestion contracts that were designed to benefit energy companies, its clear that DC Energy doesn't really appreciate open competition. When an employee left for a rival firm that entered into contracts in the same region, DC Energy sued, noting in its lawsuit that "DC Energy had emerged as the only consistently profitable trader in the congestion markets on Long Island," the suit says.