Enron All Over Again?

Remember Enron, the company that went bankrupt after gaming the electricity distribution system in California, screwing rate payers out of billions of dollars? Enron, the company that invented illegal strategies for shuttling electrical power in and out of California to take advantage of the state's deregulated electricity market, which was supposed to make things "more efficient?" Enron, the company whose traders gave those illegal schemes names like Fat Boy, Death Star and Get Shorty?

Enron, the company whose chief strategy officer, J. Clifford Baxter, was found dead, shot in the head, in his Mercedes-Benz in the middle of the road in suburban Houston, with a revolver and a suicide note? Baxter had complained to a whistleblower about Enron's bookkeeping tactics, and had resigned "to spend more time with his family." Baxter was potentially the star witness against other Enron execs. And then he wound up dead in the middle of the road with a bullet in his head.

Enron, the company whose traders were recorded saying things like:

Employee 1: "All the money you guys stole from those poor grandmothers in California?

Employee 2: "Yeah, Grandma Millie man.

Employee 1: "Yeah, now she wants her f-----g money back for all the power you've charged right up, jammed right up her a—for f-----g $250 a megawatt hour."

and

"Just cut 'em off. They're so f----d. They should just bring back f-----g horses and carriages, f-----g lamps, f-----g kerosene lamps."

Enron, the company that got Arnold Schwarzenegger elected governor by getting Californians so mad at Governor Gray Davis's inability to control Enron's rapacious behavior they tossed him out on his ear in a recall election?

Enron is dead and gone, as is its CEO and chairman, Ken Lay, who died in 2006 on vacation while still appealing his conviction for fraud, trying mightily to squirm out of a 45-year prison sentence.

But Enron's spiritual successors are alive and kicking. Companies like DC Energy are making a fortune on the electricity market by buying up contracts that pay off big during times of high demand. But DC Energy does not own any power plants, or power lines, or have anything at all to do with generating and distributing electricity. It's just an investment firm, buying and selling contracts. How is this possible?

Several years the electrical grid was deregulated to eliminate old monopolies and make more competitive markets. This was supposed to spur investment in better infrastructure and help companies balance loads. Instead, investment companies like DC Energy and Louis Dreyfus Energy got into the act, buying up contracts that were originally intended for companies that actually generate electricity be able to hedge their bets to avoid rate spikes and brownouts.

These contracts are creating perverse incentives in the electricity market: when there's congestion, they get rich. Really rich. Louis Dreyfus was caught doing manipulating electricity prices in 2009, and paid $7.4 million to settle these allegations. But no one went to jail, or even admitted fault.

When investment companies like DC Energy buy these contracts -- rather than companies who could use profits from those contracts to invest in more electrical generation and distribution capacity to reduce congestion -- all that money, paid by you and Grandma Millie, goes into the black hole of Wall Street.

These companies hire "quants," scientists and engineers versed in physics and math, who analyze demand and the grid to determine where congestion is most likely to occur. Then they buy the contracts for those times and places and make a killing at the expense of the local businesses and families that buy high-priced electricity from distant power plants.

DC Energy doesn't use that information to make the grid work more efficiently and prevent brownouts and huge rate spikes, which was the whole point of deregulation: they do it to cash in on other people's misery.

If you think you've heard the term "quant" before, you probably have. Quants engineered the 2008 financial meltdown, by applying their mathematical models to the toxic mortgage derivatives in another get-rich-quick scheme.

These scam artists will dress their scheme as somehow making the market more efficient. That might be true if power companies were taking the profit and using it balance their losses and improve capacity. But DC Energy is just a middle-man taking advantage of a shortage, gambling that they'll be able to buy electricity somewhere else more cheaply than what they promised to sell it for. They're taking the profits that real power companies would use to invest in eliminating physical bottlenecks and increasing efficiency in the real world of power generation. Not some obscure "marketplace efficiency" that exists only in economics text books.

By hijacking these profits, leeches like DC Energy are actively preventing improvements in the grid, and guaranteeing that our electrical distribution system will never be fixed.

The quants' previous scams resulted in the meltdown of our entire financial system. If we aren't careful, they'll melt down our entire electrical grid this time around.