Yves Smith explains an Al Jazeera America piece by David Cay Johnston about how Wall Street plans to jack up Northeast electricity costs through the roof:

You’d think regulators and the public would remember how badly California was burned by Enron’s electricity price manipulations, which cost each resident more than $1300 in higher energy bills, and would be eager to avoid a rerun.But memories are short.

As David Cay Johnson reported in an important story at Aljazeera, Energy Partners, a Goldman-linked investment group, looks set to repeat Enron’s ploy on the East Coast.

I strongly suggest you read Johnson’s account in full, but here’s the short version. The key to energy price manipulation now is how tight the market is overall and how few participants bid at particular auctions.

Electricity is sold at what are called “clearing price auctions”. The price set for all bidders is based on the highest price that still helps fill the overall order. In other words, if A bids $5 for 20 units of energy, and B bids $10 for 5 units, but the need at that point is for 45 units, higher bids will be treated as filling the order. In our example, we are only at 25 units out of 45 so far. So then order C for 15 units at $25 is waved in, and the final bid, for 30 units at $50, is partially filled. The last bidder supplies only 5 units of the total, but his $50 bid is the clearing price, and everyone who bid lower also gets their offers filled at $50.

So if you reduce capacity (supply), all participants will tend to bid at higher prices because they know their odds of getting all or part of a bid are better than before. And a reduction in the number of bidders also makes it easier for the suppliers to collude informally. As Johnson explains:

Trading records and experiments conducted by Professor Sarosh Talukdar at Carnegie Mellon University and others show that the electricity auction rules tend to drive prices up, not down, until they approach the level that an unregulated monopolist could charge.

This occurs because suppliers learn to arrange their bids to ensure the highest price, a good example of how competition does not always favor customers or lower prices. While collusion among suppliers is illegal, learning how to jack up prices by studying bidding patterns is perfectly legal.

The original market rules, by the way, were drafted by a massive fraud posing as an electricity trading company named Enron.

Yes, sports fans, the “rules” that Enron devised so it could game energy markets are still in force!So what, exactly, is the Energy Partners scheme? It bought three energy generating plants for $650 million. A mere five weeks after the deal closed, it said it needs to shutter Brayton Point, the second largest producer in New England, claiming it will cost the investors more than it’s worth to keep the plan running. Regulatory filings show that the electricity system in the region has gone from surplus to deficit, and baseline prices were already projected to double. Clearly, removing a major producer would lead to even greater price increases.

Johnson again:

With Brayton Point closed, New England consumers and businesses will spend as much as $2.6 billion more per year for electricity, critics of the deal suggest in documents filed with the Federal Energy Regulatory Commission.

That estimate will turn out to be conservative, I expect, based on what Enron traders did to California, Oregon and Washington electricity customers starting in 2000. In California alone the short-term market manipulations cost each resident more than $1,300, a total burden of about $45 billion.

One regulator that could block the closure of the plant, the Independent System Operator –New England, washed its hands of the matter, saying it’s not its job to worry its head about whether Energy Partners is really closing the plant so as to better manipulate the markets. Johnson called its decision “shocking” because this regulator’s supposed raison d’etre is to prevent price manipulation. If this isn’t in its wheelhouse, pray tell what is?

[...] The lesson from the Enron scam should be clear: It needlessly cost electricity customers (and investors) many tens of billions of dollars. Regulators who failed to do their job enabled those crimes. Energy Capital Partners is not a scam, but its proposal to close Brayton Point is.

Unless you want to pay a lot more for electricity, speak up now. Tell your senators and members of Congress to stop this plan to legally steal billions from electricity customers — and make sure it does not pop up in your community.