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Google's Energy trading proposal sounds eerily like Enron's disastrous derivative scheme

As the first expert witness to testify before Congress on what went wrong with Enron, the worst U.S. fraud/bankruptcy ever at that time, Google's announcement that it has applied to the Federal Energy Regulatory Commission (FERC) for "blanket authorization...  to make sales of electric energy, capacity and ancillary services," and for "certain exemptions" from reporting and accountability... is eerily reminiscent of Enron Broadband's disastrous efforts to bring swash-buckling, gee-whiz technology to the energy futures market over a decade ago. 

  • The hair standing up on the back of my neck tells me this latest scheme by Google to become an unregulated market maker in energy services could end very badly.

What's different between Enron and Google is that Enron was an energy company that entered into the tech and energy auction businesses, whereas Google is a tech and ad-auction business entering the energy business.

Deja Vu: What's eerily similar?

  • Enron's leaders thought they were "the smartest guys in the room," much like Google thinks they are the smartest guys to think about energy today. 
  • Enron Broadband was set up as a separate subsidary of Enron, just like Google Energy is separate subsidiary of Google, in order to create the illusion of a new and separate business without conflicts-of-interests or market power, when in reality they were/are functionally integrated and rife with potential conflicts and market power issues.   
  • Enron was very secretive and non-transparent about how everything would work at Enron Broadband arguing that transparency/oversight would stifle their industry-leading innovation, just like Google argues today that  transparency/oversight would stifle their industry-leading innovation.  
  • Google, like Enron did before it, effectively is entering the high-risk derivative trading market of energy futures; yes the same type of unregulated derivative financial instruments and "dark pool" trading that helped trigger the financial crisis in 2008. 
      • (For more on the lack of accountability of these types of derivatives see the analysis I submitted to the Financial Crisis Inquiry Commission: "Systemic Risk Laundering") 
    • From Google's FERC applicationGoogle requests "blanket authority" to engage "in sales of electricity that are unregulated by the commission, applicant proposes to act as a power marketer, purchasing electricity and reselling it to wholesale customers."
  • With no government oversight, derivative exchanges of potential unregulated exotic energy financial instruments that this request for "blanket authority" would allow Google to do -- could have disastrous consequences for the market like Enron Broadband did.

What are the Enron-esque issues with Google Energy?

  • Google tells the truth that it is not an energy company, but does not tell the whole truth and nothing but the truth in its FERC filing. Google states it does not have "vertical market power" because it does not have electrical generation or transmission facilities. What Google omits from the filing that Google does have market power in market-relevant information.
    • Wired: Google's Economist Hal "Varian believes that a new era is dawning... and it's all about harnessing supply and demand. "What's ubiquitous and cheap?" Varian asks. "Data." And what is scarce? The analytic ability to utilize that data." 
    • Google's monopoly over data has the potential vertical market power to undermine competition and create barriers to entry, it is just a different kind of vertical market power leverage than what the FERC is traditionally used to evaluating.  
  • While Google may be the world-leader in running algorithmic online auctions, Google's auctions are not auctions that most people understand them to be because in Google's auctions the highest bidder does not win, the bidder that makes Google the auctioneer the most money wins.
    • Will Google run energy auctions in buying and selling energy like it runs its advertising auctions as an unregulated market maker that sees both supply and demand and front-runs and self deals or will it fairly award the highest bidder what they bid for?
  • Google is the dominant wholesaler of information in the world and uses its power to drive the wholesale price of information close to zero. (See "Googleopoly IV: How Google extends its search advertising monopoly to monopsony over digital information.")
    • In other words, will Google be an honest broker in buying and selling energy or will Google use its market power advantage in market data to artificially drive down the wholesale price of energy for its own benefit as one of the biggest corporate consumers of energy in the U.S.?

In short, Google's request for blanket authority to trade derivative energy financial instruments should get the closest scrutiny of the FERC, the DOJ and the CFTC to ensure that Google does not use its non-transparent "black box" market power to anti-competitively affect the energy market or the "ancillary" derivative markets that Google could create and corner for carbon-neutral offsets.

  • Given Google's dangerous combination of market power and minimal transparency, Google should be:
    • Much more transparent about what its plans are for in the energy market and for the "ancillary" carbon-neutral offset markets; and
    • Offer specific structural safeguards to protect against Google anti-competitively leveraging its information market power into either energy or carbon-offset trading markets.