The O’Neills sold their single-story, 2,428-square-foot home. Just before Christmas 2002, they bought a newly constructed, 4,820-square-foot house that sat far back on a wide grassy lawn in a tree-lined neighborhood in town. It had a pool in the backyard with a diving board. The O’Neills were able to hire a nanny to help with the kids, and began taking skiing vacations. They joined a country club and enrolled all of their children in private school.
If there was a downside to being a millionaire, O’Neill was hard-pressed to describe it. The new money ends up going faster than a person might think—private school might cost between $80,000 and $100,000 a year for all the kids. Nannies aren’t cheap. A ski trip might cost $20,000. It turned out that before long, you were spending all that money without even doing anything extravagant like buying rare art. But still. This wasn’t the same thing as worrying about paying off the credit card each month, or worrying if you had enough money to pay for all the activities the kids had signed up for.
O’Neill worked for Koch Energy Trading until 2004, when he left to trade on his own. He got tired of working at a big company and enjoyed being independent. He formed a hedge fund that specialized in energy trading, dabbled in the oil well business, and continued to live in Houston.
For all the money he made, O’Neill retained a great deal of humility. He realized that other people in his business were making far more money than he did. A $4 million annual compensation was somewhat prosaic among the top derivatives traders in America. At Koch Industries, he personally knew many other millionaires. O’Neill was also able to recognize the difference between himself and the people he worked for. He knew that he kept only a fraction of the profit he earned, even in the best years. There were other people, not too far from his orbit, who earned hundreds of millions of dollars. That kind of money created a completely different kind of life, which he couldn’t fathom.
“I made enough money . . . to where I was comfortable. But I wasn’t powerful. It didn’t bring power with it. It just brought comfort.” O’Neill said. He wasn’t rich enough, as he put it: “Where you have enough money where you can influence things.”
That kind of money was accruing to his bosses at Koch, and to the bosses above them.
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I. Readers will learn more about this disaster in chapter 13, “Attack of the Killer Electrons!”
II. Specifically, the price was $2.27 per million British thermal units, or MMBTU in market lingo. This is the basic unit of measurement for natural gas used by traders, and all figures in this chapter are MMBTU. A British thermal unit is a measure of energy put out by a given volume of gas. A million BTUs can be about one thousand cubic feet of gas.
III. The full name was IMD Storage, Transportation and Asset Management Company LLC, and the company was based in Texas.
CHAPTER 13
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Attack of the Killer Electrons!
(2000–2002)
The problem, therefore, lies as much in the national political culture as in the specifics of California’s ill-fated experiment.
—Yale Journal on Regulation, 2002
Who would have thought? All we wanted was a bigger, healthier tomato.
—Government bureaucrat, Attack of the Killer Tomatoes!, 1978
Koch’s trading division was always expanding into new territory. Koch’s traders sought out new, opaque markets where the economics were complex, the rewards were enormous, and Koch could press its advantages of deep analysis and inside information. One of the richest horizons for new trading in 2000 was an emerging market for something that had never been traded before: electricity.
The new commodity in this market was called a megawatt-hour. This was a basic unit of power that could be bought and sold like an oil futures contract.I The size of this new market was breathtaking. The national electricity market was worth roughly $215 billion a year, making it more than twice the size of the airline or telephone industries. The natural gas market, by contrast, which had earned Koch Industries such rich profits during the 1990s, was worth a mere $90 billion. The market was even more enticing because only a handful of firms were prepared to trade megawatt-hours in 2000.
Koch Industries was one of them.
Koch formed a division that traded electricity futures called Koch Energy Trading. The company selected a young man named Darrell Antrich to pioneer its venture into the megawatt markets. Antrich was only twenty-eight years old. He looked even younger than his age, with a lean physique and closely cropped light-brown hair. When he arrived for work at Koch’s trading floor in Houston, Antrich wore a button-down oxford shirt and khaki pants, and could have easily passed for a young conservative college student. His youth was a good match for the ambition and novelty of the new team that he would lead for Koch.
Antrich helped build a team of traders who would focus on trading nothing but megawatts. Their cluster of desks was located near the natural gas trading floor where O’Neill had made his fortune, and the new electricity traders would benefit from the same infrastructure that helped O’Neill. They had access to Koch’s internal weather reports and flash alerts from the pipelines and refineries. They built a complex software system to help predict demand for electricity around the country, along with detailed flow charts of power grids and transmission pathways.
The trading infrastructure was up and running, ready to do business, but there was one significant problem: the electricity markets in which it would trade were still being built. There was an important truth embedded in this situation: Koch’s trading floor was only one half of the coin of the marketplace. The other half of the coin was the public policy and politics that would create the trading market itself. It was common for Koch’s traders and other libertarians to talk about markets as if they were organic systems that lived, grew, and evolved on their own if only left alone by the government. In fact, markets are always a system of exchange created by rules, and those rules are almost always created by the government.
This was certainly the case for the new electricity markets in which Koch was hoping to trade. A new market for electricity was being created in the United States, piece by piece, during the 1990s. One state after another was changing the rules of the power business in a process that was called deregulation—but that was a lot more complicated than simply repealing rules. The deregulation effort was really more of a reregulation effort, a political movement to shift the rules in favor of independent traders and away from a state-regulated utility system that was born in the New Deal era. It wasn’t clear until years later what an important role Koch Industries played in helping shape the effort.
As Darrell Antrich was helping set up Koch’s trading desk, another arm of Koch Industries was actively shaping the markets in which Antrich would trade. Koch was uniquely prepared to execute on this double-edged strategy. The company’s ability to influence politics had expanded dramatically since the early 1990s, when Koch was investigated by the US Senate. Over the next decade, Koch expanded its political lobbying office, increased its political contributions, and funded libertarian think tanks. Perhaps most significantly, Koch Industries became a vital supporter of a little-known national policy network called the American Legislative Exchange Council, or ALEC, which pushed efforts to deregulate electricity trading around the nation. ALEC promoted these policies in state legislatures where policy making was often ignored by national media outlets and where political influence came cheap.