"I trust the variac is grounded, so this may be an arc to the case...or failing insulation on the power cord. How OLD is this variac anyway? "

It is not grounded at all. So it must be arcing to the core but there must be another arc somewhere where it is at a lower voltage. It's not looking good. I wonder if it is even worth doing anything with.

And age ? It is old enough not to be grounded. I mean it does not have a 3 prong plug, and neither the cord or the outlet are even polarized.

It is not a spring chicken.