Electricity Scheme Is Decried
Top California officials on Wednesday deplored disclosures that a company run by H. Ross Perot provided energy traders with a blueprint for manipulating the state’s electricity market, and Gov. Gray Davis called on the federal government to investigate.
“If true, this is an ethical violation of the highest order and quite possibly a criminal offense,” Davis said in calling on the Federal Energy Regulatory Commission to investigate the allegations against Perot Systems Corp.
The company helped develop the computer systems used to track California electricity trading, and then peddled a detailed presentation to energy companies on ways to “game” the state’s power market, newly released documents show.
Perot Systems officials on Wednesday denied any wrongdoing.
The blueprint outlined a number of “strategic decisions” that companies could make to maximize profits. It said Perot Systems had “discovered a hole” in state protocols and provided specific examples of how to exploit it to increase power prices.
Among the examples was one dubbed “Game,” which described how companies could purposely clog transmission pathways by scheduling to send electricity that, in reality, is never sent anywhere but helps to drive up prices and leads to profits for energy companies.
That mirrors the scheme Enron Corp. nicknamed “Death Star,” one of the ways the now-notorious energy trader deliberately spiked prices in California, according to recently released company memos. Because California’s market system pays energy traders for relieving congestion before any electrons actually flow, energy companies may have been making profits--and disrupting the legitimate transmission of power--by creating the illusion of clogged power lines.
A state Senate committee investigating whether companies manipulated the market during last year’s crisis obtained the blueprint from Reliant Energy. Lawyers for the Houston-based company said Perot Systems made the same sales pitch to other firms selling power in California.
California lawmakers said they were stunned by the 44-page presentation, a series of computer graphics that provided a primer on the state’s deregulated electricity market and then illustrated ways to exploit it to raise power prices.
An industry consultant testifying before the Senate committee Wednesday likened it to “handing grade-school children loaded revolvers,” and concluded that power traders armed with such information would clearly have put the schemes to use.
“This is corporate behavior at its despicable worst,” said state Sen. Joseph Dunn (D-Santa Ana), the lawmaker leading the inquiry, adding that it appeared that Perot’s firm might have played a role in the “economic rape of California.”
In a statement, the Plano, Texas-based firm said it had not provided any confidential information to Reliant or anyone else and had in fact “actively alerted” two energy-market oversight bodies about “defects in market rules” already adopted by the state.
Perot Systems spokesman Eddie Reeves said the company is internally investigating why the document was produced, and added that earlier this year the firm shut down the energy consulting arm that apparently put it together.
“We’re trying to find out who exactly produced it, to whom they presented it, when, what the context was and what the goal was,” Reeves said. “Integrity is our bread and butter, and that’s why we want to get to the bottom of this.”
Perot, the former presidential candidate who serves as the company’s chairman, also telephoned Dunn on Wednesday morning, the senator said, and assured him that the firm would place “absolutely no obstacles of any kind” before California investigators. He then offered to testify--an offer that state lawmakers appear inclined to accept.
“Perot Systems itself is going to have to account for this,” said Dunn, who has concluded that the rolling blackouts that darkened much of the state last year were the result of improper business conduct and could have been avoided.
Perot could not be reached for comment Wednesday. Perot Systems’ stock price fell $3.43 per share, or about 19%, to close at $14.55 on the New York Stock Exchange. The plunge wiped out about $364 million of the firm’s market value.
The company was hired in 1997 to help set up the computer systems for the California Power Exchange, the body that was supposed to be the state’s primary power market but that went out of business last year during the height of the energy crisis, and the California Independent System Operator.
Cal-ISO handles real-time electricity trades and manages the power grid for most of the state.
Perot Systems was one of three firms hired by Cal-ISO as part of a $57-million contract to establish its computer system, according to the agency, which said its relationship with the company ended in 1998. Cal-ISO was not immediately sure how much of the money Perot Systems received. The firm also entered into a $35-million information technology services agreement with the Power Exchange in 2000. It was not clear Wednesday how much Perot Systems was paid to set up the computer system for the exchange.
Cal-ISO officials on Wednesday reviewed the Perot Systems blueprint and concluded that it did not contain any confidential information, said spokesman Gregg Fishman.
“There isn’t anything that anyone with some knowledge and know-how of the energy business couldn’t have figured out for themselves,” he said.
Lawmakers, however, raised a number of questions Wednesday about the ramifications of the blueprint. Among them, said Dunn and state Sen. Debra Bowen (D-Marina del Rey), was whether the members of the Cal-ISO board, who include energy company representatives and other so-called stakeholders in the market, had learned about the loopholes outlined in the Perot Systems document.
Though it was largely overshadowed by the Perot Systems revelation, state lawmakers also heard testimony Wednesday from an industry consultant who suggested that some of the state’s municipal utilities should have known--and may well have known--that Enron and other power companies were possibly engaging in questionable business practices.
Robert McCullough, a former utility executive who runs an Oregon consulting firm, said the state’s utilities should have suspected that something was wrong when power companies such as Enron were offering to split profits with them--in some cases 50-50--for the right to their capacity on power lines, and were then sending little or no power.
Some of Enron’s ploys were specifically tailored to employ the municipal utilities--including one dubbed “Red Congo” that used a portion of the Redding utility’s transmission line, he said, citing new documents obtained by the state.
Glendale’s municipal utility recently announced that it was investigating whether it unwittingly took part in some of Enron’s schemes by participating in similar arrangements.
But McCullough said at least one municipal entity, the Northern California Power Agency, appears to have known something was afoot, citing a document that showed it was “aggressively” marketing use of its lines to Enron and to Williams, an Oklahoma-based energy company, for a 50% cut of profits.
A lobbyist for the agency, John Fistolera, disputed McCullough’s accusation, saying his client was simply trying to make the best use of its assets, and had actually thought it was helping relieve power shortages during the energy crunch.
