Energy Scheme Details Emerge

Perot Systems was peddling ways to manipulate California’s deregulated energy market even before the market was formally launched, according to newly released records.

The state’s power grid operator was warned about the activity but apparently did nothing after initially threatening legal action.

Newly released documents show that an official with San Diego Gas & Electric Co. complained to the California Independent System Operator in the fall of 1997 that Perot Systems Corp. had offered to sell SDG&E; and other energy companies a blueprint for exploiting market loopholes.

Cal-ISO officials responded with a strongly worded letter accusing the company of a conflict of interest, citing Perot Systems’ contract with Cal-ISO to help develop the computer system for the state’s energy market.

“Perot Systems’ marketing of its inside knowledge of the ISO’s system to third parties so that they may economically exploit the new California energy market” was “a flagrant violation of basic norms of business ethics and indicative of bad-faith dealing,” former Cal-ISO President Jeffrey Tranen wrote Perot Systems Vice President H. Ronald Nash in that 1997 exchange. The practice, Tranen said, “would seriously erode the integrity of the new California energy market.”

However, current Cal-ISO officials say the dispute evidently was never settled, and records and interviews show that Perot Systems continued to offer similar information to Reliant Energy Co. in 1998, the year the deregulated energy market went live.

“Management had a concern, expressed it very forcefully,” said Charles Robinson, Cal-ISO’s current general counsel, who was not with the agency in 1997. “But I don’t see anything in our files to indicate it was ever resolved.”

Perot Systems, founded by former presidential candidate H. Ross Perot, has strenuously denied any wrongdoing. A spokesman said Friday that although the company is conducting an internal investigation into its power consulting practices, it had “uncovered nothing at all” on the SDG&E; presentation. The company’s stock, which took a beating this week after its blueprint to Reliant for exploiting the market came to light, recovered slightly Friday, rising $1.26, or 9.8%, to close at $14.16.

Contrary to assurances that Perot Systems offered in writing to Cal-ISO after the SDG&E; complaint, the marketing pitch that Perot Systems later made to Reliant contained even more details on ways to “game” the energy market, according to a California Senate investigation.

The legislative probe has determined that Perot Systems made the sales pitch to at least five companies active in California’s energy market, and has homed in on two former Perot Systems employees who helped set up the protocols for the state market, according to a source familiar with the investigation.

“If in fact Perot Systems turns out to be the [author] of some of the manipulative strategies that were subsequently used to impact the market price, Perot Systems falls under the cloud of being a co-conspirator,” said state Sen. Joe Dunn (D-Santa Ana), the lawmaker leading the investigation.

The Texas-based information technology company, Dunn argued, could not only be subject to state prosecution for violations of California business and professions codes against market manipulation, but it also could be prosecuted under federal racketeering statutes.

California Atty. Gen. Bill Lockyer is also investigating Perot Systems, and Gov. Gray Davis on Friday reiterated his call for a federal inquiry.

“California cannot continue to be held hostage to this unconscionable behavior,” Davis said in a letter to Patrick Wood, chairman of the Federal Energy Regulatory Commission.

Cal-ISO officials said Friday they are awaiting the outcome of the various investigations to determine whether to take legal action against Perot Systems, one of three companies that shared a $57-million contract to develop the computer system behind the state’s power market.

Also on Friday, a group led by Art Madrid, mayor of the San Diego suburb of La Mesa, filed a class-action suit alleging that Perot Systems engaged in “unlawful, unfair and deceptive business practices.”

Cal-ISO, the operator of 70% of the state’s power grid, became aware that Perot Systems was peddling information on market loopholes after SDG&E; executive Gary Cotton attended a presentation by Perot Systems in 1997.

Cotton, who also served on the Cal-ISO board, notified colleagues there four to six weeks later and urged that they investigate, according to the San Diego utility. He also notified the California Power Exchange, the state’s other quasi-governmental market overseer. Cotton, who retired from SDG&E; in 2000, did not respond to an interview request.

When the subsequent dispute between Cal-ISO and Perot Systems erupted in October 1997, Jan Smutny-Jones, executive director of the Independent Energy Producers Assn., was chairman of the Cal-ISO board. But he said Friday he did not recall the matter coming to the board.

“If Perot [in its presentation] identified loopholes that subsequently were closed, the information had little value,” he said. “But if they were saying, ‘This is a way to beat the system,’ that is troubling. It’s like the guy who put the home security system on your home telling people there is no alarm on the back two windows.”

Smutny-Jones said Tranen, the former Cal-ISO president, was an intense chief executive who aggressively monitored vendors. “I don’t know if he got it nipped in the bud or not,” he said. Tranen could not be reached for comment at his New York office.

Perot Systems has said its sales pitches were unsuccessful. The company made a presentation to Reliant in June 1998, then made two follow-up sales and marketing efforts later that year, according to Reliant spokeswoman Sandy Fruhman. The company turned over the presentation, for which it paid Perot Systems an $11,000 consulting fee, in response to requests by Dunn and federal regulators.

“It was an informational presentation on the operation of the California energy market,” Fruhman said. “It was a one-shot deal, and did not lead to any ongoing relationship.”

In response to suggestions by Dunn that the Western Power Trading Forum may have played a role in the dissemination of the Perot Systems blueprint, Gary Ackerman, executive director of the industry group, said it had not yet been formed when the Perot presentations began.

But Ackerman said elements of the presentations may have been shared with utilities, energy companies and other members of a trust that preceded formation of Cal-ISO and the California Power Exchange. He said there would have been nothing improper with Perot Systems discussing loopholes during the period.

“Perot Systems was hired [partly] to identify potential gaps in the system and advising ... how to fix them, which they did,” said Ackerman, who believes that Dunn has blown the Perot documents out of proportion and besmirched harmless activity. “He’s talking about a blueprint for a house that had not been built.”

Dunn on Friday fired a shot at Perot Systems, accusing the company of making misleading statements about its blueprint and the role of Cal-ISO, a charge the company denied.

Asked whether he would take Perot up on an offer to testify before his committee, Dunn, who spoke to Perot by telephone Friday, said, “The likelihood has increased.”