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Senator Alleges Memo Helped Energy Traders Commit Fraud

Mitchel Benson and Scott Thurm, Staff Reporters
The Wall Street Journal, June 6, 2002

SACRAMENTO, Calif. -- A California state senator alleged that a Texas company that helped build the computer backbone of the state's power-trading market wrote and distributed a roadmap to help energy traders find loopholes in the system in order to drive up prices and maximize profits.

Democratic state Sen. Joe Dunn released the Perot Systems Corp. documents at a hearing here Wednesday, calling the 44-page PowerPoint presentation "corporate behavior at its despicable worst." But company officials, led by Chairman Ross Perot Sr., denied the allegations, saying that the company has worked hard to alert market officials to whatever flaws its experts identified. The news sent shares of Perot Systems, founded in 1988 by Mr. Perot, down $3.43, or 19%, to $14.55 in 4 p.m. composite trading Wednesday on the New York Stock Exchange.

Separately, a consultant to a special committee investigating manipulation of California's electricity markets unveiled a detailed reconstruction of electricity trades by Enron Corp., using now well-publicized strategies with nicknames such as "Deathstar" and "Load Shift" to allegedly manipulate the state's energy markets in 2000 and 2001. The consultant, Robert McCullough, suggested that municipal utilities such as Los Angeles's Department of Water and Power may have participated in some of the schemes, along with for-profit power traders.

But Mr. Dunn, who is chairman of the committee, focused much of his attention on the undated Perot Systems memo. He described it as "a seminar on how the market participants can game" California's energy markets, "the very system that Perot Systems had established."

Among other things, the presentation pointed out ways for power traders to create artificial congestion on the state's power grid and to profit from that. Also, the presentation advised, "Gaps in the [market] protocols provide opportunities for increased profits," and create a "chance for other players to damage your position." It urged market participants to "find leverage points you can use" and "find ways to protect against actions of others."

The presentation acknowledged that the two California market operators -- the Independent System Operator and the now-defunct Power Exchange -- "will recognize holes as they operate" and will "revise protocols and systems to close the gaps." Even so, the presentation suggested, the "time lag between recognizing and closing gaps" create "a window of opportunity" and "closing open gaps may open others."

In the middle of 2000, power prices in California shot through the roof due to inadequate supply, still-strong demand and the rising price of natural gas, the fuel used by many generators. The crisis threw one of California's biggest private utilities to seek bankruptcy protection and forced the state to go into the power-buying business, an act that may cost taxpayers and ratepayers billions of dollars.

Perot Systems managed the installation and operation of the computer systems for the now-defunct California Power Exchange and the ISO, which operates the California power grid. Perot Systems designs and maintains computer systems and services. Mr. Perot's son, Ross Perot Jr., is president and chief executive.

Sen. Dunn said his concern was intensified by the fact that his committee received the documents from a major power trader, Reliant Energy Inc. What's more, in a letter distributed with the presentation, an outside counsel for Reliant, Charles J. Stevens of Sacramento, wrote that "Reliant understands that this presentation was not prepared specifically for Reliant and was made to other California market participants."

But it is unclear precisely how the 44-page presentation ended up in the piles of Reliant Energy documents that the company provided Mr. Dunn's committee or to what extent the company took advantage of any of the strategies and recommendations laid out.

Reliant spokesman Richard Wheatley said, "We believe this document was provided to Reliant as part of a Perot Systems sales presentation," but he declined to comment any further, saying the company didn't yet have any "definitive information."

Perot Systems issued a brief statement, saying the company "provided no services to Reliant Energy and no energy trading services to any California market participant." The company said it "actively alerted" the Power Exchange and ISO "to defects in the market rules ... Perot Systems did not reveal or sell any confidential information of any kind."

Officials at the ISO were skeptical of Mr. Dunn's interpretation. "There's no proprietary information there," said spokeswoman Stephanie McCorkle. Jim Kritikson, the former senior director of regulatory affairs at the Power Exchange, said Perot Systems employees worked directly for him during his tenure there. He said one of their main responsibilities -- which he said they performed well -- "was to help identify flaws in the market design so that we could fix them."

In the related matter of Mr. McCullough's analysis of California's power crisis, the consultant said that 200 Enron documents supplied to him by the state Senate committee, showed "there is no question at all" that Enron used trading strategies such as Deathstar "on a daily and repeated basis."

Mr. McCullough said the documents showed that Enron told the officials who ran California's electrical grid that it was importing power from Oregon, while at the same time telling municipal utilities that ran a parallel system that it was exporting power to Oregon.

In fact, the instructions would cancel each other out and, typically, no electricity would move in either direction. "This is check kiting, ... simple fraud," Mr. McCullough said. An undated document distributed at the hearing showed Enron reporting a profit of $44,000 on such deals in one day.

Mr. McCullough, a former utility executive and university professor, said the false instructions also may have contributed to power shortages in California, particularly in early 2001. On Jan. 17, 2001, for example, the California grid operators ordered rolling blackouts, apparently believing that the transmission lines from Oregon were at full capacity. But Mr. McCullough said that the Bonneville Power Administration, which oversees portions of Oregon's electrical grid, reported that more than half its transmission capacity into California was available.

"A reasonable person armed with this data might question whether blackouts were necessary," Mr. McCullough said. He said that energy traders may have created the impression of congestion to sell power to California officials at higher rates.

An Enron spokeswoman declined to comment on the documents or Mr. McCullough's interpretation, but said the company continues to cooperate with investigators. Representatives of the Los Angeles Department of Water and Power and the Bonneville Power Administration had no immediate comment.

Separately, Williams Cos., Tulsa, Okla., asked the Federal Energy Regulatory Commission Wednesday to conduct a review of the company's natural-gas trading records. The company said FERC hadn't asked for the data, but that it would voluntarily submit gas-trading records for December 2000 and January 2001 for review by the commission. The move follows allegations made by a former Williams employee in a New York Times article published Sunday that the company tried to corner the natural-gas market in California in that time period, an allegation the company has strongly denied.

As part of FERC's expanding investigation into Western energy markets, more than 150 traders submitted information on so-called round-trip trading in the natural-gas markets yesterday. The trades, essentially swaps of the same energy for the same price, can artificially boost revenue and can potentially move prices.

As with two previous deadlines -- one requesting information on power-trading strategies in California and one requesting information on round-trip electricity trading -- most companies denied conducting illegitimate trades but identified transactions that may look like round-trip trades. Williams, for instance, said it conducted several trades that could be considered round-trip trades, two of which it said were executed at the request of Houston-based El Paso Corp.'s trading arm. Williams said the trades didn't inflate revenue or volumes or affect prices. El Paso, in its filing, identified about 100 trades that could fit FERC's definition, but said all those trades were legitimate.

Mitchel Benson and Scott Thurm
Chip Cummins in New York contributed to this article.
Senator Alleges Memo Helped Energy Traders Commit Fraud
The Wall Street Journal, June 6, 2002

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