State electricity purchasers often finished second against veteran industry traders.
Los Angeles Times
It was the night before the darkest day of the winter energy crisis, when California’s first wave of rolling blackouts paralyzed cities from Bakersfield to Eureka.
Davis administration strategists were huddled in a Sacramento office that January evening, trying to figure how to keep the lights on, when a speeding tractor-trailer slammed into the Capitol like a runaway train.
“I looked out the window and saw the flames and the smoke rising,” said Ray Hart, head of the energy planning team. The symbolism was not lost on him.
The next day, with the state’s electricity supply on the line and the governor’s political career on the blink, Hart was called on to create an organization that overnight would become the biggest power buyer in the West, purchasing electricity for 10 million customers whose utilities were going broke.
Now, seven months and billions of dollars later, the administration is under fire for paying top dollar for a cadre of inexperienced traders who at times have been exploited by veterans in the cutthroat energy industry. Even Gov. Gray Davis acknowledges the mismatch.
“It’s like the Yankees playing a stickball team,” he said in a recent interview. “We’re totally out of our league.”
The administration’s new long-term contracts also have been criticized for paying too much for power that may not be needed in the future.
Making matters worse, nearly a dozen consultants hired by the administration owned stock in energy companies–a fact revealed only after they were belatedly asked to file personal financial statements. Five were hastily fired, and the federal government is investigating possible insider trading violations.
“How an agency could forget conflict-of-interest codes, or ignore them, is beyond me,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “This is the way people lose faith in government.”
Hart said it never occurred to him that consultants and buyers in his vastly broadened organization should file declarations of financial interest until requests for the information rolled in, including one from Davis’ Republican political rival, Secretary of State Bill Jones.
Amid all the controversy of recent days, Hart said, the efforts of his staff in helping to avoid blackouts so far this summer have been overshadowed.
“Frankly,” said Hart, a veteran administrator with the state Department of Water Resources, “it’s kind of disconcerting we aren’t getting the credit we should be getting.”
Patching Together a Team on the Fly
The state’s new energy-buying organization was a beg, borrow and recruit operation. A core group already was working in the Department of Water Resources to buy power for the massive canal pumps of the State Water Project.
The agency received an immediate infusion of $22 million to create its expanded trading arm of 88 employees and consultants.
On the fly, Hart patched together a team of retired state energy buyers, workers from a closed energy exchange and analysts from Pacific Gas & Electric, Southern California Edison and the energy industry.
Many were hired to buy electricity on the spot market after repeatedly calling power companies throughout the West to negotiate prices. Then they needed to schedule its use on a statewide monitoring system that reflects supply and demand.
From the start, the administration said it would pay higher wages than usual to attract talented traders who could hold their own against wily veterans at private energy marketing firms.
“Energy trading and purchasing is a very complex business with millions of dollars of energy purchased every day,” a state budget document said. “It is important to recognize the level of risk and the high level of expertise that is necessary to effectively manage that risk and operate the program effectively. Professionals in this business are highly compensated.”
Power buyer William Mead was among the first to get the call in early February.
“They said, ‘Can you be up here Tuesday?’ ” said Mead, a 55-year-old former Edison engineer from Duarte. “I said, ‘For a job interview?’ And they said, ‘No, bring enough stuff for several months.’ ”
They told him to bring his last paycheck and a resume, Mead said. He worked six weeks, he said, before he finally got a contract to sign.
“In those early days it was chaos because we were always at Stage 2, on the verge of blackouts,” he said. “There was no focus other than to keep the lights on.” One day, Mead said, he bought 10% of all power consumed on the state’s electricity grid during his 12-hour shift.
But, unlike Mead, most of the new crew had never bought power before, according to their resumes. Most worked at the now-defunct California Power Exchange, an energy trading floor similar to a stock market, reconciling sales and purchases made by others. Before that, one worked at a freight-forwarding company in Carson and another ran China Noodle House in Arcadia.
Energy industry insiders said they have spotted a series of rookie moves by the new group.
“They’re just buying too much or buying too little or buying too much too fast,” said Mark Palmer, spokesman for Houston-based Enron Corp., one of the nation’s largest energy marketers. “It’s like someone who flies a kite one day, and then is told to go fly a 747 the next.”
One veteran said the state traders lack the practiced subtlety that experience brings. “You don’t just come out to someone and say, ‘What’s your price?’ and then pay it. But that’s what some of them have done.”
A senior analyst at a California firm that sells power to the state traders said, “The word I get from our traders is that a lot of them have made a lot of money off them.”
Palmer said California, for the salaries it’s paying, could have done better.
A particular lightning rod for criticism is the $480,000, two-year contract of chief trader Susan T. Lee, 30, who was hired in April for $120 an hour.
With barely a year’s experience in the energy industry, she leads a 16-person crew that buys electricity the day before it’s needed or for nearly immediate use. State records show that Lee was paid more than $30,000 a month, including overtime, as she began her new duties.
“That lady’s got one year’s experience, and she’s getting 500 grand,” Palmer said. An experienced trader in private industry, he said, might make $80,000 to $120,000 in a good year, plus bonuses.
“She’s certainly making double what I am, but she’s worth it,” said Hart, who has spent two decades as a bureaucrat at the once-obscure Department of Water Resources.
Although Lee could not be reached for comment, Hart said her short tenure in the industry must be judged by the reality of today’s evolving trading market. California energy deregulation began only in 1996, and energy trading has changed enormously in just the last year, he said. “I would argue that somebody who has been involved and engaged for the last year has as much value as anybody [regardless of experience].”
Lee’s team members, meanwhile, have been signed to lucrative short-term contracts worth a maximum of $15,000 to $21,000 a month, including housing, rental cars, per diem pay and flights home on days off. State records show that many traders have actually received only about half that maximum amount.
One industry trading manager said he knew nearly all of the new state traders from their work at the Power Exchange. He said several had applied to him for a job after the exchange closed in January but he didn’t think they were qualified.
Some traders acknowledge feeling overmatched against veterans of the industry and have had to learn on the job how to compete.
“They know more than me; they’ve seen it all,” said state trader Bernard Barretto, a Navy electronics technician before he got a job at the Power Exchange in 1998.
In their own defense, the traders also said they had virtually no leverage in their early months because power reserves were so depleted that they had to buy no matter the cost.
“Our job was to buy whatever we could buy,” former trader Elaine Griffin said. “California was truly a captive market.”
Hart says the relative inexperience of his traders hardly matters because they follow strategies devised by higher-ups.
“Do the [traders] go out and start the deal? Yes,” Hart said. “Do they cut the final deal? No.”
Far from the trading trenches, the governor sees things differently. The trading arms of companies such as Enron far surpass that of the Department of Water Resources, he said.
“These are very sophisticated operations,” Davis said. “They have several meteorologists and banks of media people.”
To protect taxpayer money from being devoured by these savvy private traders in the early days of California’s power-buying binge, state officials turned to a technique called “sleeving.” They used Lee’s old Long Beach firm, Mieco Inc., and Allegheny Power to camouflage the state’s identity as the buyer.
The technique also allowed California to buy power from companies that had questioned whether the state would pay its bills.
Some traders, however, saw through the guise. The volume of energy being bought on the market by Mieco and Allegheny was the tip-off that California had weighed in.
“I knew it, and I’m pretty sure the rest of the traders out there know about it, too,” said one trader, who like others, asked not to be named because he still trades power with the state. “But it worked for a while. It helped keep the short-term prices down.”
Controversy Over Stock Holdings
The state traders were powerless, however, to protect themselves.
Just as they were settling into their new jobs, and energy prices were falling, the administration was stung by the disclosures that 11 of its traders and consultants owned energy stocks. The governor ordered them to divest the holdings within hours or be fired.
Five were ousted anyway because they had previously bought power for the state from a firm–San Jose-based Calpine Corp.–in which they had owned stock.
The highest-ranking of them was former Sacramento utility executive Richard Ferreira, who was hired on a $500,000 contract in January to negotiate long-term power contracts.
The four others were the veteran Mead and three younger buyers: Herman Leung, Constantine Louie and Peggy Cheng. Elaine Griffin, who had resigned just days before the firings, also held Calpine stock while trading for the state.
Most of the traders, who had worked together at the Power Exchange in Alhambra, said they bought the stock before they went to work for the state and had never been warned that ownership was a problem. They said no one asked if they even held any energy shares.
Mead said traders on his state team–such as Cheng, Leung and Louie–had no ability to influence Calpine’s stock price because their purchases of the company’s electricity were infrequent and small.
Mead said he had openly touted Calpine stock to his colleagues because he’d made so much money on it. He said his investments of $20,000 in 1999 and $134,000 last fall brought him about $400,000 when he was ordered to sell last month.
“You want to know how I picked Calpine?” he said. “Investor’s Business Daily has a system for selecting stocks, and Calpine showed up on its list of stocks with strong potential.”
Leung said he rarely dealt with Calpine and bought his $2,000 worth of shares on Jan. 22, while still at the Power Exchange, which had a conflict-of-interest policy barring ownership of energy stock.
“I didn’t know I would have an opportunity like this at the time,” Leung said of his briefly held state job. “I bought it just because I’m interested in the market all the time. I follow it.”
Today, shipped back home from their rented apartments outside Sacramento, the fired traders see themselves as victims of Davis’ effort to fend off further criticisms of his handling of the energy crisis.
They bristle at the fact that Davis has not required some of his most influential private advisors to file the kind of disclosure statements that led to their firings.
“The big boys, the ones hiding behind the right not to disclose, those are the ones that ought to be drawing attention,” Mead said. “They’re the ones who knew how things worked.”