opportunity minus responsibility equals tragedy

by Steven Brown

Just as authorities in Houston closed the cell door on Lea Fastow and a grand jury in that same energy capital brought an indictment against Ken Lay, controversy has swelled around another Texas-based power industry player.

Although a decidedly different entity from Enron, the Electric Reliability Council of Texas (ERCOT) is making its own headlines steeped in allegations of financial impropriety.

On July 18, The Dallas Morning News reported that a consulting firm with ties to Stephen Wallace, a former manager at ERCOT, had billed ERCOT for hundreds of thousands of dollars in technical consulting services from people who didn’t actually perform any consulting work for the council.

The consulting firm, DSS Group, billed for work from two people who later said they didn’t know why their names had appeared in the billing records. The Dallas Morning News reported that another “worker” actually had been dead for months before DSS Group became an ERCOT contractor. (Consulting is not always easy to get into, but once you’re there, you stick.)

The newspaper reported that the one DSS worker who appears to have actually done the consulting work ERCOT was paying for was Stephen Wallace’s nephew. Wallace reportedly founded DSS Group and oversaw the consulting firm’s work while he was employed at ERCOT.

DSS is the fourth and latest company now being scrutinized as ERCOT’s contracting practices are investigated. Wallace is thus far the highest-ranking ERCOT official to be connected to a consulting firm in this matter. He has denied any wrongdoing, which is a phrase so commonly uttered lately that it has come to sound not only insincere, but downright clich

Wallace’s story is an interesting and tangled one, and one that bears watching as this investigation continues.

Wallace started a company called DSS Group in 1995 in California, later moved it to Virginia, and finally to Austin, Texas, where, in 2002, the company did work for a unit of Dell Inc.

Overseeing DSS’s work for Dell was Kenneth Shoquist, who, later in 2002, went to work for ERCOT as chief information officer. Two months after Shoquist began work as CIO at ERCOT, Wallace-coincidentally enough-took a management position at the council.

Within months of Wallace’s being hired at ERCOT, DSS was brought on as a contractor. Wallace has claimed that he disclosed his relationship with DSS to both Tom Noel, then ERCOT CEO, and Shoquist, but ERCOT denies that Wallace made any such disclosure.

At any rate, the principals involved in this controversy are now pursuing other opportunities. Wallace left ERCOT in April of this year, Shoquist left in May, and Noel stepped down from his position as CEO in late July.

Noel has said that the problems with contracting are not widespread throughout ERCOT and that the allegations pertain only to “very senior managers”-which, while it’s probably true, really doesn’t make the situation any better. Whether the alleged improprieties were committed at the upper level, the middle level or the lower level of ERCOT won’t matter much to investigators or Texas ratepayers.

As noted earlier, comparing ERCOT, the grid operator, to Enron, the energy trader, is at best an apples to potatoes comparison. But there does seem to be one parallel: Deregulation, poorly implemented in California, figured prominently in the downfall of energy trader Enron. Unscrupulous traders saw opportunity in the flawed California market and pursued it with greedy intentions. The results are now being chronicled in books, TV movies and court documents.

Deregulation, while better implemented in Texas, may have also played a part in the current controversy at ERCOT. With the advent of deregulation in Texas, ERCOT’s role in the Texas power market changed and the organization underwent significant growth-from less than 100 employees in 2000 to approximately 400 today. Corresponding with this growth, The Dallas Morning News has reported that ERCOT’s spending will nearly double between now and 2008. Consumer groups in Texas claim ERCOT’s growth since the state’s deregulation has occurred with too little oversight and control-both common ingredients in recipes for corporate malfeasance.

Power industry deregulation presents unique opportunities for profit and growth, and that can be a good thing (see this issue’s industry report) or a bad thing. When those opportunities are pursued in an irresponsible manner, the outcome reads like Greek tragedy-something the former principals at Enron will have plenty of time to study while in confinement. Other companies operating in deregulated and deregulating markets would do well to learn from the mistakes of those who came before and meet the opportunity with responsibility.

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