Scandal to push systems redesign

As federal investigators dig deeper into a scandal involving shady online energy trading, it looks as if IT departments will be required to redesign the e-commerce systems that once stood out as the pride of the energy industry.

Among the recent findings of the U.S. Federal Energy Regulatory Commission: Enron Corp. used its trading systems to boost profits during California’s 2000-01 energy crisis, and Enron and other companies in the industry conducted wash trades, in which they would buy electricity at a certain price and immediately resell it at the same price in order to inflate revenue numbers.

Now, it’s widely expected that the IT departments of energy trading companies will have to build enough transparency into their trading systems to let regulators “identify when and whether misrepresentation and manipulation is occurring,” as FERC Chairman Pat Wood called for during Senate testimony last month.

Industry executives are still waiting for the FERC to weigh in with specific system overhaul requirements, which are expected sometime this summer. But according to analysts, the revamps could cost the industry tens if not hundreds of millions of dollars over the next few years.

Bob Menella, a trading operations vice-president at Con Edison Energy Inc., said the White Plains, N.Y.-based company will probably hold off on any future IT projects until the FERC issues its findings and requirements.

“We’re at the point now where we’re trying to figure out what the ground rules are going to be,” Menella said.

Con Edison has already built comprehensive tracking functions into its trading systems. But the systems will likely require significant revisions to satisfy federal authorities, Menella said.

“We designed it for our own purposes, just so we’d have a detailed record of what we’ve done, not to report it to the outside,” Menella said. “That’s a different type of system.” For example, he said, the systems weren’t built to identify wash trades or potentially questionable trades.

Early last month, Toronto-based Ontario Power Generation Inc. went live with new systems that support the province’s deregulated electricity marketplace.

CIO Dietmar Reiner said he now wants to give customers better access to data and to reduce paperwork cycles for energy traders. But such projects could be moved back if Ontario Power has to make significant systems changes so that it can continue to process trades with U.S.-based energy companies, Reiner added.

Robert McCullough, an energy industry analyst in Portland, Ore., questioned whether anyone can design systems that can properly oversee the kind of light-speed transactions in online energy trading.

“What we’re discovering is the centralized computer modelling may have been a weakness,” McCullough said.

In order to prevent such abuses from taking place, better analytics and improved integration among systems both within a company and between business partners will be needed, said James Walker, an analyst at Forrester Research Inc. in Cambridge, Mass. “I think the demand on IT increases,” he said.

Most energy trading operations now process trades in overnight batch feeds, Walker said. Mirroring a financial services industry initiative, they would need to link their trading systems with back-end credit and accounting applications to create straight-through processing that provides real-time visibility.

Reiner said the information needed to prevent wash trading exists but is often divided among generation, wholesale and distribution companies.

“We don’t have the visibility right now, but we could get a good sense of what’s available in transmission and generation if we needed to find out that information,” he said.

The Online Disconnect

Energy-industry IT professionals, analysts say too many energy trading companies figured out ways to profit with new technology

One of the lessons emerging from the national energy trading scandal is that putting good systems in the hands of unscrupulous managers will lead to bad deeds.

James Walker, an analyst at Forrester Research, said some energy traders were able to manipulate systems in ways that state and federal regulators hadn’t envisioned, turning simple trades into false revenue and ill-gotten profits. “We are going to see quite a bit of change in the industry as a result of this,” he said.

Government agencies have been trying to discern how these trading systems work once they get off the drawing board and into production, said Patrick Roach, an attorney at the Federal Trade Commission.

But Robert McCullough, an independent analyst in Portland, Ore., warned that better technology only makes it easier for rule breakers to perfect their schemes in some cases.

“We can’t catch up to the product it moves too fast,” he said. “How do you propose to stop something you can’t catch?”

Energy traders in an unregulated marketplace have been forced to build systems that assess the risks involved in trading with other companies, noted Bob Menella, a vice-president at Con Edison Energy in White Plains, N.Y. But Menella said traditional mercantile exchanges provide some protection and might become the model for the future.

“More protection of the trades is not necessarily a bad thing, and we might be looking at a model where individual companies have to work through an exchange in order to make sure everything’s on the level,” he said.

Reporter Melissa Solomon contributed to this report.

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