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Reliant Indicted for Manufacturing California Energy Crisis

SAN FRANCISCO, California, April 9, 2004 (ENS) - The California energy crisis of 2000 and 2001 was manufactured for financial gain by at least one giant out of state energy company, according to an indictment handed down by a federal grant jury in San Francisco. Houston energy company Reliant Energy Services, Inc., and four of its officers were charged Thursday in connection with a federal criminal investigation of the manipulation of the California energy markets.

The grand jury returned a six-count indictment against Reliant Energy Services, Inc., a subsidiary of the company now known as Reliant Resources, Inc., and four of its officers - Jackie Thomas, a former vice president of Reliant's Power Trading Division; Reggie Howard, a former director of Reliant's West Power Trading Division; Lisa Flowers, a term trader for Reliant's West Power Trading Division; and Kevin Frankeny, Reliant's manager of western operations. All of the defendants are residents of Texas.

power lines

Electricity carried across California power lines was expensive in 2000 and 2001, and rolling blackouts were frequent. (Photo courtesy NREL)
The indictment alleges that in June 2000, Reliant Energy Services and its officers and employees intentionally drove up the price of electricity in the state by shutting off its power generation to create the false appearance of a shortage. According to the indictment, the plan worked, and Reliant Energy Services allegedly reaped millions in illegal profits.

The defendants are charged with conspiracy to commit wire fraud and commodities manipulation and wire fraud, as well as manipulation and attempted manipulation of the price of a commodity in interstate commerce.

These charges are the first to be brought against a corporation for engaging in fraudulent and manipulative trading practices during the California energy crisis.

Attorney General John Ashcroft said, "The vast majority of American companies are businesses of integrity. The vast majority of corporate executives are honest, hardworking people. But when a company conducts itself in the manner Reliant Energy Services is alleged to have acted here, it will face severe consequences."

But Reliant says the company did nothing wrong and it intends to fight these charges. “We believe the actions that are the subject of the indictment were not in violation of laws, tariffs or regulations in effect at the time,” said Reliant Resources General Counsel Mike Jines.

Jines

Mike Jines is senior vice president, general counsel and corporate secretary of Reliant Resources, Inc. (Photo courtesy Reliant Resources)
“During the week in question, electricity was plentiful in California, there was no supply shortage, no ISO declared emergency and no blackouts, and prices were relatively low," said Jines. "There is absolutely no basis to contend that this conduct contributed to the energy shortage that occurred in California later that year."

The scene was set when deregulation of the electricity industry forced California utilities to divest their generating plants between 1997 and 1999, and during this period Reliant acquired five California power plants.

The indictment alleges that in June 2000, defendant Flowers held a long trading position in the so-called "term" market for future delivery of electricity at the Palo Verde, Arizona trading hub.

On the morning of Monday, June 19, 2000, prices in the relevant California electricity markets fell dramatically. Based on Flowers' trades and market prices, Reliant's West Power Trading Division faced an unprecedented multi-million dollar financial loss, the indictment states.

To reverse Reliant Energy Service's losing financial position, the indictment alleges that the defendants devised an illegal scheme to drive up the price of electricity in California by shutting off the majority of the company's power generation plants, intentionally creating the appearance of an electricity shortage, and disseminating false and misleading information to the market that wrongly attributed the shut-downs to environmental limitations and maintenance problems.

According to the indictment, Reliant Energy Services's manipulation worked, and prices for electricity rose throughout the remainder of the week for all market participants in the California spot and term markets.

The indictment alleges that as a result of the defendants' fraud and manipulation, the California Power Exchange day-ahead market and the Independent System Operator (ISO) "real time" market published artificially inflated spot prices for electricity which were accessed by market participants throughout California.

ISO

In the California ISO control room where the flow of electricity along the high-voltage power lines of California’s transmission system is managed. (Photo courtesy California ISO)
These electricity markets then charged all market participants artificially high prices for day-ahead, real-time and emergency electricity and energy services purchased during the period of the manipulation, the indictment states.

Among the victims of the allegedly manipulated, artificially inflated prices for electricity was Pacific Gas & Electric Co. in San Francisco, which acquired electricity for its retail customers through these markets.

The indictment alleges that once the defendants achieved the artificial inflation of prices, Reliant Energy Services proceeded to turn certain of the company's plants back on in order to sell its power to California's grid manager, the ISO, for as much as $750 per megawatt hour - the federally imposed price cap at the time.

According to the indictment, the defendants also proceeded to sell the company's previously losing financial position in the term market, which had become profitable because of Reliant's manipulative scheme.

"Reliant was among a group of large energy companies that robbed California blind during deregulation, so this should be only the beginning of the indictments," said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights.

Heller points out that Reliant charged the state of California as much as $1,900 per megawatt hour for electricity, about 6,300 percent more than the historic norm of $30 per mgh.

The foundation's own analysis shows energy company manipulation of the California energy market allowed the firms to overcharge California consumers by more than $20 billion between 2000 and 2001 and to excessively price long term energy contracts with the state by an estimated $22 billion dollars.

If convicted each defendant could go to prison for five years and be fined millions of dollars. But these penalties do not satisfy Heller, who wants to see electricity consumers get their money back.

Criminal charges alone are insufficient," Heller said. "The energy industry treated California's deregulation experiment like a license to steal and until the state's taxpayers and consumers recoup tens of billions of dollars from these thieves, even convictions will be a hollow victory."

Kevin Ryan is U.S. Attorney for the Northern District of California and a member of the President's Corporate Fraud Task Force. He said, "A market controlled by fraud is not a free market. By shutting off power plants to boost the cost of electricity, Reliant's conduct is alleged to have left millions of consumers vulnerable to the higher costs and potential blackouts at the beginning of one of the worst energy crises in history."

Faced with evidence of widespread fraud within the company, Reliant chose to be uncooperative during the federal investigation, said Ryan. As a result, the grand jury and the Justice Department send an important message today to corporate America and consumers - even a Top Five energy company can and will face criminal prosecution if it engages in far reaching criminal conduct and fails to take immediate steps to disclose and clean up its act."

Speaking for Reliant, attorney Jines called that accusation "inaccurate and unfair."

Jines said the company voluntarily disclosed the conduct, agreed to a settlement with the Federal Energy Regulatory Commission (FERC), assisted in making evidence available to the Corporate Fraud Task Force and Department of Justice, and made a series of presentations to the Department of Justice concerning the facts and the law.

"What Reliant did not do was agree that the conduct constitutes a criminal offense,” Jines said.

In October 2003, Reliant agreed to a settlement to resolve pending cases stemming from a FERC staff investigation of "potentially" manipulative behavior that could total $50 million, FERC’s largest ever.

But Heller wants the consumers of that electricity to get the overcharges back. "Now that they have indicted an energy company for a massive fraud against California, it is time for the federal government to stop protecting the power industry and force the companies to refund all the stolen money," said Heller.

FERC is also responsible for regulating power sold in the wholesale energy market, and the foundation said FERC should set prices at which electricity can be sold and bar the company from selling electricity at unregulated prices.

The group said that the FERC should immediately suspend all unregulated energy sales and return wholesale power pricing to a regulated process until the full extent of criminal behavior in the California market is determined.

FBI Director Robert Mueller, also a member of the Corporate Fraud Task Force, said the indictments demonstrate the FBI's dedication to investigating corporate greed at all levels, as "corporate fraud impacts not only individual victims but the entire economy as well."



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