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Criminal trial related to California energy crisis may start soon
by Jason Leopold
December 3, 2005

The 9th Circuit Court of Appeals is expected to issue a ruling soon on a key piece of evidence that will help kick-start the long awaited criminal trial involving Houston-based Reliant Energy and the company's alleged scheme to boost its profits by shutting down power plants in California during the height of the state's energy crisis five years ago.

At issue are technical questions federal prosecutors have raised involving the definition of "market manipulation" as stated by California's grid operator, which US District Court Judge Vaughn Walker said could not be introduced as evidence by the prosecution.

The criminal trial - the first one related to state's two-year-old energy crisis - was scheduled to begin last month. It was postponed the day jury selection was set to begin, when prosecutors asked the 9th Circuit Court of Appeals to overturn Walker's ruling that market rules of the California Independent System Operator could not be used as evidence to establish what constitute normal wholesale power prices.

Prosecutors want to submit as proof price benchmarks calculated by the ISO, an approach that federal regulators have used to distribute billions of dollars of refunds to electricity buyers from power sellers accused of price gouging. Walker sided with defense attorneys who objected to the evidence submitted by the prosecution.

Reliant and four of its traders are accused of wire fraud and single counts of commodities market manipulation and conspiracy. Reliant faces millions of dollars in fines, and the four individuals each face five years in prison and $250,000 in fines if they are found guilty.

Despite the last minute delay in the criminal trial, the case still appears to be a slam dunk for the prosecution, based on evidence already submitted by the government against Reliant, a spokesman for the Justice Department said.

One piece of evidence the government is using against Reliant is a transcript of a conversation between one of the company's traders and a power plant operator, in which the two men discuss shutting down some of Reliant's power plants in California between June 20 and 22, 2000, to create an artificial shortage so the price of power would skyrocket.

The transcript was released by the Federal Energy Regulatory Commission in January 2003. The scheme the men hatched worked: it caused power prices to reach "unjust and unreasonable" levels in California, which under the Federal Energy Policy Act is illegal.

We "started out Monday losing $3 million ... So, then we decided as a group that we were going to make it back up, so we turned like about almost every power plant off. It worked. Prices went back up. Made back about $4 million, actually more than that, $5 million," the Reliant trader says in a tape-recorded conversation on June 23, 2000.

California's energy market still hangs in limbo, with warnings of future blackouts and supply shortages in future summer months and no mechanism in place to deal with the situation.

While natural gas prices continue to skyrocket nationwide, the power situation in California is dire. Governor Arnold Schwarzenegger, who was voted into office in a special election, due in part to voters' frustration with the way former governor Gray Davis handled the energy crisis, has not made good on his promise to fix the situation.

California's electricity crisis wreaked havoc on consumers in the state between 2000 and 2001, resulted in four days of rolling blackouts, and forced the state's largest utility, Pacific Gas & Electric, into bankruptcy. California was the first state in the nation to deregulate its power market nearly 10 years ago in an effort to provide consumers with cheaper electricity and the opportunity to choose their own power provider. The results have since proved disastrous. The experiment has cost the state more than $70 billion, according to some estimates.

For three years, California officials pleaded with federal regulators, President Bush, and Vice President Dick Cheney to provide the state with some relief from soaring wholesale power prices and investigate energy companies, including Enron, Williams Companies, and Reliant, for allegedly manipulating the market.

Bush and Cheney responded personally to former California governor Gray Davis's pleas for help in May 2001 by saying the crisis was the result of California's poorly designed power market, which left some regulatory restrictions in place.

It wasn't until Enron collapsed in October 2001 and evidence of the company's manipulative trading tactics emerged that FERC began to take a look at the company's role in California's electricity crisis. Since then, memos written by former Enron traders were uncovered, with colorful names like "Fat Boy" and "Death Star," that contained the blueprint for ripping off California.

Enron's top trader on the West Coast, Timothy Belden, the mastermind behind the scheme, pleaded guilty in 2003 to conspiracy to commit wire fraud and has agreed to cooperate with federal investigators, who are still trying to get to the bottom of the crisis more than four years later.

California had demanded $8.9 billion from energy companies for overcharging the state for electricity during its year-long energy crisis. An administrative law judge for the agency released a preliminary decision in December that says California is due no more than $1.2 billion in refunds because the state still owes the energy companies $1.8 billion in unpaid power bills.

Shutting down power plants in California to boost wholesale prices is not a new issue. In 2002, CBS News reported that Williams Companies engaged in identical behavior around the same time as Reliant. The evidence, also a transcript of a recorded conversation between a Williams trader and a power plant operator in California, showed the two conspiring to shut down a power plant for two weeks to boost electricity prices and Williams's profits. FERC kept the evidence under wraps for a year and cut a secret deal with Williams to refund California $8 million it obtained through the scam without admitting any guilt.

FERC released the transcripts in late November 2002 after the Wall Street Journal sued the commission to obtain a full copy of its report. Had the evidence been released before the collapse of Enron, it may have helped California's case, but it would have hurt the Bush's National Energy Policy, which was made public instead in May 2001, the same month Williams and FERC hatched a settlement. During this time, Bush visited California and met with Gov. Davis to discuss the energy crisis. Bush told Davis he could not do anything to help the state.

A few weeks before the meeting between Bush and Davis, Vice President Dick Cheney, who chairs Bush's energy task force, was interviewed by PBS's "Frontline" for a special series on California's energy crisis. During the interview, Cheney flat-out denied that energy companies ripped off California.

"The problem you had in California was caused by a combination of things - an unwise regulatory scheme, because they didn't really deregulate," Cheney said in the May 17 "Frontline" interview. "Now they're trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They've obviously created major problems for themselves and bankrupted PG&E in the process."

When asked whether it was possible that energy companies were behaving like a "cartel" and if some of the high power prices in California could be the result of manipulation, Cheney responded with a resounding "no."

The Bush administration's critics have said it's highly unlikely that the president, Cheney, and members of his energy task force were kept in the dark about the Williams and Reliant scams, especially since the findings of the investigation by FERC took place around the same time the policy was being drafted. According to evidence obtained by Congressman Henry Waxman (D-Calif.), the energy task force "considered and abandoned plans to address California's energy problems in its report."

Reliant has also been connected to Cheney's energy task force, which met between January and March 2001 to work on Bush's National Energy Policy.

Reliant, along with Entergy and TXU, two other major electricity corporations based in Texas, hired Diane Allbaugh as a lobbyist. Allbaugh is the wife of Joe Allbaugh, "the only member of Bush's so-called iron triangle of trusted Texas cohorts to have served on the energy task force" and a director of the Federal Energy Management Agency, according to an August 26, 2001, report in the Los Angeles Times.

Reliant, TXU and Entergy each paid Diane Allbaugh $20,000 for consulting work during the last three months of 2000, according to her January 2001 financial disclosure report. It's unclear whether she lobbied the energy task force on behalf of Reliant, TXU and Entergy, which would have certainly been a conflict of interest, but her husband, Joe Allbaugh, "has participated in task force talks with a direct bearing on the energy companies' interests generally, such as environmental rules for power plants and electricity deregulation - a specialty of his wife's," the Times reported.

"At least twice, Joe Allbaugh was privy to updates from (Bush) economic advisor Lawrence Lindsey (a former member of Enron's advisory board) on California's malfunctioning market, where Reliant stands accused by the state of overcharging," the Times reported.

The energy bill signed by Bush in August was a boon to Reliant Energy. House Energy Committee Chairman Joe Barton has for years pushed for legislation to create more competitive electricity markets. Reliant, whose executives enjoy close a relationship with Barton, played a role in shaping the energy bill, and worked side by side with Barton for years in shaping a portion of the energy bill that deals with competitive power markets.

Barton's staff includes two former Reliant executives, and until recently, Reliant's lobbying team included two former Barton aides. Reliant employees contributed more than $35,000 to Barton's political causes between 2001 and 2004. Barton holds about $15,000 in Reliant stock, which has increased nearly tenfold since he bought the shares in 2002.

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Jason Leopold is the author of the explosive memoir, News Junkie, to be released in the spring of 2006 by Process/Feral House Books. Visit Leopold's website at www.jasonleopold.com for updates.