U.S. Charges Reliant Over California Energy Crisis
The Justice Department on Thursday brought the first criminal charges against a company for alleged misconduct during the California energy crisis, accusing Reliant Energy Services Inc. of inflating electricity prices in June 2000.
The six-count indictment, returned by a federal grand jury in San Francisco, also named four current or former employees of the Houston-based subsidiary of Reliant Resources Inc. According to law enforcement officials, Reliant shut down four of its five California power plants to create a bogus electricity shortage and give prices a sharp lift -- generating profits that helped the company avoid a looming multimillion-dollar loss.
The indictment added fuel to the long-running debate over who was to blame for California’s 2000-01 energy crisis. Evidence of misbehavior by power companies has been used by consumer advocates and politicians to lobby for big refunds for the state’s ratepayers, who were victims of a market meltdown that caused rolling blackouts and spiraling utility bills.
The Reliant case also provided the Bush administration with an opportunity to look tough on white-collar crime.
“When a company conducts itself in the manner Reliant Energy Services is alleged to have acted here, it will face severe consequences,” Atty. Gen. John Ashcroft said.
Named in the indictment are Reliant Energy Services; Jackie Thomas, the firm’s former vice president of power trading; Reggie Howard, former director of its West Power trading division; Lisa Flowers, a trader; and Kevin Frankeny, manager of Western operations. Flowers and Frankeny are on administrative leave. All are charged with wire fraud, conspiracy and commodity-price manipulation.
Reliant Energy Services could be fined as much as $1 million -- or twice the profit made from the alleged misconduct, whichever is greater -- if convicted of commodities manipulation. And the wire fraud charges carry a maximum penalty of $500,000, or twice the profit made, whichever is greater.
The individuals could each face up to 30 years in prison and maximum fines of $1.75 million.
Reliant executives Thursday defended the company and its employees, saying the actions being targeted by the Justice Department were legal at the time. The company said it had fully cooperated with the authorities.
“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.
He added: “There is absolutely no basis to contend that this conduct contributed to the energy shortage that occurred in California later that year. We intend to contest these charges vigorously.”
The four individuals couldn’t be reached for comment.
Advocates for California consumers said the indictment bolstered the state’s case for almost $9 billion in energy refunds -- an issue that may be decided soon by the Federal Energy Regulatory Commission. Reliant already has agreed to pay $13.8 million to settle a civil enforcement action brought by FERC.
More broadly, the indictment lends credence to claims that criminal fraud played a role in the energy crisis, which in addition to high electricity bills also left the state saddled with costly long-term power contracts.
“It confirms what everybody in California knows -- and what everybody in the rest of the country refused to believe,” said Peter Navarro, an economist at UC Irvine. “But it doesn’t mean anything unless it translates into breaking the overpriced energy contracts and getting the refund that we’ve requested.”
An energy industry representative said it would be a mistake to make too much of the Justice Department’s action.
“This is not going to lead to widespread criminal charges,” said Gary Ackerman, executive director of the Western Power Trading Forum in Menlo Park, Calif., which represents traders and plant owners. “This is not indicative of widespread behavior by others.”
Three Enron Corp. traders have been charged with illegally manipulating electricity prices during the crisis. Two have pleaded guilty and a third faces trial later this year.
In deciding whether to indict a company in connection with the crisis for the first time, the Justice Department considered several factors.
Ashcroft took aim at what he viewed as the prevailing values at Reliant Energy Services in June 2000, declaring: “When evidence shows that a company’s culture breeds corruption and disrespect for the law, the Department of Justice will not hesitate to bring criminal charges against the company itself.”
According to the indictment, in June 2000 Reliant was facing a multimillion-dollar loss on a trading position taken by Flowers. To prevent the loss, Flowers and the others conspired to close down power plants in California, “intentionally creating the appearance of an electricity shortage” and driving up power prices, the indictment alleges.
Once prices jumped, the power plants allegedly were reactivated so Reliant Energy Services could sell electricity at the new, higher prices -- and also sell Flowers’ trading positions at a profit.
Ashcroft hinted that Reliant hadn’t been sufficiently cooperative during the government’s 17-month investigation -- a factor that officials consider in deciding whether to indict a company.
“Suffice it to say that the reason we have a corporate indictment here is well-stated in the policy that has been clear and unmistakable for a couple of years,” he said.
