John M. Forney, 41, on Tuesday became the third former Enron executive to be charged with a federal crime for manipulating the California energy market. The current employee of American Electric Power (AEP) was arrested Tuesday at AEP’s headquarters in Columbus, OH, for his involvement in Enron’s manipulation of the western energy market during the height of the California energy crisis from 1999 through 2001.

He follows two other former Enron executives, Timothy Belden and Jeffrey Richter, who already have pled guilty. Forney appeared in the U.S. District Court in Columbus on Tuesday and was released on a bond secured by his home, according to a joint statement by Kevin Ryan, U.S. attorney for the Northern District of California; Leslie Caldwell, director of the Justice Department’s Enron Task Force; and Mark Mershon, special agent in charge of the San Francisco field office of the Federal Bureau of Investigation.

Forney was charged in a criminal complaint with wire fraud and conspiracy for his involvement in a number of infamous trading schemes, such as “Ricochet,” “Death Star,” “Black Widow,” “Red Congo,” and “Get Shorty” — all names given by Enron traders for easy recognition on the company’s Portland, OR, trading floor.

The complaint against Forney, who managed Enron’s real-time trading desk starting in 1999, alleges that he was the architect of several of the purportedly illegal strategies designed to manipulate California’s energy markets. Death Star also was known within Enron as the Forney Loop, or Forney’s Perpetual Loop. The strategy was designed to earn revenue for Enron by exploiting the California Independent System Operator’s (CAISO) congestion management system. Enron traders, acting at Forney’s direction, scheduled energy to flow in a looping pattern. This allowed Enron to schedule energy flows without actually putting any energy onto the transmission lines.

In other words, Enron submitted schedules to the ISO that pretended to move electrons, but in reality did not. Because the scheduled energy appeared to relieve congestion, the CAISO awarded Enron congestion relief payments. The ISO was deceived because part of the looping schedule was outside of California, and it therefore could not detect the looping path of the energy scheduled.

The complaint also alleges that Forney was deeply involved in other schemes designed to collect congestion payments by making fraudulent statements to the ISO, including scheduling energy to a transmission hub that Enron knew was off line, and by falsely promising to deliver firm energy. Enron pretended to sell firm when, in fact, it was selling non-firm energy.

According to the complaint, the Ricochet scheme, also known within Enron as “Ping Pong,” was designed to evade federally approved price caps on California energy. Ricochet involved buying energy generated in California in a forward market, and then selling it back to the CAISO in the real time market shortly before the power was actually generated.

When selling the power to the ISO, Enron’s traders, acting at Forney’s direction, fraudulently misled the ISO about the origin of energy in order to avoid the price caps and reap huge profits, the complaint said. The general idea was to buy energy in an earlier market, park it with a power company outside of California, buy it back for a small fee in the hour-ahead market, and then sell it to the ISO inside California. In doing so, Enron was able to pretend that the energy it was selling to California at an inflated rate was generated outside the state, when in fact it was located in California the entire time.

It should be noted, however that although Enron engaged in numerous illegal trading schemes, many of which FERC has said were used by other energy firms, the CAISO has said the schemes were not the cause of the state’s energy problems. Statewide blackouts were caused by a lack of supply and transmission capacity (see Power Market Today, Dec. 2, 2002).

“While California consumers were suffering through blackouts and Stage III alerts, Enron was manipulating western energy markets for profit through illegal, fraudulent means,” Ryan, a member of President Bush’s Corporate Fraud Task Force, said in announcing the charges. “Our investigation of illegal activities during the energy crisis is active and continuing, and remains one of this office’s and the Justice Department’s top priorities.”

Mershon said the arrest shows that “the FBI will remain vigilant in its pursuit of those individuals who capitalized on the manipulation of the California energy markets. The citizens of California can be assured that the FBI will continue to investigate any person or company that was involved in this criminal activity that affected millions of Californians and their families.”

Forney is scheduled to make another District Court appearance in Columbus on June 9 for an identity hearing. When those proceedings are completed, he will be ordered to appear in San Francisco federal court to face the charges spelled out in the complaint. No date has been set for that appearance.

AEP issued a statement to clarify that although Forney worked in commercial operations for the company, his arrest was not related to any actions he performed during his 15 months with AEP. “The arrest is related to a period of time prior to March 1, 2002, when he joined AEP,” said Jeffrey Cross, AEP general counsel. “We have no reason to believe Forney was involved in any inappropriate activities while with AEP.”

Forney was placed on administrative leave after the arrest. He has held a variety of non-executive positions in AEP’s commercial organization since joining the company. Most recently he was engaged in fuel procurement and logistics for the delivery of coal to AEP’s power plants.

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