Reliant Resources Inc. subsidiary Reliant Energy Services Inc. and four trading executives were indicted Thursday on charges that they artificially drove up power prices in California by withholding generation capacity from the market during a two-day period in June 2000. Reliant is the first company to face criminal charges for its role in the state’s power crisis.
A federal grand jury in San Francisco, CA, returned a six-count indictment against the Houston-based energy company and the employees on charges that they schemed to manipulate and defraud the California market, costing electricity buyers in the state as much as $32 million during that period.
The indictment was announced at a Department of Justice press conference in Washington, DC, which was attended by Attorney General John Ashcroft, FBI Director Robert Mueller, FERC Chairman Pat Wood, Chairman James Newsome of the Commodity Futures Trading Commission and others. “The vast majority of corporate executives are honest, hard-working people. But when a company conducts itself in a manner Reliant Energy Services is alleged to have acted here, it will face severe consequences,” Ashcroft vowed.
Reliant Resources said it was notified last month by federal prosecutors that a criminal indictment was in the offing. The company at the time pledged to “vigorously…contest any charges.”
The indictment alleges that in June 2000 Reliant Energy and its employees intentionally drove up the price of electricity in the state by shutting off the majority of its power generation plants to create a false appearance of a shortage. “The plan worked, and Reliant Energy Services allegedly reaped millions in illegal profits,” the Justice Department said in a prepared statement.
As a result of the alleged fraud and manipulation, the California Power Exchange (PX) day-ahead market and the Independent System Operator “real time” market published artificially inflated spot prices for electricity, which were accessed by market participants throughout California, federal prosecutors said. The markets ultimately charged market participants artificially high prices for day-ahead, real-time and “out-of-market” (emergency) supplies and energy services during the period of manipulation, they noted.
Reliant employees named in the criminal indictment were: Jackie Thomas, 49, a former vice president of Reliant’s Power Trading division; Reggie Howard, 37, a former director of Reliant’s West Power Trading division; Lisa Flowers, 37, a term trader for Reliant’s West Power Trading division; and Kevin Frankeny, 42, Reliant’s manager of western operations. All are residents of Texas.
Depending on which is greater, Reliant Energy faces up to $500,000 for each count of conspiracy and wire fraud, or double the gross gain or gross loss to the victims of the scheme, and up to five years probation. For commodities manipulation, the company would have to pay the greater of $1 million, or double the gross gain or loss to the victims, and up to five years probation.
If convicted, individual defendants charged with conspiracy to commit wire fraud and commodities manipulation, and with wire fraud violation would face hundreds of thousands of dollars in fines and prison as well.
Arrest warrants were issued for the four Reliant employees on Thursday, but they were stayed until noon the following day. The defendants were given the opportunity to surrender themselves and make an initial appearance in federal court in San Francisco Friday before Magistrate Judge James Larson.
The indictments come a little more than a year after Reliant Resources reached a consent arrangement with the Federal Energy Regulatory Commission to pay $13.8 million for withholding electricity from California’s market inflate prices during the two-day period in June 2000.
The January 2003 agreement resolved all issues arising from actions taken by the company on June 20 and 21, 2000, which Reliant employees allegedly withheld 1,000 MW from customers of the California PX apparently in an attempt to ratchet up prices for electricity.
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