Three years ago, while California’s energy crisis was spiraling out of control, Vice President Dick Cheney secretly met with half-dozen corporate executives of the country’s largest energy companies to hammer out a national energy policy for President George W. Bush.
Cheney appeared on a number of news programs in May 2001 to promote his new energy policy, which turned out to be a boon for the energy industries, but abandoned consumers and environmental groups. Naturally, during some of those interviews, Cheney was asked whether a handful of the energy companies that sold electricity in California and stood to benefit financially from the new policy were behaving like a “cartel” and manipulating prices in the state’s deregulated electricity market.
“No,” Cheney said in a May 17, 2001 interview with PBS‘ “Frontline;” a day after the final energy policy report was released. "The problem you had in California was caused by a combination of things--an unwise regulatory scheme, because they didn't really deregulate. 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...”
California's electricity crisis wreaked havoc on millions of people 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 in an effort to provide consumers with cheaper electricity and the opportunity to choose their own power company. The results have since proved disastrous. The experiment has cost the state more than $30 billion.
For three years, California officials pleaded with federal energy regulators, President Bush and Vice President Cheney, to provide the state with some relief from soaring wholesale electricity prices and to investigate many of the energy companies that sold power to California for allegedly manipulating the market.
Former Governor Gray Davis met with Bush a couple of weeks before Cheney’s “Frontline” interview and asked for federal assistance, such as price caps, but Bush refused saying the free-market would sort out the mess.
But Cheney ‘s denials that his friends in the energy sector weren’t to blame for the power crisis are sure to come back and haunt him and could hamper President Bush’s reelection campaign. Later this month, the United States Attorney’s office in the Northern District of California is expected to issue its first criminal indictment against an energy company for manipulating wholesale energy prices in California that could boost the state‘s claims that it‘s owed billions in refunds for overcharges. The company at the center of the probe is Houston-based Reliant Resources, Inc.
Reliant said in a news release March 8 that it was notified by the US Attorney’s office about the pending indictment, which stems from allegations that the company deliberately shut down its power plants in California for a few days in June 2000, creating an artificial shortage and causing wholesale prices to skyrocket.
A spokesman for the US Attorney’s office said he could not comment on pending cases, but he confirmed that his office is also seeking criminal indictments against several current and former Reliant employees whom he would not name. A Reliant spokesman said “the actions that are the subject of the United States Attorney's investigation were not in violation of laws, tariffs or regulations in effect at the time and intends vigorously to contest any charges.”
The evidence the US Attorney‘s office will use against Reliant is a recorded transcript of a conversation between a Reliant electricity trader and a power plant operator that first emerged publicly a year ago. The conversation between the two employees seemed to settle the three-year long debate about the nature of California’s energy crisis.
"[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.
The scheme worked. It caused power prices to reach “unjust” and “unreasonable” levels in California, which, under the Federal Power Act, is illegal.
The Federal Energy Regulatory Commission, the agency responsible for keeping the country’s wholesale electricity and natural gas markets in check, released the transcript in February 2003 after announcing that Reliant agreed to refund California $13.8 million, without admitting guilt.
What’s interesting about the allegations against Reliant is that the company has 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 Aug. 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-on-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.
According to evidence obtained by Congressman Henry Waxman, D-California, last year, the energy task force "considered and abandoned plans to address California's energy problems in its report."
Whether Joe Allbaugh or his wife Diane urged Cheney to abandon the issues related to California’s energy crisis is unknown. Neither of them would return calls for comment and so far Cheney has refused to give up the names of the energy executives and lobbyists he met with. The U.S. Supreme Court is expected to take up that issue later this year.
However, it’s not the first time, Diane Allbaugh has been questioned about corporate cronyism.
In 1996, the Dallas Morning News reported that Diane Allbaugh represented clients with interests in pending Texas state deregulation of telecommunications and utilities markets, while her husband served as then-Gov. Bush's chief of staff. At the time, Bush said he was troubled "if it creates a public perception that something unfair is taking place."
She eventually withdrew from the contracts she represented at the time.
While U.S. lawmakers continue to ask what the Bush administration knew about the 9-11 attacks and when they knew it, the same can be said about the administration’s knowledge about the California energy crisis.
Did Cheney publicly deny that energy companies were manipulating the market because it would have derailed the National Energy Policy? Only a Magic Eight Ball can answer that question correctly, but there appeared to have been a coordinated effort by federal energy regulators to conceal smoking-gun evidence of market manipulation in California in May 2001 around the same time that Cheney released the final version of the National Energy Policy.
Another recorded conversation between two employees of Tulsa, Okla.-based Williams Cos. showed that the two men conspired to shut down a power plant in Southern California for two weeks to boost electricity prices and create an artificial shortage in the state. The scheme is identical to the one Reliant engaged in and took place during the same time, in June 2000.
But FERC, the nation’s top energy watchdogs, kept the evidence under wraps and cut a deal with Williams in May 2001--the same month Cheney released the energy policy--agreeing to refund California $8 million it obtained through the scam, without admitting any guilt.
FERC released copies of the Williams transcripts in November 2002 after the Wall Street Journal sued the commission to obtain the full copy of its report.
It's possible that Bush, Cheney and members of the energy task force were kept in the dark about the Williams and Reliant scams, but given the administration’s track record on other matters such as 9-11, the Iraq war, the Medicare legislation, etc., it doesn’t seem likely.
Jason Leopold is the former Los Angeles bureau chief of Dow Jones Newswires. He spent two years covering the California energy crisis and the Enron bankruptcy. He just finished writing a book on the energy crisis, which is due out in December through Rowman & Littlefield.