Cheney Suppressed Evidence in California Energy Crisis
    By Jason Leopold
    t r u t h o u t | Investigative Report

    Thursday 19 July 2007

In-depth investigation shows how Vice President Dick Cheney pressured federal energy regulators to conceal evidence of widespread market manipulation by energy companies during the California electricity crisis in 2001.

    In March 2001, while California's two largest utilities were teetering on the brink of bankruptcy, and the state's electricity crisis was spiraling out of control, Vice President Dick Cheney summoned Curt Hebert, the chairman of the Federal Energy Regulatory Commission (FERC), to his office next to the White House for a hastily arranged meeting.

    Cheney had just been informed by his longtime friend Thomas Cruikshank, the man who handpicked the vice president to succeed him at Halliburton in the mid-1990s, that federal energy regulators were close to completing an investigation into allegations that Tulsa, Oklahoma-based Williams Companies and AES Corporation of Arlington, Virginia had created an artificial power shortage in California in April and May of 2000 by shutting down a power plant for more than two weeks.

    Cruikshank was a member of Williams's board of directors, and perhaps more importantly, had been one of many energy industry insiders advising Cheney's energy task force on a wide-range of policy issues, including deregulation of the nation's electricity sector, that would benefit Williams financially.

    Cruikshank informed the vice president he had learned about the preliminary findings of FERC's investigation during a Williams board meeting earlier in March 2001. FERC, Cruikshank told Cheney, was in possession of incriminating audio tapes in which a Williams official and an AES power plant operator discussed keeping a Southern California power plant offline so Williams could continue to receive the $750 per megawatt hour premium for emergency power California's grid operator was forced to procure to keep the lights on in Southern California.

    AES was the operator of two power plants in Los Alamitos and Williams marketed the electricity. The power plants were designated by the California Independent System Operator (ISO), the agency that manages the state's power grid, as crucial in order to ensure a reliable flow of electricity in the Southern part of the state. To stave off the potential for blackouts, the ISO was given the authority to pay top dollar for power if the power plants operated by AES, as well as power plants operated by other companies, were not in operation.

    California's electricity crisis wreaked havoc on consumers in the state between 2000 and 2001. The crisis resulted in widespread 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 provider. The results have since proved disastrous. The experiment has cost the state more than $30 billion.

    According to a copy of the March 2001 Williams transcript, Rhonda Morgan, a Williams official, told an AES power plant operator "it wouldn't hurt Williams's feelings" if the power plant that was down for repairs was kept offline for an extended period of time so the company could continue to be paid the "premium" for its emergency energy supplies from the ISO. In a separate conversation with Eric Pendergraft, a senior AES official, Morgan said, "I don't wanna do something underhanded, but if there's work you can continue to do ..."

    Pendergraft responded to Morgan, saying, "I understand. You don't have to talk anymore."

    The collusion between Williams and AES allowed Williams to earn an extra $10 million over a period of 15 days and set in motion a series of events that resulted in the California power crisis between 2000 and 2001, a crisis that was based almost entirely on manipulative practices by energy companies.

    This story is based on a two-month investigation into Cheney's energy task force; how the vice president pressured cabinet officials to conceal clear-cut evidence of market manipulation during California's energy crisis, and how that subsequently led Cheney to exert executive privilege when lawmakers called on him to turn over documents related to his meetings with energy industry officials who helped draft the National Energy Policy and also gamed California's power market. Truthout spoke with more than a dozen former officials from the Energy Department and FERC as well as current and former energy industry executives all of whom were involved in personal discussions with Cheney relating to the National Energy Policy.

    In addition to Hebert, the FERC chairman, the other senior cabinet officials who attended the March 2001 meeting in Cheney's office included Andrew Lundquist, the former executive director of Cheney's energy task force, now an energy industry lobbyist, White House political adviser Karl Rove, President Bush's chief of staff Andrew Card, and Energy Secretary Spencer Abraham, according to former Energy Department and FERC officials who spoke on condition of anonymity because they said they were not authorized to disclose details of their secret meetings with Cheney or information about the energy task force meetings.

    Joe Allbaugh, another adviser to the vice president’s energy task force, had heard of a similar situation involving an energy company his wife was involved with. Allbaugh told Cheney that Reliant Energy also shut down a power plant in California in June 2000. That caused wholesale power prices in California to reach levels that exceeded "just and reasonable" rates, a violation of the Federal Power Act. FERC apparently had audio tapes of Reliant employees discussing the scheme.

    "[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.

    Allbaugh's wife, Dianne Allbaugh, was a lobbyist for Reliant, TXU and Entergy, who was paid at least $20,000 a month by those corporations, and told her husband what she had learned from executives at Reliant. Allbaugh then informed Cheney.

    Cruikshank and Allbaugh did not return dozens of calls or respond to emails seeking comment. Devona Greenstone, a spokeswoman for Hebert, was sent a detailed list of questions for Hebert to answer and was given more than one week to respond to the queries. But neither Greenstone nor the former FERC chairman replied despite numerous follow-up phone calls and emails sent to Hebert and Greenstone. A spokesperson for Cheney also failed to return 16 messages left for comment over the past month.

    If You Were "King" or "Il Duce"?

    Joseph Kelliher, a former Energy Department official, had been soliciting advice from Williams, Reliant, El Paso, Enron and other energy companies on natural gas issues on behalf of Cheney, another area those companies were accused of gaming, particularly in California.

    In a March 10, 2001 email, just a week or so after Cheney was briefed by Cruikshank about the Williams scheme, Kelliher emailed energy lobbyist Dana Contratto, asking Contratto if he was "King or "Il Duce, what would you include in a national energy policy, especially with respect to natural gas issues?", according to energy task force documents.

    Contratto responded with a three-page list of ideas, many of which were included in the final version of the energy policy.

    On another occasion, Kelliher sought out Stephen Craig Sayle, an Enron Corp. lobbyist, to make similar recommendations. Sayle, former counsel for the House Commerce Committee, sent Kelliher Enron's "dream list." The list included a recommendation that the administration commit to market-based emissions trading, which was also used in administration's National Energy Policy.

    Sayle wrote Kelliher about the energy policy, saying, "a multi-pollutant regulatory strategy should be estimated for the power generation sector including: Gradually phased in [mercury, nitrogen oxides and sulfur dioxide emissions] reductions; reform/replacement of NSR; use of market-based/emission trading programs; inclusion of both existing and new plants and equal treatment for both. The last bullet is the critical one to ensure that: a) we encourage the new generation that is required; b) we ensure that the new technologies developed through DOE programs can come into the market.

    "Obviously, this is a dream list," Sayle said in the March 23, 2001 email he sent to Kelliher. "Not all will be done. But perhaps some of these ideas could be floated and adopted."

    Sayle also provided Kelliher with a PowerPoint presentation on behalf of his other energy clients in the so-called Clean Power Group, a consortium made up of a handful of the country's biggest energy companies, including NiSource Inc., Calpine Corp., Trigen Energy Corp. and El Paso Corp, whose mission, according to the group's web site, is to "streamline requirements under the Clean Air Act for electric generating facilities while at the same time making major reductions in air emissions."

    The PowerPoint presentation, A Comprehensive Multi-Pollutant Emission Control Strategy for Power Generation, summarized the Clean Power Group's support of a "cap and trade" method in addressing emissions of mercury, nitrogen oxides and sulfur dioxide from power plants, but included a proposal for a voluntary cap on carbon dioxide. The Clean Power Group stood to benefit from the initiative it urged Kelliher to get the White House to adopt in that the companies could release more emissions under its proposed plan than under the more restrictive rules the Clinton administration had put in place.

    After receiving Sayle's email and supporting material, Kelliher recommended that President Bush "direct the Administrator of the Environmental Protection Agency (EPA) to propose multi-pollutant legislation that would establish a flexible, market-based program to significantly reduce and cap emissions; provide regulatory certainty to allow utilities to make modifications to their plants without fear of new litigation; provide market based incentives, such as emissions-trading credits to help achieve the required reductions," all of which the president approved and was eventually incorporated into the National Energy Policy.

    In fact, President Bush's "Clear Skies" initiative consists of many of the bullet points laid out months earlier in Sayle's email to Kelliher.

    In addition to Kelliher's correspondence with Sayle, he also met with oil and gas industry lobbyists who helped draft language that Kelliher passed on directly to the White House. Two months later, the president issued executive orders nearly identical to those Kelliher received from the lobbyists months earlier, according to energy task force documents.

    Kelliher now chairs FERC, the agency that is entrusted with keeping a close eye on wholesale energy markets, ensuring that companies like Williams and Reliant refrain from engaging in the type of manipulative practices they were caught doing during the spring and summer of 2000 in California.

    Cheney Orders FERC to Seal Evidence

    But the documentary evidence of widespread market manipulation that FERC obtained in March 2001, while Kelliher was soliciting energy industry officials to assist in writing the National Energy Policy, and when Cruikshank and Allbaugh disclosed to the vice president the manipulative tactics Williams and Reliant had engaged in, was sealed by FERC on direct orders by Cheney because it would have been a political nightmare for the Bush administration and would have derailed a recommendation of one of the cornerstones of the vice president's National Energy Policy: deregulation, and perhaps scuttle the policy altogether if evidence about the energy companies behavior in California was made public, according to half-a-dozen former FERC officials and former Energy Department officials.

    So in May 2001, just days before Cheney unveiled his long-awaited National Energy Policy, FERC entered into confidential settlements with Williams in which the company forfeited $8 million it was owed by California's grid operator for power Williams sold into the marketplace at inflated prices. Williams did not admit any guilt for the power plant shutdown and, on orders from Cheney, FERC agreed to keep details of the settlement sealed. FERC later entered into a similar settlement with Reliant. The company agreed to forfeit $13.8 million it was owed by California's grid operator, did not admit to any wrongdoing, and FERC kept the details of the settlement confidential.

    Moreover, FERC kept California officials in the dark about the nature of the state's claims that its wholesale electricity market was being manipulated. Hebert is now the vice president of external affairs for Entergy in New Orleans.

    For former Governor Gray Davis, the illegal behavior by energy companies like Williams that federal energy regulators discovered, then covered up, during a time when the former governor had said publicly he believed such behavior had taken place, is beyond disturbing.

    Instead of protecting the interests of consumers, FERC's primary job, Hebert toed the White House line and together with Cheney, Hebert had come out publicly to say that Davis should immediately order the California Public Utilities Commission to relax environmental restrictions on the permitting process related to power plant construction and raise electricity rates to keep utilities Pacific Gas & Electric and Southern California Edison from becoming insolvent. The insolvency issue was due to the fact that the utilities were paying higher prices for power than it was legally allowed to charge its customers under the state's deregulation law.

    In an interview, Davis, now an attorney with Loeb & Loeb in Century City, California, said he never saw the evidence FERC had obtained implicating Williams in shutting down power plants in the state.

    "If I had hard evidence that this was happening, I would have stood out in front of the Congress until they did something," Davis said. "I thought there was something rotten going on but I never believed that these energy companies would outright steal from us."

    "This was an absolute outrage and was based on pure greed," Davis added. "I clearly didn't know this was happening with Williams. I think FERC perpetrated a fraud on the American public and California consumers by sealing the findings of this investigation while I was out there saying that this type of manipulation was happening. I think that if the results of this investigation were made public in March 2001, when FERC knew this was taking place, it would have stopped energy deregulation in America in its tracks. This admission in effect by Williams would have been the death knell for energy deregulation."

    Davis had a tumultuous relationship with the federal agency that appeared to be based on partisan politics. Just three months before Cruikshank and Allbaugh provided Cheney with details that the energy companies they were affiliated with had gouged California consumers and violated the state's market rules, the vice president, and FERC's chairman, railed against Davis, blaming the energy crisis on him and said the governor's claims that energy companies were acting like a "cartel" were baseless.

    "The basic problem in California was caused by Californians," Cheney said, adding that he would resist calls by lawmakers to allow price caps to be placed on wholesale energy prices in the Western United States.

    Even after Hebert had secured evidence showing that Williams manipulated the power market, he continued to pin the blame for skyrocketing power prices squarely on the shoulders of Davis and the state's Democratic leaders.

    "I went to FERC and laid out our problems and was promised they would look into it. Nothing happened," Davis said. "My experience with FERC during the energy crisis was wholly unsatisfactory. I did not ever feel that they believed their job was to act in the public interest. I always believed they were acting in the interests of the energy companies. They operated as if they were a wholly owned subsidiary of the energy companies."

    Hebert, however, fell out favor with the Bush administration when he privately opposed a recommendation by Ken Lay, made to Cheney, to open up the country's transmission lines to corporations such as Enron. Lay requested Cheney and Bush replace Hebert, which they did in the summer of 2001.

    PG&E Files for Bankruptcy; Rove Orchestrates Political Spin Campaign

    In a televised speech to California residents on April 5, 2001, Davis resisted Cheney's and Hebert's calls to increase electricity rates for average consumers to keep the state's public utilities afloat, opting instead to increase electricity rates of the state's largest power customers such as manufacturing plants. The next morning PG&E filed for Chapter 11 bankruptcy protection.

    Davis publicly railed against the Bush administration's refusal to launch an investigation into wholesale energy companies trading practices, and its position on price caps. Davis's rhetoric started to impact the Bush administration's approval ratings. Rove, working closely with Cheney, entered into discussions on how the White House would respond to criticism by Davis that the Bush administration was turning its back on California.

    "Karl [Rove] started to talk about using the resources of former Republican National Committee staffers to put together an attack campaign against Davis, and pin the power problems on the governor and his administration," according to one former high-level Energy Department official who was privy to the conversation between Rove and Cheney.

    Rove enlisted the help of former RNC staffers Ed Gillespie, then a lobbyist who was working for Enron and other energy companies, and Scott Reed, who used to work for the RNC and was the former manager of Robert Dole's presidential campaign, to start devising a strategy to attack Davis and lead people to believe that the energy crisis was entirely his fault. Gillespie was recently tapped by President Bush to replace Dan Bartlett as White House counselor.

    Reed and Gillespie, who was doing double duty advising Cheney's energy task force on behalf of Enron, advised Rove and the vice president that the PG&E bankruptcy left Davis vulnerable and the best course of action for the White House was to take advantage of Davis's vulnerability by stating that Davis single-handedly, in refusing to raise electricity rates, caused one of the largest bankruptcies in American history. Gillespie went a step further, according to Energy Department officials familiar with his conversations with Rove and Cheney, by suggesting that the White House start courting Republican gubernatorial candidates to replace Davis in the 2002 election.

    At the White House in April 2001, Rove met with Brad Freeman, President Bush's California finance chairman during the 2000 presidential campaign, and Gerald Parsky, an investment banker, who was Bush's top adviser in California. The discussion centered on Parsky and Freeman's interest in courting actor Arnold Schwarzenegger to discuss his bid for governor in 2002.

    "That would be nice," Rove said about the possibility of Schwarzenegger, a Republican, to replace Davis as governor, according to people who were briefed about the meeting. "That would be really, really nice."

    Davis said he could see now see how the energy crisis created a political opportunity for the White House in California.

    "In retrospect I could see how that happened," Davis said. "There's no question that the energy companies saw me as an adversary when I wouldn't buckle under their demands. I was vulnerable and the [energy companies and the White House] took advantage of it. This crisis took place in the early days of the Bush administration. I figured these guys are too busy picking out furniture for their offices. I didn't think they [the Bush administration] were spending their days in office involved in some full-scale conspiracy. But it turns out they were."

    Cheney Takes Aim at Davis

    Meanwhile, Cheney continued to meet with energy company officials who were instrumental in drafting key aspects of the National Energy Policy. At the same time, the usually reclusive vice president was granting interviews to numerous reporters discussing his take on the California energy crisis which continued to spiral out of control.

    In May 2001, the PBS news program "Frontline" interviewed Cheney who was asked by a correspondent whether energy companies were acting like a cartel and using manipulative tactics to cause electricity prices to spike in California.

    "No," Cheney said during the "Frontline" interview, even though he was personally briefed about energy companies manipulating the state. "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 and bankrupted PG&E in the process."

    The same month, May 2001, Davis met with Bush at a Century City hotel, not far from the offices he now works at as an attorney. He pleaded with Bush one last time to put price controls in place. Bush refused.

    Behind the scenes, while Bush and Davis discussed the state of the energy crisis, Gillespie was emailing Enron officials on the status of Cheney's energy policy. He alerted Enron executives to the exact language that would appear on one of the hot-button issues revolving around price caps in California and the west and allowing energy companies free access to the nation's transmission lines.

    "I believe this is the exact language that will appear under the 'energy supply' section of the report," Gillespie wrote. "Recommends that the President encourage the FERC to use its existing statutory authority to promote competition and encourage investment in transmission facilities," which Enron was lobbying heavily for. "Please keep this under wraps. We do not want to circulate this beyond the folks listed on this email. Please let me know any concerns. As we have known for several weeks, the report is not as explicit as we would want, but the White House, vice president, and [Department of Energy] have repeatedly but verbally assured us that they are making clear to FERC exactly what this means."

    Another email Gillespie forwarded Enron officials, dated May 17, 2001, came from Cheney's spokeswoman, Juleanna Glover, who told Gillespie "you're really relied upon around here ... hear your name all the time in connection w. tough issues, but you know that already."

    On May 21, 2001, five days after unveiling his energy policy, Cheney told Tim Russert on "Meet the Press" that Davis was to blame for the energy issues in the state.

    "They knew over a year ago they had a problem, and Gray Davis refused to address that problem," Cheney said. "[They] kept putting it off and putting it off and putting it off, with the notion that somehow price caps could be maintained. Now, today, where are they in California?"

    GOP Front Group Attacks Gray Davis, Shields Bush, Cheney

    At the same time, Reed informed Rove and Cheney that his nonprofit, the American Taxpayers Alliance, a Republican front organization, would begin to air a series of scathing radio commercials taking aim at Davis's failure to tame the energy crisis in June 2001. The ads, Reed said, were aimed to shift attention away from Republicans in Washington and "back to Sacramento where it belongs." Reed added that the ads would leave Davis "bleeding like a stuck pig."

    The ads, which began to air in June 2001, did in fact make an impact:

    "He's pointing fingers and blaming others. Gray Davis says he's not responsible for California's energy problems; after all, the Public Utilities Commission blocked long-term cost-saving contracts for electricity. But who runs the PUC? The people Gray Davis appointed - Loretta Lynch and other Davis appointees who left us powerless. That's why newspapers say he just ignored all the warning signals and turned a problem into a crisis. Grayouts on Gray Davis."

    The ads and the negative press Davis received helped set in motion a chain of events that would lead to a historic recall campaign and put Schwarzenegger in office.

    What the public didn't know, however, is that Cheney and Rove recommended that Reed approach Reliant Energy, the firm that one of Cheney's energy task force advisers, Joseph Allbaugh, was affiliated with via his wife's lobbying for the company, to fund the radio spots, according to former Reliant executives involved in the matter. Reliant donated nearly $2 million of Reed's $3.2 annual budget, yet the company only reported spending a total of $340,000 on government lobbying in apparent violation of the law, according to the company's public records.

    Gillespie also launched a public relations campaign against Davis. He took ads out in print publications attacking Davis. The ads were paid for by Gillespie's 21st Century Energy Project, which he formed in close coordination with Karl Rove less than a month after the National Energy Policy was released in May 2001, according to former Enron executives who worked closely with Gillespie. Enron funneled at least $75,000 to Gillespie to pay for the ads through Grover Norquist's Americans for Tax Reform, according to documents obtained by Truthout.

    Russ Schriefer, who worked with Gillespie on Bush’s presidential campaign and formed Mosaic Media with Quinn Gillespie in February 2001 to produce advocacy ads for Republicans, wrote the Davis ads. The ads aired on ABC, Fox and CNN.

    Norquist, a longtime friend of Cheney's, was personally tapped by Rove to assist Gillespie with the ad campaign. Norquist may be best known for his close relationship with disgraced lobbyist Jack Abramoff. One of Abramoff's clients, Raul Garza, chief of the Kickapoo Traditional Tribe of Texas, donated $25,000 to Norquist's organization in order to obtain an invitation to a reception with President Bush on May 9, 2001. Norquist and Abramoff were also in attendance and a photograph of Garza standing alongside Bush with Abramoff in the background was kept from public view when the Abramoff scandal blew up. Bush had denied publicly that he ever met Abramoff.

    At the time, Gillespie said the ads were necessary "because Davis put all his time and energy into trying to shift responsibility and President Bush spent all his time and energy trying to accept responsibility. The president is trying to change the tone, but others of us have to point out that the crisis developed on the watch of Governor Davis and President Clinton."

    Executive Privilege

    Immediately following reports that Cheney relied upon the recommendations of 400 energy industry executives to draft the National Energy Policy, lawmakers began to demand that the vice president turn over documents regarding his task force meetings to Congress. The vice president vehemently refused.

    With White House Counsel Alberto Gonzales weighing in on the issue, the administration exerted "executive privilege" as the reason it refused to turn over task force documents to Democratic lawmakers. The issue reached the Supreme Court that ruled in Cheney's favor. As Attorney General, Gonzales still refuses to publicly release audiotapes from 2000 and 2001 in which other energy companies were also found to have discussed ways in which to manipulate the California energy market. Some of the heads of those companies implicated in the crisis also provided Cheney with input on the National Energy Policy.

    In 2004, Reliant became the first energy company that was indicted for its role in manufacturing the California energy crisis. A year later, the company refunded California $453 million.

    Last month, two power companies agreed to pay California $84 million to settle charges stemming from the 2000-2001 California energy crisis.

    PacifiCorp, a unit of MidAmerican Energy Holdings Co., paid the state $27.9 million to resolve claims that it manipulated the California and Pacific Northwest electricity markets in 2000 and 2001. MidAmerican Energy Holdings is a subsidiary of Warren Buffet's Berkshire Hathaway Inc.

    In a second case, a subsidiary of Houston-based El Paso Corp. paid California $56 million.

    Joseph Kelliher, the chairman of FERC, and the man who, on behalf of Cheney in March 2001, lobbied these very companies to help write the National Energy Policy, helped negotiate the settlements.

    Davis feels vindicated in light of the refunds paid to California consumers, which, to date, have totaled about $6 billion. He said that he believes he would likely never have faced a recall if FERC publicly released details of its investigation into Williams in March 2001. But despite what he knows now Davis doesn't hold a grudge against the individuals responsible for using the energy crisis to have him recalled.

    "No one ever said life is fair," Davis said.