U.S. v. Reliant Energy Services, Inc.

• Decision Date: 28 February 2006
• Docket Number: No. CR 04-0125VRW.,CR 04-0125VRW.
• Parties: UNITED STATES of America, Plaintiff, v. RELIANT ENERGY SERVICES, INC, et al., Defendants.
• Court: U.S. District Court — Northern District of California

420 F.Supp.2d 1043

UNITED STATES of America, Plaintiff, v. RELIANT ENERGY SERVICES, INC, et al., Defendants.

No. CR 04-0125VRW.

United States District Court, N.D. California.

February 28, 2006.

COPYRIGHT MATERIAL OMITTED

William M. Goodman, Topel & Goodman, George Cotsirilos, Cotsirilos & Campisano, Mary McNamara, Swanson & McNamara LLP, San Francisco, CA, Philip T. Inglima, Crowell & Moring LLP, John L. Williams, San Jose, CA, for Defendants.

ORDER

WALKER, Chief Judge.

The United States has filed criminal charges against Reliant Energy Services, Inc ("Reliant") and four Reliant employees: Jackie Thomas, Reginald Howard, Lisa Flowers and Kevin Frankeny (collectively "defendants"). The indictment charges each defendant with one count of commodities price manipulation in violation of § 9(a)(2) of the Commodity Exchange Act (CEA), 7 U.S.C. § 13(a)(2), four counts of wire fraud in violation of 18 U.S.C. § 1343 and one count of conspiracy in violation of 18 U.S.C. § 371. Doc # 1 (Indictment). Defendants jointly moved to dismiss the original indictment on vagueness and other grounds. Doc # 72 (MTD).

Subsequent to the filing of defendants' motion, the government obtained three superseding indictments. Without abandoning their initial motion, defendants now jointly move to dismiss the third superseding indictment on the ground that it is barred by the applicable statute of limitations. Doc # 218 (MTD-3SI). Based upon the parties' arguments and the applicable law, both motions are DENIED.

I

A

This case arises from California's electricity "crisis" in summer 2000. In 1996, California created two new non-governmental entities to orchestrate the transmission and sale of electricity: the California Independent System Operator ("CAlSO") and the California Power Exchange ("CalPX"), both of which were California non-profit, public-benefit corporations. Until it ceased operation in 2001, CalPX was a crucial hub of the electricity generation market, overseeing an auction system for the sale and purchase of electricity on a non-discriminatory basis to meet the electricity loads of CalPX customers, called load-serving entities ("LSEs"), that provide electricity to retail, end-use customers. CalPX's auctions ran on a day-ahead and same-day basis. CalPX would determine, on an hourly basis, a single "market clearing price" which all electricity wholesalers would be paid based on short-term supply and demand bids submitted by all CalPX participants ("spot market"). In addition, CalPX operated a block forward market by matching supply and demand bids for long-term electricity contracts ("term market").

Responsibility for the efficient functioning of the high-voltage transmission grid fell to CAISO and, to that end, it ran the spot market for electricity. During the time period in question in this case, if consumer demands were not met by scheduled supplies into CalPX or other sources, CAISO was required to procure additional electricity to serve consumers' requirements and maintain the stability of the grid. To facilitate this, CAISO purchased reserve capacity from wholesalers. This reserve capacity was left idle until CAISO required additional generation of power. If CAISO required additional generation of power, it issued an order to the whole saler to generate such power out of the reserve capacity; if not, the reserve capacity was left ungenerated. The CAISO-operated market was called the "real time" or "imbalance" market.

While CAISO and CalPX were organized under California law, both were subject to the jurisdiction and regulation of the Federal Energy Regulatory Commission (FERC). Under the Federal Power Act (FPA), FE RC has jurisdiction over "the sale of electric energy at wholesale in interstate commerce," 16 U.S.C. § 824(b), but the California Public Utility Commission retained jurisdiction over all retail sales of electricity in California.

While LSEs had sources of electricity that they themselves owned or controlled (e g, nuclear, hydraulic), retail customer demand for electricity greatly exceeded this source of supply. The court will refer to this excess demand for an LSE's supply as the LSE's "net short." CalPX operated as the exclusive market for LSEs' net short electricity needs. LSEs were required to purchase the majority of their net short demand in the CalPX spot market.

Reliant, based in Houston, Texas, owns five generation plants in southern California. According to the indictment, in early June 2000, defendant Flowers (on behalf of Reliant) entered into long-term trading contracts for electricity delivery for the third quarter of 2000 and 2001, expecting that electricity prices would increase. Indictment ¶ 16. On June 19, 2000, however, the spot market price for electricity unexpectedly fell. Based upon the trading contracts entered into by Flowers and the sharply decreased market price, defendants determined that Reliant was facing a multi-million dollar loss. Id. To avoid this loss, the indictment alleges that defendants conspired to manipulate (and did manipulate) the California electricity market to increase the price of electricity.

Specifically, the government asserts that defendants manipulated the market by creating a false and misleading appearance of an electricity supply shortage to CalPX, CAISO and other market participants. Id. ¶ 19. Defendants were able to create this illusion of a supply shortage by (1) shutting down some of Reliant's generation plants, (2) physically withholding electricity from the spot market, (3) submitting supply bids at inflated prices to ensure that the bids were not accepted and (4) disseminating false and misleading rumors and information to CAISO, brokers and other traders regarding the availability and maintenance status of, and environmental limitations on, Reliant's southern California generation plants. Id.

The government asserts that defendants' scheme was successful; by June 21, 2000, the purported electricity supply shortage had caused the spot market price of electricity to soar. The indictment alleges that defendants took advantage of the artificial price they had created by selling large amounts of electricity at this inflated price. Ultimately, the government alleges, instead of suffering a loss, Reliant made millions in profits and that California electricity purchasers overpaid by as much as $32 million.

Based upon defendants' alleged conspiracy, scheme to defraud and manipulation, the state of California filed a civil suit against Reliant and the government filed the criminal charges at issue here. Count one of the indictment charges defendants with conspiring to commit wire fraud and commodities price manipulation in violation of 18 U.S.C. § 371. Counts two through five charge defendants with wire fraud in violation of 18 U.S.C. § 1343. Finally, defendants are charged in count six with violating 9(a)(2) of the CEA, 7 U.S.C. § 13(a)(2), which in pertinent part makes it a crime for "[a]ny person to manipulate or attempt to manipulate the price of any commodity in interstate commerce" (hereinafter the "criminal manipulation provision").

B

After defendants jointly moved to dismiss the original indictment, the government obtained a superseding indictment on June 29, 2005 ("Indictment S1"), and a second superseding indictment on October 11, 2005 ("Indictment S2"). Doc ## 231 (1SI), 181. Trial in this matter was scheduled to commence October 31, 2005. A pre-trial conference was held on October 17, 2005, and after reviewing the parties' proposed jury instructions, the court served upon the parties its own proposed final jury instructions on October 24, 2005. On October 25, 2005, the government obtained a third superseding indictment ("Indictment S3"). Doc # 208 (3SI). On October 28, 2005, defendants filed a joint motion to dismiss Indictment S3. Doc # 218.

Also on October 28, 2005, the Friday before trial was to commence, the government, pursuant to 18 U.S.C. § 3731, filed a notice of appeal of one of the court's pretrial evidentiary rulings. Doc # 219. Upon receipt of the government's notice of appeal, the court conveyed to the parties its understanding that the government's § 3731 filings "would divest the court of jurisdiction over aspects of the case that are involved in the appeal and prevent the court from empaneling a jury during the pendency of the appeal." Doc # 216 (citations omitted). The court nonetheless requested the parties to appear as scheduled on October 31, 2005, in order to discuss certain matters. Id. One matter the parties took up at that time was the court's jurisdiction to hear and rule upon defendants' motion to dismiss Indictment S3 during the pendency of the appeal, the issue to which the court now turns.

II

A

A trio of Ninth Circuit opinions guides the court: United States v. Gatto, 763 F.2d 1040 (9th Cir.1985), United States v. Emens, 565 F.2d 1142 (9th Cir.1977), and United States v. Cox, 475 F.2d 837 (9th Cir.1973).

In Cox, the district court granted the defendants' motion to suppress and, apparently, the government timely appealed pursuant to § 3731. During the pendency of the appeal, the defendant moved to dismiss the indictment. "[C]oncerned as he was with the aspects of the guarantee of speedy trial within the sixth amendment," the district court granted the motion to dismiss, and the Ninth Circuit unanimously affirmed. Cox, 475 F.2d at 841. Although it is not perfectly clear whether the court viewed the issue as one of jurisdiction, significantly, the Cox panel did not conclude that the district court lacked jurisdiction to dismiss the indictment due to the government's pending § 3731 appeal.

In Emens, the Ninth Circuit clarified that Cox's holding was indeed jurisdictional in nature. In rejecting the government's argument that " § 3731 impliedly prohibits a District Court from dismissing an indictment pending appeal of an order granting a motion to suppress evidence," the panel explained that under Cox...