The Arizona Republic
Whistleblowers slam federal power agency, claiming corruption, threats
The receipts just didn’t make sense: Employees at a federal power agency in Phoenix were using U.S. government purchase cards to buy millions of dollars’ worth of items from sportinggoods stores like Bass Pro Shops or Cabela’s, and from specialty auto shops.
Ammunition. Scopes for assault rifles. Engine superchargers. Radar detectors. The merchandise had nothing to do with electrical grids or transmission lines.
Nate Elam, former assistant regional manager at the Western Area Power Administration office in Phoenix, shakes his head remembering his shock reviewing receipts submitted by his employees in 2014. Then he mentions something even more alarming: Instead of aggressively going after corruption, Elam alleges, WAPA’s bosses slow-walked the investigation, retaliated against those who uncovered fraud and failed to pro-
tect them from threats.
“You see stuff everywhere,” said Elam, a 14-year federal employee who once worked for the U.S. Attorney’s Office. “But I’d never seen the corruption — or the lack of wanting to do anything about it — like I did in the Department of Energy.”
Keith Cloud, WAPA’s chief of security who worked with Elam to expose creditcard abuse, said the situation was harrowing due to a gun culture within the agency. As some employees began making threats and using intimidation tactics, Cloud said, administrators delayed protective measures and held almost no one accountable.
“We asked them to look into all of this,” Cloud said. “What’s appalling to me is, I cannot protect my staff, because they just won’t do anything.”
Finally, after FBI counterterrorism agents began investigating, WAPA’s Desert Southwest Office hired armed guards and commissioned a threat assessment.
Mark Gabriel, chief executive officer for the federal agency, says the entire controversy has been overblown, that the theft outbreak was limited and that reforms are in place. He also noted that two former employees have been criminally charged in connection with purchase-card irregularities.
“Yes, there were criminal activities, unfortunately,” Gabriel noted in a recent interview. “We investigated ourselves, and we were able to educate ourselves. I believe it’s a piece of history.”
Gabriel declined to address why his security chief, assistant regional manager and top procurement officer have jeopardized their careers making contrary allegations. Or why members of Congress are hounding his agency for answers. “There’s only one set of facts,” Gabriel said. “And I think the organization here has done a heckuva job.”
A ‘slush fund’?
WAPA is a federal government agency within the U.S. Department of Energy. It markets electrical energy to utilities throughout the West. It spans an area equivalent to distances from Paris to Moscow and from Athens to Oslo.
The mission is to ensure consumers get safe, clean and economical power for lights, air-conditioners, factories and plugged-in devices.
The $1.1 billion agency employs 1,454 federal workers. They maintain 17,000 miles of high-voltage lines and 328 substations, transmitting power on behalf of utilities such as Arizona Public Service Co. They market power from 57 hydroelectric plants and Arizona’s coal-fired Navajo Generating Station.
The operations are so vital — and so sensitive to potential terrorism — that key employees require top-secret clearances.
For three years, controversy has jolted the system. Allegations are spelled out in hundreds of records obtained by The Arizona Republic, including internal emails, congressional inquiries, U.S. District Court files and whistleblower complaints.
Cloud and Elam said the embezzlement reflects a larger problem at the federal agency — one that ultimately hurts consumers. They contend waste and mismanagement are obscured and ignored in part because WAPA has built up a $767 million reserve known as the “unobligated balance.”
Agency officials assert WAPA needs a large backup fund to buy power if the hydroelectric system is hit with shortages caused by drought or disaster. While that is true, Elam and Cloud said the balance became so huge, it served as a sort of slush fund. “It was a blank check. For years WAPA operated with no financial limits,” Elam said. “This allowed for all of the corruption and lack of internal controls and oversight.”
Utility companies in Arizona and California have complained to Congress that WAPA is overcharging them for power. Investigators have been unable to calculate how much consumers may have overpaid for electricity as a result, but 92 percent of WAPA’s funding ultimately comes from residential and commercial users.
Arizonans get about 12 percent of WAPA’s power. According to agency records, WAPA’s utility customers have seen total price increases over the past decade ranging from a high of 70 percent to a low of 10 percent. Tyler Carlson, chief executive at Mohave Electric Cooperative Inc., said WAPA has engaged in “double budgeting” — charging utilities $25 million to $30 million per year for services that are also paid via federal appropriations. “What it means is an ability to spend money without a whole lot of strings,” he added.
Carlson said the increased cost ultimately is borne by the consumer. “It has to be,” he noted. “It’s a trickle-down type of scenario.”
(Agency spokeswoman Teresa Plant said the term “double budgeting” is a “misnomer.” “WAPA is not charging customers for electric service while, at the same time, receiving federal appropriations for that same service,” she added.)
Jorge Canaka, government relations director for the Tempe-based Grand Canyon State Electric Cooperative, said his association has been hit with annual WAPA rate hikes of around 7 percent while other regions are getting price reductions. Canaka said utilities want greater transparency and input.
Records show WAPA officials realized the surplus was an emerging issue by 2013. One internal memo questioned whether to publicly disclose a practice that the U.S. Office of Management and Budget would view as a “back-door method of financing.”
“Given that likelihood, we should not disclose this,” the memo concluded. “It’s better to ask forgiveness if OMB finds out than to ask permission in advance.”
A subsequent report by the Government Accountability Office said the Energy Department “should develop and finalize strategies for reducing tens and hundreds of millions of dollars of excess unobligated balances.” The Energy Department’s strategy report, released last fall, claims WAPA needs an even larger contingency: $818 million.
A question of security
Plant, WAPA’s public affairs chief, said the administration is committed to “organizational excellence.” She said WAPA “continues to identify and implement measures to save money,” and blamed spending increases on efforts to improve security.
“WAPA’s customers in Arizona benefit from the lowest wholesale costs that we provide through our dedication to improving business practices,” Plant added in an email.
This year, WAPA’s financial condition is so robust, the agency returned $429 million to the U.S. Treasury and still retained a huge surplus, according to its annual report.
Cloud said the money glut is especially perplexing because the power system is unsafe — vulnerable to terrorism and other breaches — due to an underfunded security program. Several power substations, including one near Phoenix, have been compromised in recent years. Cloud said intruders “literally tore the door off the back of the (Phoenix-area) station like it was a sardine can.”
To prevent a potential catastrophe, Cloud said, the agency needs $90 million for fencing, cameras, alarms, personnel, computer protections and other defensive systems.
An inspector general report released last April noted that previous reviews in 2003 and 2010 determined WAPA had not completed risk assessments or security assessments. Investigators said the agency “had not placed sufficient emphasis on physical security.”
Gabriel, the agency CEO, said the power grid is well-defended. He said spending for cyber and physical security has increased dramatically, and WAPA plans to invest about $10 million annually over the next decade.
Last summer, Republican Arizona Sens. Jeff Flake and John McCain sent a letter to the Department of Energy inspector general demanding to know if WAPA employees were held responsible for embezzlement.
A month later, the senators complained of inaction and said WAPA’s integrity is in jeopardy. “We are deeply troubled by the fact that DSW (Desert Southwest) has not fully implemented changes to its procurement practices,” they wrote.
The two senators have proposed legislation designed to force openness in WAPA finances.
McCain recently told The Arizona Republic via email, “While WAPA purports to provide affordable power for Arizonans, the agency’s overhead has skyrocketed in recent years due to widespread waste and mismanagement, and it has passed on these costs to consumers in the form of high energy bills. This abuse of federal power is unacceptable.”
In October, Rep. Jason Chaffetz, RUtah, chairman of the House Committee on Government Oversight and Reform, chimed in with a letter to Gabriel seeking records from “an investigation into allegations of financial and facility mismanagement.”
Gabriel, whose compensation package totals $547,000, told The Republic early this month that disagreements with Congress are being resolved.
Controversy surfaced in 2013 at WAPA’s regional office in Phoenix, where auditors found lax financial controls.
The Energy Department’s auditors, using a combination of receipts and purchase-card records, corroborated at least $6.8 million in what was later described as questionable, “potentially fraudulent or improper transactions.” Western officials contend outright thievery involved a much smaller amount. But Elam and Cloud say the audit examined only a fraction of purchase-card expenses over a two-year period. A complete review, they said, would expose other crimes and losses in the “tens of millions of dollars.”
Instead of doing a full sweep to change the culture, internal critics said, the agency tried to bury its scandal. Nearly all the perpetrators went unpunished, along with supervisors who failed to prevent or detect the scams. And, according to a second audit, problems continued. From December 2014 through October 2015, investigators identified more than 11,600 potentially fraudulent transactions. One employee picked up 2,000 rounds of ammunition for a .308 rifle. Others tricked out government and personal vehicles with fancy wheels and elevated suspension systems. Receipts disappeared. So did the merchandise.
Virtually none of the stolen money has been recovered. WAPA says two Desert Southwest employees and one supervisor were disciplined for purchase-card misconduct. One was fired.
Another was charged criminally after he resigned: George L. Molina Jr., a former maintenance transmission specialist, is scheduled to be sentenced in April for theft of public money. According to U.S. District Court records, Molina accounted for more than $174,000 in purchase-card losses, buying an all-terrain vehicle, firearm accessories and a John Deere lawn tractor. His offenses carry a sentence of up to 10 years, but prosecutors will recommend no prison time under terms of a plea agreement that requires payment of restitution. A second WAPA employee, Jason Hardy of Colorado, has a hearing scheduled March 29 to change his plea to guilty. Hardy, an electronic-equipment craftsman, is under indictment on charges of fraudulently buying more than $37,000 in items such as ham radio gear, a bicycle and clothing.
In late 2015, as whistleblowers pressed for accountability, suspected employees allegedly began fighting back with threats and intimidation. Elam said there were nasty messages and his vehicle was tampered with twice.
In emails during late 2015 to Ron Moulton, senior vice president for the Desert Southwest Region, Elam noted the ammunition purchases and urged a threat assessment. He also requested a home security system.
He said FBI agents confirmed a danger of workplace violence. Concern was magnified, Elam added, because his wife suffers from a rare medical condition that blocks the production of adrenaline. The illness, exacerbated by stress, can be life-threatening.
Elam was not alone. In an email at the time, George Kelley, former WAPA vice president for procurement, wrote that during 30 years as a government worker he had “never seen anything like this and certainly have never felt unsafe at work like I do at Western (WAPA) on a daily basis.” (Kelley, who declined to comment, was terminated and then reinstated after filing a claim with the U.S. Merit System Protection Board. He resigned from WAPA late last year.)
Finally, in late 2015, an independent consultant did a violence assessment. WAPA released a version with key portions redacted. According to an unredacted copy of the report obtained independently by The Republic, the blackedout findings concluded: “Multiple employees reported having been threatened directly or heard others being threatened regarding the current investigations . ... Several indicated they had not bothered to report the incidents for reasons of fear and/or the belief upper management would not act.”
The report cited a history of threats and “minimal” disciplinary reaction. “Because of past failures to address these issues more seriously,” it concluded, “it is very likely the incidents will increase in number and severity.”
Elam eventually had to buy his own home security system because WAPA wouldn’t. On Dec. 20, 2015, he resigned with a warning about continued danger