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.

Lawmakers intervene

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.

Criminal charges

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.

Whistleblo­wer threats

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

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