Bloomberg News

Reliant to Pay $22 Million to Resolve Federal Charges

March 06, 2007

Reliant Energy Inc., the second- largest Texas power retailer, agreed to pay $22.2 million to settle criminal charges that the company and its energy traders manipulated California power prices in 2000.

The company admitted it shut many of its power plants and its employees spread false information to justify reduced electricity production as part of a plan to drive up energy prices and avoid trading losses, according to an agreement with federal prosecutors filed today in U.S. District Court in San Francisco. The government agreed to drop charges of commodity price manipulation, wire fraud and conspiracy and a federal judge granted its request to dismiss the indictment.

Power prices during California's energy crisis in 2000 and 2001 rose 10-fold and consumers endured rolling blackouts. Reliant, based in Houston, agreed to pay $460 million in 2005 to settle California's claims of energy price manipulation and $13.8 million in 2003 in a settlement with federal energy regulators.

``We have consistently maintained that the conduct in question was not in keeping with the standards of conduct we expect from our employees and we accept full responsibility for this matter,'' Joel Staff, Reliant's chairman and chief executive officer, said in a statement.

Federal prosecutors in San Francisco also agreed to drop criminal charges against Reliant trader Lisa Flowers; J. Kevin Frankeny, western operations manager; Jackie Thomas, former vice president of power trading; and V. Reginald Howard, former director of the west power trading division.

Individuals Dismissed

Prosecutors dropped the charges because the four cooperated in the investigation. All four were charged with one count of commodity-price manipulation, four counts of wire fraud and one count of conspiracy to commit commodity manipulation and wire fraud, the same charges filed against Reliant, according to the agreement.

The individual defendants ``accept and acknowledge responsibility,'' court documents said.

George Cotsirilos, an attorney for Thomas, and John Williams, an attorney for Frankeny, didn't return messages left after hours. Nanci Clarence, an attorney for Flowers, and Philip Inglima, an attorney for Howard, wouldn't comment.

Flowers and Frankeny are on administrative leave from the company, said Reliant spokeswoman Pat Hammond.

Facing a $3 million loss on bad bets that electricity prices would rise, Flowers, Frankeny, Thomas and Howard devised a plan in June 2000 to shut down power plants in California to reduce supplies and drive up prices, transcripts of their phones calls contained in court records show.

First to be Prosecuted

The U.S. said the plan violated federal commodities laws and cost California and utilities $32 million.

Reliant was the first company to face federal criminal charges stemming from the California power crisis when it was indicted in 2004, said then-U.S. Attorney General John Ashcroft.

The deferred prosecution agreement requires Reliant to pay $36 million minus a credit of $13.8 million for payment already made in a civil settlement with federal energy regulators. Reliant agreed to cooperate with federal investigators and establish a corporate compliance plan to detect and prevent future misconduct.

The government agreed not to seek new charges against Reliant if it complies with the agreement for two years.

Luke Macaulay, a spokesman for the San Francisco U.S. Attorney's office, which brought the case against Reliant, wouldn't comment.

Reliant operates power plants in nine U.S. states. It announced its 13th loss (RRI:US) in 17 quarters on Feb. 27, after above- normal winter temperatures lowered demand for electricity to heat homes.

The company's fourth-quarter net loss narrowed to $53.7 million, or 17 cents a share, from $134 million, or 44 cents, in 2006. Revenue fell 9.8 percent to $2.34 billion.

The case is U.S. v Reliant Energy Services Inc., 04-125, U.S. District Court, San Francisco.

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Patrick Oster at poster@bloomberg.net


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