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Houston Jury Raps HL&P With $30M in Damages

Houston Jury Raps HL&P With $30M in Damages

The other shoe - five times larger than the first - dropped on Reliant Energy's Houston Lighting & Power Co. (HL&P) last week in a case that found the utility defrauded three Texas cities of fees owed for its exclusive right to sell electricity. A district court jury in Houston awarded the three cities $10 million each in punitive damages. That's on top of $4.2 million in actual damages (about $6 million including interest and attorneys' fees) awarded two weeks ago.

Reliant could be on the hook for a lot more as the litigation monster it's fighting has far more legs than two. About 45 cities, including Houston, still are suing in a class action that accuses Reliant of underpaying them by more than $100 million. The jury's findings in the current case could be applied to the other cities as well. Additionally, about 38 cities opted out of the original class action, and they could stand to get something, too, said a plaintiffs' attorney.

The initial three cities and their punitive damage awards are Pasadena, $2.3 million; Galveston, $1.7 million; and Wharton, $200,000. The punitive award for each city breaks down to $7 million against HL&P for fraud; $2 million against HL&P for unjust enrichment; and $1 million against Houston Industries Finance Inc.

Carol Freedenthal, principal with Houston-based Jofree Corp., said the jury award is small change to Reliant, which has assets worth more than $26 billion. "Nobody likes to lose a few million, but it's not that significant."

While the cities maintained HL&P underpaid franchise fees through fraud, the issue of who actually owes cities franchise fees and when will be one of growing importance as the energy industry continues to unbundle services, Freedenthal noted. He participated in a case in South Texas where the City of Edinburg successfully sued a local gas distribution company for franchise fees on transportation-only service (see NGI Dec. 14, 1998). "As the industry changes and we go through where we now have transporters and merchants, the city needs to continue to collect that tax because the needs of the city are still there."

While the punitive award fell short of the $40 million or so plaintiff's attorneys were aiming for, an early afternoon call to the Houston firm O'Quinn & Laminack found the lawyers out "celebrating." Reliant was as awestruck as viewers of its annual downtown "Power of Houston" fireworks display.

"We did not commit fraud, and we are amazed at the punitive damage finding," said spokeswoman Leticia Lowe. "The manner in which we paid the cities under our franchise agreements has been in accordance with [Texas] PUC [Public Utilities Commission] orders and agreements with the cities in which we provide service. Franchise payments are a direct pass-through, and what we collect from our customers is simply passed on to the cities." Lowe stressed the case is not over until the judge enters the final verdict, expected in a couple of weeks. And that's not likely to be the end either. "...[I]t is likely that the ultimate decision in this case will be reached only after a lengthy appeals process," Reliant said in a statement.

After returning to the office, O'Quinn lawyer Elizabeth Hawkins said the award is enough to make HL&P sit up and take notice. "I think the most significant part about this is the jury last Thursday found fraud and malice, and the $10 million verdict per city is to say, 'HL&P, don't do this anymore.....' Now it becomes a business decision."

Joe Fisher, Houston

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