What enouraged Wall Street sent shivers of skepticism through half-empty Sacramento political corridors last week in the wake of the largest settlement ever involving the allegations of western wholesale energy market manipulation.

The Federal Energy Regulatory Commission agreed Thursday to settle market manipulation allegations against Houston-based Reliant Resources and five of its California generating subsidiaries for up to $50 million. Under the settlement, Reliant has agreed to voluntary “reforms” guiding the company’s future business behavior. Reliant did not admit to any violations in entering into the settlement.

The case grew out of an investigation into power trading, dispatching and transportation schemes used by energy traders during the power and natural gas shortages of 2000 and 2001 when wholesale costs rose dramatically in California.

Because of the settlement, Texas-based Reliant is now “well-prepared” to pursue other negotiated settlements and/or dismissals of pending litigation in California, said Christine Tezak, from the Washington Research Group of Charles Schwab & Co. “To date, California state-level lawsuits have been dismissed on grounds that the FERC has jurisdiction, and relief is forthcoming in that venue (those cases are now being appealed).”

The settlement doesn’t cover the pending FERC refund proceeding or a trial staff deal, but Reliant officials are hoping this settlement will provide momentum to resolve the other outstanding cases.

Not surprisingly, California Gov. Gray Davis had another take on the FERC-Reliant deal, calling it “a few pennies on the dollar” among billions of dollars “stolen” from California consumers. “Once gain, FERC regulators are proving to be the toothless bureaucrats we know them to be,” Davis said. He called the $50 million settlement fee paid by Reliant “chump change.”

“What incentive is there for generators to play by the rules if they can get away with this?” the governor asked rhetorically in between recall election campaign appearances late Thursday.

A spokesperson for California’s Attorney General Bill Lockyer told the Los Angeles Times that the FERC settlement is “definitely not something to summarily thumb your nose at,” but even so, the fines may not equal anything close to the alleged profits Reliant may have reaped. Local news reports in California emphasized that Reliant is still part of a U.S. Justice Department investigation and several class action lawsuits consolidated in federal court in California.

“Reliant still has some tough work ahead in California,” said Tezak. “State representatives continue to complain about ‘low’ levels of refunds. Reliant also has finite financial resources and its ability to ‘buy’ resolution through settlement offerings is limited.” She said the findings in the latest FERC settlement, however, “dramatically” lessen the risk of fallout from the still “hard-to-define outstanding liability” of state cases on appeal and class action lawsuits.

Compared to other, facing stiffer penalties in the industry, Tezak said she would expected Reliant “to settle for a smaller sum consistent with less serious offenses.”

Last January, Reliant reached another FERC settlement under which it paid $13.8 million for shutting down power plants in California for two days in June 2000, and the company agreed last August to pay $836,000 with allegations at FERC that it gamed electricity markets in the West.

FERC said the new settlement calls for Reliant to pay $15 million in cash within 30 days; two more installments of $5 million each due Sept. 30, 2005 and Sept. 30, 2006, and as much as another $25 million from the merchant power plant operator auctioning 824 MW of capacity over the next three years. “The settlement proceeds from the three annual auctions will be dependent upon market conditions, but will not exceed $25 million,” FERC said in its announcement of Thursday’s action. “California investor-owned and municipal utilities will have the right of first refusal for this low-cost capacity.”

Having established a $103 million reserve to cover potential liabilities as of June 30, Reliant said the settlement will “close out all outstanding FERC-initiated proceedings and investigations” regarding Reliant’s participation in the western wholesale energy market meltdown in 2000-2001. Reliant retains the authority to sell power at market-based rates.

Noting the company must “assume responsibility for its actions,” Joel Staff, Reliant’s CEO said the company intends to “conduct our business in a fashion that not only meets the letter and spirit of the law, but also sets a standard of excellence based on the highest ideals of corporate responsibility. “To this end, we have implemented a comprehensive set of reforms aimed at ensuring that all of our activities are consistent with a corporate philosophy based on these principles.”

What FERC characterized as “extensive reforms” in Reliant’s compliance program — already implemented — were “an important factor in acceptance of the settlement” by the federal regulators. Reliant will be required to make regular reports to FERC’s Office of Market Oversight and Investigations of all of its sales for a year.

FERC Chairman Patrick Wood said the Reliant settlement “should serve as a warning to all energy companies” that there are consequences to “attempts to manipulate energy markets.” Wood noted that the Reliant deal is “just a small part” of FERC’s overall response to California past electricity crisis, which continues to carry both political and economic fallout in the nation’s most populous state and in national regulatory and financial circles.

In terms of the overall federal regulatory response to the California situation, Wood said, “Judgment…should be reserved until we complete these complicated proceedings.” The head of FERC noted that in his Congressional testimony this year he has supported legislation that would beef up the federal commission’s limited civil penalty authority.

Reliant’s CEO Staff indicated that resolving all of the California issues “continues to be a major goal” at the company, and he is committed to “cooperating with those remaining agencies that are continuing to review the events of 2000 and 2001.”

Reliant operates or has under development 117 power plants totaling 22,000 MW in 13 states; five of those plants are in California, totaling about 4,000 MW. Unlike other troubled merchant operators, Reliant for the time being is hanging on to most of its assets, although a Houston-based spokesperson pointed out that the company is in the process of selling its 560 MW Desert Basin power plant in Casa Grande, AZ, to the local public sector utility, Salt River Project, and its CEO has announced that the company will review its other assets to determine which ones will go on the sales block.

The company’s wholesale model and strategy was forged in the 1997-98 period, the spokesperson said, so obviously it is not applicable to the post-Enron Corp. environment in the industry today. Under the Texas restructuring plan now ongoing for the state’s electricity industry, Reliant will have an opportunity to buy back about 14,000 MW of local power plants now operated by a separately spun off generating company, Texas GenCo.

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