The other shoe – five times larger than the first – dropped onReliant Energy’s Houston Lighting & Power Co. (HL&P) lastweek in a case that found the utility defrauded three Texas citiesof fees owed for its exclusive right to sell electricity. Adistrict court jury in Houston awarded the three cities $10 millioneach in punitive damages. That’s on top of $4.2 million in actualdamages (about $6 million including interest and attorneys’ fees)awarded two weeks ago.
Reliant could be on the hook for a lot more as the litigationmonster it’s fighting has far more legs than two. About 45 cities,including Houston, still are suing in a class action that accusesReliant of underpaying them by more than $100 million. The jury’sfindings in the current case could be applied to the other citiesas well. Additionally, about 38 cities opted out of the originalclass action, and they could stand to get something, too, said aplaintiffs’ attorney.
The initial three cities and their punitive damage awards arePasadena, $2.3 million; Galveston, $1.7 million; and Wharton,$200,000. The punitive award for each city breaks down to $7million against HL&P for fraud; $2 million against HL&P forunjust enrichment; and $1 million against Houston IndustriesFinance Inc.
Carol Freedenthal, principal with Houston-based Jofree Corp.,said the jury award is small change to Reliant, which has assetsworth 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 soplaintiff’s attorneys were aiming for, an early afternoon call tothe Houston firm O’Quinn & Laminack found the lawyers out”celebrating.” Reliant was as awestruck as viewers of its annualdowntown “Power of Houston” fireworks display.
“We did not commit fraud, and we are amazed at the punitivedamage finding,” said spokeswoman Leticia Lowe. “The manner inwhich we paid the cities under our franchise agreements has been inaccordance with [Texas] PUC [Public Utilities Commission] ordersand agreements with the cities in which we provide service.Franchise payments are a direct pass-through, and what we collectfrom our customers is simply passed on to the cities.” Lowestressed the case is not over until the judge enters the finalverdict, expected in a couple of weeks. And that’s not likely to bethe end either. “…[I]t is likely that the ultimate decision inthis case will be reached only after a lengthy appeals process,”Reliant said in a statement.
After returning to the office, O’Quinn lawyer Elizabeth Hawkinssaid the award is enough to make HL&P sit up and take notice.”I think the most significant part about this is the jury lastThursday found fraud and malice, and the $10 million verdict percity is to say, ‘HL&P, don’t do this anymore…..’ Now itbecomes a business decision.”
Joe Fisher, Houston
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