Reliant Settles Before the Storm

Reliant Energy Inc. (RRI), based out of Houston, TX is one electric utility company that is no stranger to legal scrutiny or federal regulation. With jury selection complete for the Enron trial that could land founder Kenneth Lay and former CEO Matt Skilling in prison for the rest of their lives, electric energy companies like Reliant may all feel the negative effects of this high profile case.

On December 22, 2005 Reliant came to an agreement with FERC (Federal Energy Regulation Committee) to pay $512 million to cover claims for refunds, billing adjustments and other monetary remedies to California parities for their role in the 2000-2001 energy crisis. Other parties represented in the settlement included Pacific Gas & Electric Co., a unit of parent PG&E Corporation (PCG), Southern California Edison, a Edison International Company (EIX), and San Diego Gas & Electric, a utility of Sempra Energy (SRE).

During the energy crisis California residents were subject to paying sky rocketing electricity bills accompanied by days of rolling blackouts. The demand was said to have been brought on by the ever increasing need of California based tech companies need for power along with the increased usage of PCs and other electronics in residential communities.

California was the first state to deregulate electric back in 1996. In effect investor-owned utility companies California utilities were forced to sell their power generating plants and buy their power on the wholesale market where prices per kilowatt-hour fluctuate like the Dow Jones Average. As demand began to rise during the summer of 2000 wholesalers quickly raised their prices dramatically from an average of $30 per megawatt hour in 2000 to $330 per megawatt hour in 2001. The refunds being paid are tied to these rates that eventually trickled down to consumers.



What's Next
According to their last quarterly filling with the SEC, on November 03, 2005, natural gas prices rose 42% in the third quarter of 2005. Natural gas prices directly effect Reliant's (RRI) cost of producing electricity. In order to handle the increase in natural gas Reliant will phase in price increases for residential customers while also entering into hedges to cap the commodities rising cost. In spite of this maneuvering Reliant still expects a $100 million dollar shortfall in the first quarter of 2006. Too make matters worse Reliant expects to lose and additional $400 million over the next few years due to losses from previous hedging activities.

On a Good Note
Reliant did make strides in the 3rd Quarter of 2005 to prepare for the future by selling three plants in New York for $975 million and by selling emissions allowance for $97 million. Reliant's (RRI) book value is currently $13.28 while the stock has been trading in the $9.25 - $10.65 range for the past two months. These reasons could explain why more than 5 million shares of Reliant common stock has been picked up by Institutional Investors over the past 4 months.

Not For the Faint of Heart
On November 1, 2005 shares of Reliant dropped 25% from the $12 dollar range to $9.15 after reporting a third quarter loss of $270 million with the bulk of the loss stemming from a separate regulatory settlement and a loss on energy derivatives. Reliant (RRI) also faces competition from TXU Energy (TXU), the largest retail provider of electricity in Texas, and a host of other utilities companies that are vying for customers. The best play here is to watch how the company performs during the Enron trail. Reliant could be headed lower if investors' emotions kick-in as the Enron headlines draw our attention. Investors must remember to read headlines with their eyes, and choose investments with their head.