Ms. Felicia Greer August 19, 2004 Page 2 of 4
On April 30, 2004, RESE filed supplemental information with the Commission providing details of an indictment against RES. As noted in that filing, the United States Attorney’s office in the Northern District of California indicted RES, a subsidiary of Reliant Energy, Inc. (herein “Reliant” and formerly known as Reliant Resources, Inc.) and an affiliate of RESE. In addition, the United States Attorney indicted four former and current employees of RES, none of whom is an officer of RESE, RES, or Reliant. The indictments are based on allegations that RES engaged in price manipulation by curtailing electricity generation in California on two days in June 2000 at the direction of its traders. The applicant, RESE, was formed on February 4, 2002, and no officer of RESE was an officer of RES or Reliant in any capacity during the period covered by the indictment.
In January 2003, Reliant entered into a settlement agreement with the FERC regarding the actions that are the subject of the indictment. In the settlement, Reliant neither admitted nor denied that these actions affected prices in any market, or violated any law, tariff or regulation. Reliant discovered this behavior as part of its review of past trading practices in California and voluntarily brought it to the attention of the FERC. Although Reliant believes that the traders’ actions were not in violation of any laws, tariffs or regulations, they were not consistent with how Reliant operates or the expected behavior of its employees. Reliant agreed to the settlement with FERC in order to, among other things, put these issues behind it and move forward with its business. The company took appropriate personnel actions with respect to the employees involved, as well as substantive and definitive steps, including implementing wide-ranging changes in the senior management team (including replacing all but the secretary and assistant treasurer of RES, retaining only one member of the board of directors from that period, and establishing new lines of authority and accountability), instituting a code of conduct for its trading employees to define the parameters of acceptable and unacceptable trading behavior, and strengthening its corporate compliance program (including the establishment of the Chief Compliance Officer and two other compliance positions). These corrective actions evidence Reliant’s commitment to conducting its business with the highest integrity.
It is important to keep in mind that the actions that are the subject of the indictments relate to an isolated situation involving trading activity over a two-day period more than four years ago. There was no supply shortage at the time, no ISO-declared emergency, no blackouts, and the two days fell during a low-priced week in the market. Reliant’s total generation during the period far outpaced historical generation levels. Reliant intends to defend vigorously the charges in the indictments. Furthermore, RESE does not believe that the indictments will have any material adverse impact on its ongoing business operations, including its ability to provide reliable electric service under its contracts with Maryland consumers.