Reliant chairman calls FERC settlement talks ‘difficult’

Peaking plant investments will be much harder to justify in California now that federal regulators have instituted electricity price controls in that market and could push out the time when it will come back into balance, said Joe Bob Perkins, president and chief operating officer, Reliant Energy Wholesale Group.

Despite the problems in the western markets and declining stock prices, Reliant executives told analysts Tuesday, the financial outlook for Reliant Energy Inc. and its majority-owned affiliate Reliant Resources Inc. remains unchanged.

Chairman Steve Letbetter said the negotiations over outstanding receivables and possible refunds under way at the Federal Energy Regulatory Commission are probably for the best because it “takes politics out of the discussion” and puts a “process in place” that could lead to a solution.

A FERC administrative law judge is attempting to broker a settlement between California Gov. Gray Davis who is demanding refunds of $9 billion from power generators, and generators who say they are owed billions of dollars for power delivered to the state for which they have not been paid.

Reliant has been a “vocal” opponent of price caps, but the market was “not functioning” anyway, he said. Whether the company can “do anything around those discussions will be difficult,” Letbetter said, but Reliant has had experience settling issues with Texas regulators.

Chief financial officer Steve Naeve said Reliant Resources is on track to earn $1.65/share fully diluted in 2001 and $2.17/share in 2002. With goodwill added back in 2001, he said the number will be about $1.68/share this year and $2.17/share next year.

Reliant Energy, which will continue to be regulated under Texas’ restructuring law, will have earnings of about $1.85/share this year and $1.03/share in 2002. Nave attributed the decline to accounting and other changes. The company will be renamed by early next year, he said, and is expected to sell about 14,000 Mw of Texas generating capacity, to become a transmission and distribution company.

As part of its strategy, the company is spending about $350 million to build transmission capacity “to get a lot of power off the Houston Ship Channel where it is being built and into the rest of Texas,” Naeve said.

Perkins said Reliant Resources entered the summer months with essentially all its firm capacity committed in the Southwest, where just a few transactions in a thin market are defining the forward curves. The absence of price signals and the Federal Energy Regulatory Commission price control order have erected new barriers to entry into the market, increasing the value of the company’s California generating assets, and potentially pushing until 2006 when supply will exceed demand, Perkins said.

“Hydro is a huge question mark,” he said. “Near term weather and hydro have probably pushed down prices more than they should be.”

Possible Northwest entry
With supplies forecast to be short in the Northwest, Perkins said Reliant may want to establish a “foothold” there to work in conjunction with existing assets in California and other states in West. In addition to the West, Perkins said Reliant views Florida as a short market, while the mid-Continent and Atlantic markets are short in the near term moving to adequately supplied in 2003-4. The company has acquired or built assets in both regions.

In Florida, “reserve margins are even shorter than in the West,” Perkins said. He noted Reliant is working with Florida utilities and presently has 60% of its capacity there contracted. “We are very comfortable with the unhedged portion,” he said.

Both the Texas markets and the Northeast are overbuilt with reserve margins exceeding 20%, Perkins said. However, excess power could be a plus to the regulated arm of Reliant which will become a net buyer when the market fully deregulates in Texas.

With natural gas prices selling for under$4/MMbtu down from $10/MMbtu this winter Shahid Malik, Reliant’s head of risk management, marketing, and trading, said industrials companies have begun to come back into the gas market. “I don’t think prices will fall below $3,” he said, and supply will continue to be tight.

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