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When Brian Cray graduated from St. John’s University School of Law in New York City in 1984, he went straight into the legal department at the local utility. Working at Consolidated Edison Company of New York, Inc., the city’s century-old supplier of electricity, gas, and steam, certainly wasn’t the fast track to money and fame. But Cray wanted to get to know one business inside out, in a way he never could at a big law firm. During the next 14 years, he diligently handled litigation and contracts, got married, and set about raising four children. In 1998 this quiet, orderly life was abruptly altered when the deregulation revolution hit Con Ed. Although the utility’s transmission and distribution business (its “wires and pipes” operation) would remain regulated, its monopoly on electricity generation would get pulled apart. This experience was hardly unique. Across the country, utility monopolies — a turn-of-the-century financier’s invention guaranteeing reliable electric service in exchange for freedom from public ownership and private competition — were being dismantled, their generating and energy services businesses shoved into the open market. One of Con Ed’s first steps into the world of competition was to bid for Western Massachusetts Electric Company, itself on the block thanks to deregulation. Con Ed won, and Cray found himself the sole in-house lawyer handling the $47 million acquisition. It was not only the largest purchase he’d ever worked on, it also was the company’s first major acquisition after deregulation — which meant Con Ed brass were watching closely. Add a very tight deadline, and suddenly Cray’s job was as pressured as that of any transactional lawyer at a huge law firm. Now 41, Cray laconically says that working on the deal was “really interesting.” His boss, Con Ed senior vice president and general counsel John McMahon, is a bit more expansive: “Our guy killed himself.” By the time phase one of the makeover was done, Cray had successfully handled the high-profile acquisition as the new, mini-general counsel for a newly created and competitive Con Ed subsidiary. While the adaptable Cray represents one type of lawyer in the new utility legal department, Susan Tomasky is another. As general counsel of the Federal Energy Regulatory Commission from 1993 to 1997, she had championed competition in electricity and gas markets. In 1997 Tomasky took a natural career step for FERC’s top lawyer: She became a partner in the energy practice at a major firm; for Tomasky it was the Washington powerhouse Hogan & Hartson. But soon she was wooed away by a client: In 1998, Tomasky became general counsel of Columbus’s American Electric Power Company, Inc., one of the nation’s largest investor-owned utilities. Less than two years later, Tomasky is running full tilt at AEP. Speaking very fast, with equal parts warmth, force, and intelligence, this candidate for a cover of Ms. magazine says that the new job lets her implement the massive changes she helped spark within the electric industry. It’s “incredibly exciting,” says Tomasky, 47, and “a great deal of fun.” Restructuring is moving at a different pace in the 25 states where it is happening, but the affected utility law departments all are going through essentially the same transformation. Pressure and demands are greater, but so too are opportunities. The insiders who can tolerate the change have a shot at new, high-stakes work and advancement. Those who can’t stand the heat are moving on; mergers may force a few more out. At the same time, new types of outsiders are getting lured into the business: An explosion of mergers and acquisitions has created an escalating demand for transactional and antitrust lawyers; and as some generating companies set up electricity trading operations, they urgently need commercial lawyers. Although the new, competitive subsidiaries are clamoring for counsel, utility law departments still have to service the regulated transmission-and-distribution side of the business. So general counsel are looking at ways to restructure departments for maximum effectiveness and efficiency. Keeping costs down is critical because competition on rates is now cutthroat. Comparison-shopping for electricity is a strange idea for most Americans. For nearly as long as electricity has been sold, we’ve purchased it from our local utility, a vertically integrated monopoly that served all households and businesses in a specific geographic area. For a century, these so-called natural monopolies consisted of three distinct parts: plants that generated electrons, heavy wires that transmitted the electrons at high voltage, and lower voltage wires that distributed them to customers. Electricity trading among these monopolies (let alone across national boundaries) was rare. All of this began to shift in the 1970s, as electricity demand slackened and the high cost of nuclear power, coupled with rising prices for fossil-fuel and natural gas, drove up rates. Prompted by the Arab oil embargo, President Jimmy Carter stuck solar panels on the White House roof, and Congress passed the Public Utility Regulatory Policies Act of 1978, which forced utilities to buy power from independent producers. The goal was to encourage the growth of companies that would produce renewable energy (like wind and solar). But the result was to crack the door open to competition in electric power generation. Back then, Susan Tomasky was a newly minted college graduate. Interested in public policy and considering, but undecided about going to law school, she took a job with the House Commerce Committee, which was then preoccupied with the oil embargo. Tomasky took to energy policy like a plug to an outlet. She so impressed Charles Curtis and Robert Nordhaus, then, respectively, chairman and general counsel of the Federal Energy Regulatory Commission, that they later hired her to work at FERC. In the late 1980s, the invention of small, gas-fired turbines made it economical for nonutility newcomers to get into the electricity business. Fed up with high rates, big industrial buyers pushed for reform. With the technology available and the successful example of natural gas deregulation to look to, Congress took action in 1992, passing the Energy Policy Act. The law opened the wholesale electric power market to competition and gave FERC the authority to ensure that competition was fair. By then, Tomasky had graduated from George Washington University Law School and risen through the ranks of private practice — her interest in energy policy still very much alive. In 1993 she returned to FERC, this time as the general counsel. As such, she was deeply involved with the agency’s landmark open-access transmission rule-making of 1996, which compelled all investor-owned transmission systems to offer competitors access to their wires on the same terms enjoyed by the owners. As it became clear that nonutility generators could produce cheaper power than utilities, states began to deregulate the electricity market. California led the way in 1994, with an ambitious plan that let retail customers (which, in this business, means all end-users: residential, commercial, or industrial) shop around for better rates. The idea behind deregulation is a competitive generation sector duking it out for market share across a continental transmission grid. Today’s buyers of electricity are often separated from generators by thousands of miles. And all of the complex, new transactions that make this possible require intensive legal work — of course. So when McMahon, Con Edison’s general counsel, describes deregulation as “sort of a boon” to lawyers, it’s sort of a huge understatement. In the past two years, his 75-lawyer department has raced to keep up with its client’s transformation. Traditionally, the big utilities have done most of their work in-house. “We like to keep it that way — and the company likes it,” says McMahon. Con Ed’s total annual spending on legal services is about $25 million, approximately 20 percent of which goes to outside counsel. As a result, McMahon says, “my guys” may be working too hard. But — he adds with a grin — “a busy lawyer is a happy lawyer.” The switch from serving a monopolistic client to one that’s just another contender in a fiercely competitive marketplace has meant significant adjustment for legal staffs. Some older utility lawyers are retiring, and it’s clear that others will be “merged” out of their jobs. But Cray’s story is typical of many who are in-house when the shake-up comes. They welcome the compelling new assignments, reinvigorated colleagues, and potential for greater responsibility, advancement, and compensation. But seizing these opportunities requires a new mind-set. “In the old utility days, you could take your time; the emphasis was on making it perfect,” says Harold Borden, a 25-year veteran of the law department at New Jersey’s Public Service Electric and Gas Company and now general counsel of PSEG Power LLC, an unregulated subsidiary. “Now time is of the essence.” This was certainly the case for Cray. When Con Ed’s bid for Western Massachusetts Electric Company was accepted in January 1999, the clock started to tick for a closing by July. In order to meet revenue projections, Con Ed had to own the generators during the peak summer period — when air conditioning sends electricity bills through the roof. Cray and company made the deadline. It was, says Cray in his low-key way, “satisfying.” Time pressure is not the only new element. Traditionally, because everything had to pass muster with exacting regulators, utility lawyers worked in “command and control mode” with the business staff; if the lawyers were anxious about a move, they nixed it — and prevailed. “That’s not an option anymore,” says Borden. Now lawyers have to tolerate more risk. “The regulatory culture tends to be more cautious,” says Edward Comer, vice president and general counsel of the Washington, D.C.-based Edison Electric Institute, the electric industry’s trade association. “The unregulated culture is more entrepreneurial.” Cray, for instance, went from serving familiar clients on routine matters (such as helping the purchasing department with contracts for fuel and trucks) to serving a newly created client on a matter larger and more complex than any he’d handled before. “It’s taking a very able contracts attorney,” says GC McMahon, “and transforming him into a dealmaker.” Cray is now primary counsel for Consolidated Edison Energy, Inc., the subsidiary that bought Western Massachusetts Electric and invests in, operates, and markets the output from generating facilities to wholesale buyers. He handles the legal side of a variety of multimillion-dollar deals, including the sale of power to wholesale buyers. As the lawyers move closer to the business people, GCs also have to rethink departmental structure, which historically has been very centralized. The Con Ed legal department serves the regulated business plus four unregulated subsidiaries (including Cray’s Con Ed Energy). As of the end of 1999, Con Ed had invested $284 million in these businesses, which sell retail energy services, wholesale energy, infrastructure development, and communications infrastructure respectively. Says McMahon: “We don’t want the business units to feel like they’re being served out of the back of a truck.” So he has appointed a senior lawyer to act as a “mini-GC” for each. All four business units “want to be independent,” says McMahon, but it’s the job of the mini-GCs to keep the affiliates in line with the parent company. After all, they too carry the Consolidated Edison name. Over at AEP in Ohio, Tomasky says that it’s still economical to keep her 39 lawyers under one roof, so to speak. But that very well might change as more of her staffers work more closely with specific business units. And that could mean, Tomasky predicts, that her staff may have to “get comfortable” with two compensation systems, in which lawyers working for the unregulated entities receive bonuses based on their businesses’ success — a brave new concept for utility lawyers. McMahon expresses distaste for such a system because he fears it might make lawyers on the regulated side feel “second-class.” Con Ed has, however, recently instituted a bonus tied to company performance. Compensation for in-house lawyers at utilities has tended to be at the low end of the in-house spectrum. According to consultant Altman Weil, Inc.’s “2000 Law Department Compensation Benchmarking Survey” ["Good Times Keep On Rollin'," March] the median cash compensation (salary plus bonus) for electric and gas utility general counsel is $260,000. The median for management attorneys is $138,505, for “mature” lawyers $105,040, and for junior lawyers $79,437. But both Tomasky and McMahon predict that as they compete for legal talent in a wider marketplace, salary levels will increase. The utility GCs are beginning to fish for lawyers in the bigger pool because deregulation is changing the mix of skills their departments need: Suddenly there’s a pressing demand for transactional, antitrust, and commercial lawyers. Antitrust issues have become paramount at American Electric Power. In addition to going through restructuring in ten states, AEP has spent more than two years on a merger with Central and South West Corporation. The Dallas-based public utility holding company owns four electric operating subsidiaries, which together serve 1.7 million customers in four states, as well as international energy operations and nonutility subsidiaries. Approvals from FERC and the Securities and Exchange Commission are still pending. Tomasky says that she “can’t begin to guess” the total number of hours in-house lawyers have put into the deal. The majority of the work, however, was done by outside counsel. New York’s Simpson Thacher & Bartlett was the lead firm, except on regulatory matters, on which Washington, D.C.’s Steptoe & Johnson led the way. D.C.’s Hogan & Hartson worked on antitrust matters, and both Chicago’s Sidley & Austin and D.C.’s Van Ness Feldman provided environmental counsel and litigation work. And, says Tomasky, AEP’s in-house lawyers were “very, very active” in litigation management. Because AEP has set up a trading organization, Tomasky says she also has “a crying need” for commercial lawyers. The utility currently has four and immediate plans to hire two more. From there, Tomasky expects growth in this area to be “steady.” AEP, which last year had $6.9 billion in revenue, currently provides energy to 3 million customers in seven states. Like Con Ed, the huge utility also needs deal lawyers as it undertakes mergers and acquisitions in search of economies of scale. AEP has holdings in Australia, China, and the United Kingdom as well as subsidiaries that provide power engineering, energy consulting, and energy management services worldwide. Domestically and internationally, AEP has a core group of seven transactional lawyers, and Tomasky says that it’s likely that she’ll be hiring more. The Northeast-focused Con Ed also is superbusy; it’s been buying and selling infrastructure at a furious pace. In a move designed to expand its transmission and distribution business, the company acquired Orange and Rockland Utilities, Inc., which serves southeastern New York State and adjacent parts of New Jersey and Pennsylvania, for $790 million. About the same time Con Ed sold off three “bundles” of generating facilities in New York City, each to a different buyer, to jump-start a wholesale electricity market there; total revenue from those sales was $1.65 billion. The regulatory review for these transactions is arduous. The Orange and Rockland merger, for instance, required approval by three states and four federal agencies and consumed 3,500 man-hours of law department time. Although Con Ed retained New York’s Cravath, Swaine & Moore as merger counsel and D.C.’s Steptoe & Johnson to help with the federal regulatory filings, the majority of the work was done in-house. The whole process took 14 months. And there wasn’t any time to relax at the end. The Western Massachusetts Electric Company deal was under way, and in October 1999 Con Ed announced plans for the $7.5 billion acquisition of Northeast Utilities, which serves 1.7 million customers in six states. Con Ed’s outside counsel for this megadeal will be the same, says McMahon; but the goal here too is to keep as much of this work in-house as possible. Con Ed also has a pressing need for more contracts lawyers. So where will GCs be looking, and what are they looking for? McMahon, who came up through the ranks himself, likes “growing” his own: hiring recent graduates and training them. But he’ll also be looking for experienced lawyers and turning to recruiters and plain old word of mouth for leads. Tomasky says that AEP has not hired anyone straight out of school for a long time, but she doesn’t rule it out. Recently she’s made one “important hire” from a firm and also snagged three lawyers from competitors to work on AEP’s wholesale marketing and trading activities. According to PSEG’s Harold Borden, lawyers are also “migrating in” to utility law departments from other deregulated businesses, such as telecommunications. Absorbing other companies also is swelling the ranks. Con Ed offered jobs to everyone in Orange and Rockland’s eight-lawyer department. Three accepted, but Orange and Rockland senior vice president, general counsel, and secretary G.D. Caliendo took his golden parachute and retired, as did his assistant general counsel; one lawyer returned to the firm where he’d practiced prior to joining O&R another left the law altogether; and yet another took time off to have a baby. Those who moved to Con Ed had a relatively easy transition. Not only did they already have working relationships with Con Ed lawyers, thanks to facilities the two utilities had co-owned, they also lived within commuting distance of Manhattan. The merger with Northeast Utilities, expected to close at the end of July, will be more complex, says McMahon. With about 30 lawyers, Northeast’s department is bigger, and its headquarters, in Berlin, Connecticut, is over 100 miles away from Con Ed’s. Although McMahon is quick to point out that lawyers will continue to be needed in Connecticut and likely other New England locations, distance is an irreducible fact. But dragging a 118-year-old industry up to market speed in less than a decade is bound to create strain as well as opportunity. Cray’s longer days have him grumbling about his 90-minute commute home to the suburbs north of New York City. And Tomasky hates when business trips take her away from her 5-year-old daughter. But no matter how demanding the new market may get, says Tomasky, “you still have to keep the lights on.”

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