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In the sometimes-shocking world of energy services, keeping a solid footing and steady focus can mean the difference between survival and lights out. Houston-based Reliant Resources Inc., an electricity and energy services wholesale and retail provider, focuses on the competitive segments of the electric power industry, marketing those services under the Reliant Energy brand name. Reliant Resources provides retail services to more than 1.6 million electricity customers in Texas and aims to become one of the country’s largest commercial gas and power merchants at the wholesale level. Recently, chairman and CEO Steve Letbetter and GC Hugh Rice Kelly shared with Texas Lawyer Associate Editor Cristina Smith some of their thoughts on their business, the aftermath of Enron Corp. and the California power crisis. Texas Lawyer: What did you do prior to joining Reliant Resources and how was this experience helpful? Hugh Rice Kelly, general counsel and corporate secretary, Reliant Resources Inc.: I joined Reliant in 1984. I had been a trial lawyer for 10 years and had branched into utility regulation for the last two years prior to going with Reliant, which was then Houston Industries. The prime operating company of HI was Houston Lighting & Power Co. (HL&P). TL: What in particular made moving in-house an attractive choice for you? Kelly: The reason I moved in-house was that in a practical sense I had no real choice. I greatly enjoyed my work for HL&P and was invited to become the general counsel. I realized that if I wanted to continue doing the work I enjoyed I would have to take the job, even though at the time I would just as soon have remained with Baker Botts. As things turned out, however, I’m very glad I made the move. TL: What did you look for when hiring a general counsel? Steve Letbetter, chairman and chief executive officer, Reliant Resources Inc.: The most important factor is to get a good lawyer. I consider a good lawyer somebody who understands both the business and the law and who can work effectively across the range of the company’s activities. TL: What characteristics were most important? Letbetter: The most important characteristic is having the legal ability to identify the right direction when legal trouble hits. Also important is the ability to understand the business dimension of our ongoing activities. TL: What kinds of issues have you had to handle? Kelly: The kinds of issues I’ve had to handle over the years began at the time energy prices skyrocketed in the late 1970s and early ’80s and then collapsed in the mid-’80s. This caused all kind of havoc for utilities, which at that time were following the practice of making very long-term fuel arrangements. When fuel prices collapsed, it became imperative to obtain relief from the long-term, high-priced gas and coal contracts to which HL&P had become committed during the preceding period. It took us years to finally work through this thicket of problems. During that time and accelerating toward the late ’80s and early ’90s was the third phase of the fuel-driven train wreck. This came in the form of highly contested rate cases. … [W]e also prosecuted a series of appeals of adverse Texas Public Utility Commission rulings. Several of these were ultimately decided at the Texas Supreme Court. We prevailed in all of those appeals. When we concluded those difficult concerns, the looming probability that our industry would be deregulated came to dominate our legal work. The company had long opposed deregulation, but by the mid-’90s it became clear that deregulation was going to happen whether we were on board or not. We therefore adopted the position that if deregulation was going to happen, it should be done in a responsible way. We participated actively in the 1997 Texas legislative session and were especially active in the 1999 session, at which S.B. 7, the electric deregulation statute, was finally passed. From the time of deregulation forward, life has been even more hectic than before. We concluded that the best way to handle the matter was to split our company into two pieces, which in retrospect seems like building the pyramid at Giza. We finally got that finished and launched our new unregulated company, which I joined. This is Reliant Resources. Our initial stock offering sold for $30 per share, and we were very optimistic for the future of this business. While we are still optimistic, that viewpoint has been tempered by the terrible situation caused by California’s … crisis and the almost total collapse of the industry following the implosion of Enron Corp. Our stock currently sells for $5. In the aftermath of Enron’s collapse, the energy industry was found to have strayed pretty far from the ideals of a free marketplace. … In 2001, the firestorm that erupted in California … could only be described as a searing experience. This is not yet over, although we now seem to be on the downhill slope. At the present time we are moving on all fronts to defeat the numerous and meritless lawsuits pending against us in California as well as to work out problems with the federal regulators on pending proceedings. We have ongoing matters pending at the Securities Exchange Commission, the Federal Energy Regulatory Commission, the Commodities and Futures Trade Commission and with two federal prosecutors, one in New York and one in San Francisco. Despite the sound of this, we have strong reasons to believe that within a few years all of these matters will be resolved, and we’ll be in a position to recover and prosper producing electricity. TL: What is the best thing about your job? Kelly: The best thing about my job is that there is never a dull moment. I have brilliant people to work with within the company, outstanding lawyers within our legal department, and equally outstanding lawyers with the many outside law firms we have employed in the numerous legal battles of the last 20 years. TL: How many attorneys do you supervise and what is the level of your interaction? Kelly: Thirty-five lawyers located in Houston, Washington and Pittsburgh. In the department, I interact primarily with a small group of lawyers that report directly to me or who are in charge of major aspects of our practice. I wish I had more time to be more thoroughly involved in the activities of all of the lawyers in the department, but I have to split my time between the inside lawyers, the outside lawyers and business executives. TL: What are your short-term and long-term goals with regard to your legal department? Kelly: The short-term goal of the legal department is to weather the storm we are currently engaged in. It is not easy to describe this process, but it is primarily driven by external events and calls for a judicious balancing of offensive and defensive strategies. Long-term goals of the department are to begin working on more of a planned basis rather than reacting to forest fires. To get to that point, we’ll have to put the forest fires out first. TL: What impact, if any, has the Enron debacle had on how you do business? Kelly: The impact of the Enron debacle could not have been more profound, since we are directly involved in the same industry. My review of the past 20 years covers most of these points. I should add that the deregulation issue and its immediate ancestors, the cogeneration and independent power movements, were principally led by Enron. We had many political and regulatory fights with Enron but eventually made our peace with them. Not long thereafter came the Enron collapse and all of the grave consequences to our industry. TL: What role does the GC play in key business decisions? Letbetter: This depends on the nature of the decision. As an electric provider, we remain subject to a very substantial level of regulation, so the general counsel and his staff are inevitably involved in most of our key business decisions. TL: What is your weekly interaction with the legal department, on average? Letbetter: My weekly interaction with the legal department, which is pretty much every day, is primarily with Kelly … and his deputy, Mike Jines. This is a more or less ongoing dialogue on a broad range of matters. TL: How do you attract and motivate your legal staff? Letbetter: The job of attracting and motivating the legal staff is performed by the general counsel and his managers. We supply the work, which I know they find very challenging.

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