Sector Insight

Due to its specialised nature, the energy and utilities sector has traditionally kept its legal work in-house, but with the lure of hiked-up City salaries, all that is changing. Dearbail Jordan reports.

The energy and utilities sector is just starting to emerge from one of its most intensive periods of consolidation and change.

In 1998, energy companies were hit by a sudden drop in oil prices, forcing many of them to start restructuring programs.

The UK's second largest independent oil and gas exploration company Lasmo slashed staff numbers by 25 per cent and off-loaded a number of assets. And BP, once the darling of the sector after its £67.7bn takeover of Amoco at the beginning of 1998, spent much of the following year in limbo after the US Federal Trade Commission put the brakes on its £15bn merger with Atlantic Richfield.

Utility companies did not fair much better. Towards the end of 1999, Ian Byatt, the water industry regulator, introduced plans for 1 April 2000 to cut household prices by 12.3 per cent, causing companies to come under pressure to slash their operating costs.

And companies that deal in electricity and water, such as Hyder and United Utilities, were served a double blow after the energy watchdog, the Office of Gas and Electricity Markets, unveiled its intention to cut domestic bills by £15.

Peter Bevan, group general counsel at BP Amoco, believes the changes have had a knock-on effect for law firms that count energy and utility companies among their clients.

He says: “Apart from the reconstruction of the sector, there has been significant activity which has impacted on the legal side.”

Sam Dunkley, deputy general counsel for upstream at BG, the old trading arm of British Gas which is demerging from regulated pipeline monopoly Transco, says: “Regulation is a growth area because of the dramatic erosion in terms of rates.”

Hyder, which is in the throws of being taken over by Japanese investment bank Nomura Securities, turns to senior regulatory adviser and ex-civil servant Malcolm Nicholson at Slaughter and May for regulatory matters.

When choosing firms, one in-house lawyer says: “Regulatory law is important. I would start with someone who has a background in the industry so you don't have to spend time explaining things.”

However, until recently energy and utility companies tended to handle the majority of their legal work in-house, purely because that was where the specialist expertise was based.

Dunkley says that although there has been a change in outsourcing work in the downstream and corporate areas, upstream work is still handled largely internally.

He says: “Upstream is a niche practice and is not an area that firms have got into.”

One consequence of the specialist nature of the sector is that there is a growing demand for energy lawyers in private practice.

Bevan says: “There are a number of firms that are beginning to develop their energy practices. It was a big area 10 years ago, then it slowed down but it has been boosted again over the past two years.”

And the firms are poaching from in-house departments in order to fuel their expansion.

One in-house lawyer says: “The people we use have moved from in-house departments to private practice.

“I have seen that trend develop. The additional experience is in-house.”

Among those who have made the jump are Rafique Kahn, who joined CMS Cameron McKenna from British Gas, and Garry Pegg, joint managing partner at Leboeuf Lamb Greene & MacRae, previously of Chevron and BHP who has been joined recently by Anthony Golding from Lasmo.

One lawyer says: “One of the features of the sector is that these companies are producers of strong legal departments. It is the same thing that you find in banks. It is a reflection of the quality of the work the in-house departments need to produce.”

And the recent salary increases for newly qualifieds and associates in the City will make it more difficult for the sector to recruit and retain high-quality lawyers to in-house positions.

Although BG has not yet been affected, recruiting 10 lawyers in the past year, Dunkley says: “If it goes on like this it will.”

For the moment, downstream and corporate work companies have a better choice of firms than upstream and the methods for putting together a panel are the same as in any other sector.

Geoff Williams, director of legal affairs at Hyder, says that when he joined the firm six years ago, Allen & Overy was the main firm for the company. But he changed to Slaughter and May because he had used the firm in his previous post at Bass.

He says: “We just went to see it. I have never been a fan of beauty parades and I have never done them. I am not saying they are wrong but they just do not appeal to me.”

Williams prefers a more personal approach to choosing his firms. The company employed the services of Simmons & Simmons in the United Arab Emirates on the basis of personal recommendation.

He says: “Someone knew [the firm]. We have people overseas and they probably met someone who recommended them over a gin and tonic.”

Williams adds: “We want two things of our firms. Do they do what we want them to do? As long as they do and they are not wildly uneconomic, we are happy.”

At the same time, he employs a strict policy on the use of firms. “We have a system whereby no one in the group goes to see a lawyer without me giving the say-so,” he says.

At BG, Dunkley uses Shearman & Sterling, Linklaters & Alliance, Allen & Overy and Skadden Arps Slate Meagher & Flom. He says the panel has been in place since 1996 but is about to come under review.

However, the list of firms has been sitting in his in-tray for a number of months waiting for his perusal. Dunkley says he has not got round to it because of the demerger and because the existing combination of firms has worked well over the past four years.

“We haven't made any plans to do a general beauty parade, we have been pretty happy with the panel,” he says. “Linklaters has a stranglehold on the corporate work while Skaddens and Allen & Overy advise on the project work.”

Like Williams, Bevan does not use beauty parades. “I don't like them. I do not think it is necessary to do that. I ask people to send in quotes,” he says. “I sometimes think that you can get some feel for a firm through its marketing, or we rely on recommendations from one of our established banks.”

Bevan says that the company tends to keep most of its work in-house and outsources about 20 per cent to external advisers.

He says: “It is more of an ad hoc thing. We will typically go to a firm when we have a need for expert advice. We will go outside our preferred list of suppliers if there is a conflict.”

While BP Amoco does not have a specific policy on reviewing its firms, Bevan says he uses an electronic “little black book” that the lawyers in the department update with information about firms they have used.

He says he is hoping to make the system more sophisticated in the future, especially in monitoring the firms it uses for international coverage.

David Flynn, company solicitor at Viridian, which uses both Herbert Smith and CMS Cameron Mckenna, takes a more simplistic approach to the process, preferring to interview firms before instructing them.

On the merits of conducting a yearly review, one in-house lawyer says: “I think that an on-going relationship is more important and produces a good service.

“You are not always going to use the same people but variety is part of the job. I do not think an in-house department is doing its job if it goes to the same people.”

He says that when choosing his law firms, he uses “the normal tools of marketing, like seminars”.

However, he adds: “We pick a problem, decide the people to take care of it and then make a phone call. As a group we will talk about it.”

COMPANIES IN SECTOR

FTSE 100 ranking: 2

Market capitalisation: £134.3bn

Firms include: Linklaters & Alliance, Morgan Cole and Sullivan & Cromwell.

BP Amoco's takeover of Arco was approved in April. The company recently sold Altura Energy, an exploration and production joint venture with Shell Oil, to Occidental Petroleum for $3.6bn (£2.4bn).

FTSE 100 ranking: 31

Market capitalisation: £10.6bn

Firms include: Freshfields, Rowe & Maw, Shepherd & Wedderburn, McGrigor Donald, MacRoberts and Biggart Baillie.

While Scottish Power's financials for the year ending 31 March is in line with market expectations, the utility giant intends to slash costs at its US-based business PacifiCorp. The move is intended to bolster operating profits in the face of regulatory price cuts.

FTSE 100 ranking: 33

Market capitalisation: £9.9bn

Firms include: Linklaters & Alliance, Ashurst Morris Crisp, Herbert Smith, Lovells, Pinsent Curtis, Eversheds and DLA.

Centrica is well known as being the former retail arm of British Gas. It intends to diversify its business by launching a telephone and online service in September. It acquired the Automobile Association for £1.1bn last year.

FTSE 100 ranking: 80

Market capitalisation: £3.9bn

Firms include: Clifford Chance, Ashurst Morris Crisp, Denton Wilde Sapte and Linklaters.

Following its decision to demerge its UK and international power businesses last year, National Power is writing down £1.37bn of debt to prepare for the launch of the separate entities on 2 October. The company has sold two of its domestic power stations to British Energy and NRG Energy.

FTSE 100 ranking: 87

Market capitalisation: £3.5bn

Firms include: Garretts, the legal arm of Arthur Andersen.

Another company to suffer at the hands of price-cutting regulators, United Utilities responded by announcing 1,000 job cuts. More recently the group unveiled plans to float Norweb Telecom and sell Norweb Contracting to Alstrom SA.

FTSE 250 ranking: 3

Market capitalisation: £3.3bn

Firms include: Freshfields, Wragge & Co, Simmons & Simmons, Ashurst Morris Crisp, Shearman & Sterling, Milbank Tweed Hadley & McCloy, White & Case, Sullivan & Cromwell and Swidler Berlin.

Powergen is continuing the trend for consolidation by acquiring US-based LG&E Energy for £3.4bn. The group recently bought generating capacity in Northern Ireland and has entered the e-commerce market through a joint venture with Affinity Internet Holdings. The two companies will develop methods of billing online.

FTSE 250 ranking: 102

Market capitalisation: £830.2m

Firms include: Clifford Chance, Lovells, Rowe & Maw, Masons, Bevan Ashford, MacRoberts, Morgan Cole, Cravath Swaine & Moore and Morgan Lewis & Bockius.

British Energy recently announced a profit warning, citing shutdowns at its two nuclear power stations and cuts in electricity prices as the factors behind it. But it has recently moved into the online arena by purchasing a stake in HomeDirectory.com.