Spark Energy has grown exponentially in the last few years, with ten major acquisitions since July 2014. Behind the scenes of these acquisitions, and at the helm of the legal team, is Gil Melman, vice president and general counsel, who has been a vital contributor to the company’s growth and success.
As Melman explains, the legal team aims to do as much of the work in-house as possible. But with a modestly sized staff, this is no small feat. Operating in nineteen states, each with its own set of regulations governing the electric market, Melman and his staff are responsible for constantly tracking regulatory developments in each state and ensuring compliance. Needless to say, it’s a lot of responsibility. And on top of that, there are the usual corporate obstacles—governance, SEC compliance, and HR matters—to attend to as well.
But Melman’s decade-plus experience in the legal departments of two other energy companies and a venture capital firm, as well as a stint as an M&A specialist with a corporate law firm, prepared him well for the challenges of building a company in a new area of the electric industry. However, there are aspects of the work at Spark Energy that are novel and make the work even more engaging.
For example, most competitors outsource much of the legal work surrounding M&As, but Spark Energy takes an alternative approach. “Doing most of the work in-house is part of our business model,” Melman explains.
One of the benefits of this strategy is lower legal costs, and unlike the old electric utility model of regulated monopolies, every source of operational savings is essential. In Spark Energy’s market space, efficiency, along with customer service, will be crucial to which companies survive, Melman says.
In addition, upper management is committed to operating lean, so it’s vital for Melman to use his resources efficiently. Hiring the right people with the expertise for supporting acquisitions and using outside counsel judiciously is the guiding strategy. “We typically put one or two of our lawyers on an acquisition, and we might pull in an outside lawyer to help us with specific tasks,” Melman explains.
He’s also developed an approach to hiring outside counsel that economizes the budget. Rather than relying on local firms for help, he engages with lawyers in the less expensive New Orleans market. “This way, I don’t have to pay for Houston office space,” he says. “I can get $600 worth of service for half of that price in New Orleans.” While Houston is a hub of the energy industry, and has many law firms supporting the sector, there are also capable law firms in New Orleans that are well-versed in energy markets.
Much of the legal work for acquisitions amounts to identifying risks; this includes poring over contracts target companies have with their energy providers. The aim is to determine if any commitments or termination fees could create hurdles in the acquisition. Other red flags could include clauses that restrict where the target company is allowed to sell its services.
Litigation risks, such as class action lawsuits, are also a significant issue in the energy sector. For example, the target might have a case pending where customers argue that they didn’t fully understand the product and weren’t properly informed about its parameters. “Hypothetically, we could have a case where a vendor that sells products on the company’s behalf ignored training or wasn’t trained well,” Melman says.
This is a risk that the legal team must also mitigate in the regular course of business—not just when assessing a potential acquisition. “We have to take a proactive approach to make sure customer communications and regulatory compliance are top-notch,” Melman says. This work includes reviewing marketing materials and telephone scripts and monitoring telephone calls to ensure that customer service representatives and telemarketers adhere to approved communication protocols.
To add to the mix of regulatory compliance, active lawsuit management, and M&A, Melman’s practice includes acting as secretary to the company’s board of directors and managing the legal side of the company’s SEC reporting. Melman has a six-person compliance department that, among other duties, verifies that training materials are up to date, and certifies that the materials are being used and that workers are properly trained. To stay on top of regulatory trends, the head of that department receives updates from outside counsel in every state where the company does business. Outside counsel then stays abreast of regulatory changes in their area and convey that information to in-house compliance specialists.
While having a small legal staff puts an abundance of responsibility on individuals, which can be stressful at times, it also allows for a close-knit, informal management style to flourish. Melman fosters an open-door policy where ad hoc communication is encouraged. With frequent communication among staff, Melman is able to track how projects are developing and can provide ongoing guidance. It’s an approach that would not work for a larger legal department, but it suits his personal style and meets the company’s needs.
The market sector is undergoing an intense period of consolidation, he notes. In the future, he believes, the competitive supplier market will be less of a commodity market and will be driven by how well the remaining players provide modest differentiation and customer service. Regulations will of course impact how the industry serves customers and interacts with them. Melman’s staff may then spend less time on acquisitions and more on guiding customer service and marketing. Adjusting to new market conditions is, and will continue to be, what the new, deregulated electric utility market demands.
***
Morgan Lewis:
“As General Counsel for Spark Energy, Gil has unparalleled legal experience and is an exceptional strategic thinker who excels at developing valuable solutions and delivering on what he promises. We truly enjoy working with Gil.”
—Michelle Pector, Partner
