EXHIBIT 99(b).REI

ITEMS INCORPORATED BY REFERENCE FROM RELIANT ENERGY MARCH 31, 2001 FORM 10-Q

(2)  DERIVATIVE FINANCIAL INSTRUMENTS

     Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS No. 133), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement requires that derivatives be recognized at fair value in the balance
sheet and that changes in fair value be recognized either currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
If certain conditions are met, an entity may designate a derivative instrument
as hedging (a) the exposure to changes in the fair value of an asset or
liability (Fair Value Hedge), (b) the exposure to variability in expected future
cash flows (Cash Flow Hedge) or (c) the foreign currency exposure of a net
investment in a foreign operation. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in earnings in the period it occurs.

     Adoption of SFAS No. 133 on January 1, 2001 resulted in an after-tax
increase in net income of $61 million and a cumulative after-tax increase in
accumulated other comprehensive loss of $252 million. The adoption also
increased current assets, long-term assets, current liabilities and long-term
liabilities by $703 million, $252 million, $805 million and $340 million,
respectively, in the Company's Consolidated Balance Sheet. The Company also




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reclassified $788 million related to the Company's Zero-Premium Exchangeable
Subordinated Notes (ZENS) due to the adoption from the current portion of
long-term debt to indexed debt securities derivative. During the three months
ended March 31, 2001, less than $1 million of the initial transition adjustment
recognized in other comprehensive income was realized in net income.

         The application of SFAS No. 133 is still evolving and further guidance
from the Financial Accounting Standards Board (FASB) is expected. The FASB
released tentative guidance in April 2001 on three issues that impact our
industry. The FASB concluded in its tentative guidance that contracts subject to
"bookouts," a scheduling convenience used when two utilities have offsetting
transactions, cannot qualify for the normal purchases and sales exception. The
FASB also released tentative guidance that will prohibit option contracts on
electricity to qualify for the normal purchases and normal sales exception.
Lastly, the FASB issued tentative guidance that forward contracts containing
optionality features which modify the quantity delivered cannot qualify for the
normal purchases and sales exception. The tentative guidance issued by the FASB
is subject to a comment period which ends on June 1, 2001. If the tentative
guidance is unchanged, the Company is required to adopt this guidance as of July
1, 2001. The Company is in the process of determining the effect of adoption.

     The Company is exposed to various market risks. These risks are inherent in
the Company's financial statements and arise from transactions entered into in
the normal course of business. The Company utilizes derivative financial
instruments to mitigate the impact of changes in electricity, natural gas and
fuel prices on its operating results and cash flows. The Company utilizes
cross-currency swaps and options to hedge its net investments in foreign
subsidiaries, interest rate swaps to mitigate the impact of changes in interest
rates and other financial instruments to manage various other market risks.

     Trading and marketing operations often involve market risks associated with
managing energy commodities and establishing open positions in the energy
markets, primarily on a short-term basis. These risks fall into three different
categories: price and volume volatility, credit risk of trading counterparties
and adequacy of the control environment for trading. The Company routinely
enters into futures, forward contracts, swaps and options to hedge purchase and
sale commitments, fuel requirements and inventories of natural gas, coal,
electricity, oil, emission allowances, weather derivatives and other commodities
and to minimize the risk of market fluctuations in its trading, marketing, power
origination and risk management operations.

(a)  Energy Trading, Marketing and Price Risk Management Activities.

     The Company offers energy price risk management services primarily related
to natural gas, electric power and other energy related commodities. The Company
provides these services by utilizing a variety of derivative financial
instruments, including (a) fixed and variable-priced physical forward contracts,
(b) fixed and variable-priced swap agreements, (c) options traded in the
over-the-counter financial markets and (d) exchange-traded energy futures and
option contracts (Trading Derivatives). Fixed-price swap agreements require
payments to, or receipts of payments from, counterparties based on the
differential between a fixed and variable price for the commodity.
Variable-price swap agreements require payments to, or receipts of payments
from, counterparties based on the differential between industry pricing
publications or exchange quotations.

     The Company applies mark-to-market accounting for all of its energy
trading, marketing and price risk management operations. Accordingly, these
Trading Derivatives are recorded at fair value with net realized and unrealized
gains (losses) recorded as a component of revenues. The recognized, unrealized
balances are included in price risk management assets/liabilities.

(b)  Non-Trading Activities.

     Cash Flow Hedges. To reduce the risk from market fluctuations in revenues
and the resulting cash flows derived from the sale of electric power and natural
gas and related transportation, the Company enters into futures transactions,
forward contracts, swaps and options (Energy Derivatives) in order to hedge some
expected purchases of electric power, natural gas and other commodities and
sales of electric power and natural gas (a portion of which are firm commitments
at the inception of the hedge). Energy Derivatives are also utilized to fix the
price of compressor fuel or other future operational gas requirements and to
protect natural gas distribution earnings and cash flows against unseasonably
warm weather during peak gas heating months, although usage to date for this
purpose




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has not been material. The Energy Derivative portfolios are managed to
complement the physical transaction portfolio, reducing overall risks within
management-prescribed limits.

     During the three months ended March 31, 2001, the Company entered into
interest-rate swaps in order to adjust the interest rate on $375 million of its
floating rate debt. In addition, as of March 31, 2001, the Company's European
Energy segment has entered into financial instruments to purchase approximately
$120 million to hedge future fuel purchases payable in U.S. dollars.

     The Company applies hedge accounting for its derivative financial
instruments utilized in non-trading activities only if there is a high
correlation between price movements in the derivative and the item designated as
being hedged. This correlation, a measure of hedge effectiveness, is measured
both at the inception of the hedge and on an ongoing basis, with an acceptable
level of correlation of at least 80% for hedge designation. If and when
correlation ceases to exist at an acceptable level, hedge accounting ceases and
mark-to-market accounting is applied. During the three months ended March 31,
2001, the amount of hedge ineffectiveness recognized in earnings from
derivatives that are designated and qualify as cash flow hedges was immaterial.
No component of the derivative instruments' gain or loss was excluded from the
assessment of effectiveness. If it becomes probable that an anticipated
transaction will not occur, the Company realizes in net income the deferred
gains and losses recognized in accumulated other comprehensive loss. During the
three months ended March 31, 2001, there were no deferred gains or losses
recognized in earnings as a result of the discontinuance of cash flow hedges
because it was no longer probable that the forecasted transaction would occur.
Once the anticipated transaction occurs, the accumulated deferred gain or loss
recognized in accumulated other comprehensive loss is reclassified to net income
and included in the Company's Statements of Consolidated Income under the
captions (a) fuel expenses, in the case of natural gas transactions, (b)
purchased power, in the case of electric power purchase transactions, (c)
revenues, in the case of electric power sales transactions and (d) interest
expense, in the case of interest rate swap transactions. Cash flows resulting
from these transactions in Energy Derivatives are included in the Company's
Statements of Consolidated Cash Flows in the same category as the item being
hedged. As of March 31, 2001, current non-trading derivative assets and
liabilities and corresponding amounts in accumulated other comprehensive loss
are expected to be reclassified to net income during the next twelve months.

     The maximum length of time the Company is hedging its exposure to the
variability in future cash flows for forecasted transactions excluding the
payment of variable interest on existing financial instruments is five years.
The maximum length of time the Company is hedging its exposure to the payment of
variable interest rates is approximately five years.

     Hedge of Net Investment in Foreign Subsidiaries. The Company has
substantially hedged its net investment in its European subsidiaries through a
combination of Euro-denominated borrowings, foreign currency swaps and foreign
currency forward contracts to reduce the Company's exposure to changes in
foreign currency rates. During the normal course of business, the Company
reviews its currency hedging strategies and determines the hedging approach
deemed appropriate based upon the circumstances of each situation.

     The Company records the changes in the value of the foreign currency
hedging instruments and Euro-denominated borrowings as foreign currency
translation adjustments as a component of stockholders' equity and accumulated
other comprehensive loss. The effectiveness of the hedging instruments can be
measured by the net change in foreign currency translation adjustments
attributed to the Company's net investment in its European subsidiaries. These
amounts generally offset amounts recorded in stockholders' equity as adjustments
resulting from translation of the hedged investment into U.S. dollars. During
the three months ended March 31, 2001, the derivative and nonderivative
instruments designated as hedging the net investment in its European
subsidiaries resulted in a gain of $155 million which is included in the balance
of the cumulative translation adjustment.

     Other Derivatives. Upon adoption of SFAS No. 133 effective January 1, 2001,
the Company's indexed debt securities obligations related to its ZENS obligation
was bifurcated into a debt component valued at $122 million and an embedded
derivative component valued at $788 million. Changes in the fair value of the
derivative component are recorded in the Company's Statements of Consolidated
Income. Changes in the fair value of the Company's Investment in AOL Time Warner
Inc. common stock should substantially offset changes in the fair value of the
derivative component of the ZENS.



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     In December 2000, the Dutch parliament adopted legislation allocating to
the Dutch generation sector, including a subsidiary of the Company, N.V. UNA
(UNA), financial responsibility for various stranded costs contracts and other
liabilities. The legislation became effective in all material respects on
January 1, 2001. In particular, the legislation allocated to the four Dutch
generation companies, including UNA, financial responsibility to purchase
electricity and gas under an import gas supply contract and three electricity
import contracts. The gas import contract expires in 2015 and provides for gas
imports aggregating 2.283 billion cubic meters per year. These contracts are
derivatives pursuant to SFAS No. 133 due to the pricing indices. As of March 31,
2001, the Company has recognized $326 million in long-term non-trading
derivative liabilities for UNA's portion of these stranded costs contracts. For
additional information regarding UNA's stranded costs and the related
indemnification by former shareholders of these stranded costs, see Note 11(e).

     Subsequent to March 31, 2001, the Company has entered into interest rate
swaps to fix the rate on $1.3 billion of the Company's floating rate debt, which
expire in 2002. The Company has not designated these derivative instruments as
hedges. Changes in the fair value of the swaps will be recorded in the Company's
Statements of Consolidated Income.

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