U.S. Representative Pete Olson of Sugar Land, a member of the House Subcommittee on Energy and Power, proclaimed Luminant to be "one of the latest victims of an agency that is out of control."

Texas Attorney General Greg Abbott, who many predict will succeed Perry (if he doesn't seek re-election), sued the agency to halt the rule.

While the pols were scapegoating the EPA, they ignored a plain, painful reality: Power supplies in Texas have not kept up with the state's booming population. Our deregulated market has given us higher electric rates, but it hasn't been enough for power producers to see the potential profits they need to justify building pricey new generation plants. And Luminant? During the big freeze, its parent company, Energy Future Holdings — the company that merged with TXU in 2007 through the largest leveraged buyout in history — was sweating a refinancing it hoped would extend the maturities on nearly $18 billion in debts it could not afford to pay.

When the Observer asked the business manager of the International Brotherhood of Electrical Workers Local 2337, which represents the men and women running Luminant's plants, whether cost-cutting contributed to the failure of four of its units during that winter storm, Randall Pierce replied succinctly: "Yes."

For the moment, though, Luminant had managed to whip state politicos into a fearful frenzy. And while all eyes were focused on the agency at the center of it, few were paying attention to Luminant's books, or to a system in which Texas is nearly isolated, and where blackouts could become a fact of life.


Goldman Sachs and Kohlberg Kravis Roberts, the latter the investment firm that in 1988 bought RJR Nabisco in what was at the time the largest leveraged buyout in history, lusted after TXU in 2006, and it was easy to see why.

The company's vitals were strong. At that moment, the energy market beamed beatifically on its fleet of coal-fired power plants. That's because in Texas' ERCOT region, the price of natural gas — which fires the biggest chunk of the state's power plants — sets the market price for electricity. After Hurricane Katrina ravaged Gulf Coast pipelines and pinched off supply, that price soared as if it might never stop. TXU had an army of coal-fired plants with low-fixed costs and a ready supply of lignite coal that allowed the company to produce electricity for a fraction of what it could sell it for. On paper, those plants probably looked like they could print money.

In April 2006, just a few days before Earth Day, TXU announced plans to build 11 more coal-fired plants, virtually guaranteeing that the DFW area would never comply with federal air quality standards. Environmentalists and a coalition of Texas mayors vowed to stop them. The stage was set for KKR and its buyout group to gallantly ride into Texas, playing the role of men in white hats who would rescue the state from the smoggy future TXU had in store for it. It was at the height of the mid-aughts buyout binge, and this wasn't KKR's first rodeo. Their bid to buy power companies in Oregon and Arizona had been rebuffed by state legislatures suspicious of the company's motives. This time, KKR and its partners left nothing to chance. They recruited as advisers and lobbyists heavyweights like former Dallas Mayor Ron Kirk and former U.S. Secretary of State James A. Baker III. They courted environmentalists and lawmakers, greasing the rails with nearly $20 million in political contributions.

The buyout group made clear that, if it bought TXU, the multibillion-dollar plans to build 11 coal-fired plants would be scrapped; they'd only build three. KKR, Goldman, TPG Capital and their newly formed company, Energy Future Holdings — which as yet had no assets — were hailed as heroes. The Environmental Defense Fund announced a green partnership with KKR, whose enterprise value was $410 billion and whose holdings included healthcare behemoth HCA.

KKR and Energy Future were going to usher in the new, green dawn of Texas. They were going to join the U.S. Climate Action Partnership to help enact "environmentally effective and economically sustainable climate change programs." And they were willing to pay TXU's shareholders $45 billion for the privilege of dragging the utility out of its dirty past and into the sustainable age.

Never mind that KKR's plan would involve saddling the acquired company with debt, slashing costs and flipping it for a 20-percent profit in five years — or failing that, liquidating its assets. Or that the company never had any financial incentive to bring 11 new plants online, which would only drive down the cost of electricity and its profits. Texas environmentalists, for once, had reason for optimism.

Chief Executive Officer John Wilder and other TXU management, on the other hand, clearly had doubts about the wisdom guiding their suitor's overtures. In a packet sent to investors to convince them to consent to the buyout, TXU management pointed out that the transport cost of coal had risen by as much as 100 percent.

Sure, gas prices were high now, they added, but if TXU or Energy Future wanted to break even, natural gas prices couldn't dip below $6.35 per million British Thermal Units.

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16 comments
Sclm087
Sclm087

While I have no love for the power company, the EPA is out of control. They are costing us billions in fines that companies have to pass on to us and the EPA is responsible for the loss of many jobs. They are power hungry and full of themselves....like putting real bullets in Barney Fife's revolver.

TexasElectricityRatings
TexasElectricityRatings

1.) Any notion of blaming the deregulated electricity market as it stands, or on investment guys for the problems plaguing Energy Future Holdings (at this point) as a problem that threatens blackouts and generation shortages is just folly. TXU was a mess beforehand, and they have been a mess since from the top down based on management, bad decisions, poor understanding the market, etc. The debt issue is huge, and one that I don't see how they'll ever be able to get out of successfully, although there is a very real possibility that they'll be seen as "too big to fail" on some level. That being said, as another poster pointed out, if/when they go belly up someone else will come in and buy their assets cheap and likely run them better anyway. So it's hardly a fear that this is going to cause us to lose generation or be without power.

2.) 2.) The EPA guidelines being passed down are complete garbage, and I don't think they were as obvious as this article would have you believe. For every "industry insider" that said they should have known what was coming, I could probably find 3 that were shocked, and not just people at Energy Future Holdings, but also at NRG, Xcel, etc. They're a real issue. But no, they aren't to blame for Texas's power problems.

3.) 3.) I'm sick of the myth that these people keep throwing out that Texans are paying some of the highest electricity rates in the country, as well as how deregulated rates compare with the regulated areas of Texas as well. If people in deregulated are paying high rates, it is THEIR choice and because they haven't leveraged the market or shopped for competitive rates. I've debunked this repeatedly. 50% of the people in deregulated areas are still with their incumbent providers paying absurdly high prices and won't flex the options the market provides them. The data used in this article is from the EIA and is horribly flawed, as it only measures state by state, and doesn't take into account people who pay more when they don't. The rates available in deregulated areas of Texas are the 3rd cheapest int he United States right now.

4.)4.) The BIGGEST issue here, barely covered in this article until the end, is the power generation assets and the discussion of raising the market cap to lure in new investment. I wrote a big piece on this on Wednesday. This is where people should be furious. The Texas generation issues are very real, and anyone paying attention saw them coming around 2005 when the population of Texas starting exploding and no new generation was being built...even when Natural Gas prices were favorable. And now they're extremely inhibitive. This is the problem that people have been sitting on their hands and ignoring, and this is the real problem...not the EPA or Energy Future Holding's problems. There's been no problems encouraging the generation of wind plants using subsidies and money. Of course, wind generation doesn't blow consistently or when Texas actually needs it, such as the sweltering summer. Deregulation has worked wonders for THAT kind of inconsistent generation, so pointing the finger at the same system as being at fault for a lack of natural gas generation plants is silly and hypocritical. The problems, as always, stem from political issues.

The discussion of raising the market cap should be a huge topic right now, but it's being ignored. Raising the cap from $3k to $4500 this summer, and eventually to $7500 doesn't guarantee new generation, it just might encourage it. What is does guarantee is that EVERYONE will be paying more. And doing it this summer feels like another POLITICAL move by the PUC Commissioners to cover their own backsides.

Tyler Nicholson
Tyler Nicholson

Like the article, very enlighting, and the artwork is just great!

Mister_Mean
Mister_Mean

Luminant remindes me of the Greek goverment bond debt.

Wutaboutu
Wutaboutu

Very well written article. And very informative. Thank you, Brantley, for this article.

Sa
Sa

I live in Garland. We had *one* - count 'em, one - rolling blackout at my house during the Feb 2011 freeze. Hurray for Garland Power and Light!

No, I don't work for them.

bassnabber
bassnabber

A few observations.

One reason municipally owned and other public utilities are bringing generation online is to avoid the prospect of their service areas transitioning to open access. What wasn't stated is that they are able to sell excess electricity into the grid and reap the benefits of the ERCOT generation bid stack.

The statement, "Deregulation, we were told, would open the market up to competition, driving down prices for the ratepayer. That didn't happen. In fact, prices rose. Dallasites and Houstonians, in particular, have paid some of the highest electricity bills in the country." is inherently incorrect. Electricity prices are the lowest they have ever been and research will bear that statement out regardless how you want to spin it. What has increased are the distribution provider costs which is monitored and approved by the PUCT.

The statement, "And when gas prices fell as the Barnett Shale glutted the market, rates paid by Texans living outside of deregulated areas fell by twice as much as those inside." is also incorrect. I know because I receive service from a Coop and my prices right now are approximately 30% higher than what I could get if I were to have access to open access market.

In relation to generation capacity, what you are witnessing is the generation sector holding the market at ransom via the legislature and PUCT until they receive some form of capacity payments (i.e. subsidies) because they dislike an energy only market. Known as ICAP in the eastern markets, not one generation plant has been built, though consumers have shelled out hundreds of millions of dollars for the sake of perceived system reliability. Ask for a written guarantee that if price signals are reached that each generator will build a new plant and see what kind of response you receive.

Perhaps a little more research would benefit the overall picture of what is really going on behind the scenes.

Robert
Robert

The fact your COOP is 30% higher than the market price is indicative they are burning has purchases made before the dramatic fall of natural gas prices between 2007 and now. Many Municipal operated utilities and COOP's made the mistake of buying a full service contract for unusually long terms (5-10 years or more in some cases) at gas prices that were off the peak high of $13-$14 per MMBTU in 2007, but significantly higher than today. Bottom line, natural gas drives the price of energy in Texas. That price is crazy low at the moment due to a variety of market forces, and when that price goes up again, so will the cost of energy in Texas. Deregulation hasn't accomplished what it said it would. It isn't because the principles of a free market are wrong, it is because the folks making the money have no incentive to provide the lowest price, just a price low enough to beat the next highest retail energy producer. In otherwords the pricing is now cost + the highest profit I can make, rather than the previous model of cost + a set return. There are times when a deregulated market will produce cheaper energy than a regulated market, but more often than not, a regulated market is cheaper when it comes to consumable commodities.

Commando
Commando

Before de-regulation, when TXU was an'integrated' utility, residential rates were around 8-8.5%......in the 70's and 80's rates at 7.5% were not unheard of....so, tell me again, how is de-regulation supposed to help me.....all Wilder did was destroy a once pround and respected Electric Company that had consistent AAA ratings and provide good returns for their investors

bassnabber
bassnabber

Comparing back 30 to 40 years ago is not really comparing apples to apples to today's environment, however even with today's operating cost you can today sign up for electric service for 12 months at 7.5 cents / kWh all in which means the electric portion of that rate is actually around 4.5 cents / kWh. If one were to look around a little more you could, today, actually get an all in price of 6.2 or approximately 3.2 cents / kWh for the electric portion of the charge. Its all about choice and options. Based on my experience the prices of the 70's & 80's normally didn't reflect the all in value so in the examples you provided I'd suggest that you are seeing roughly a 40% savings in price / cost to you for the 12 month offer and roughly 57% for the other offer I reference for just the electricity portion of a like bill. Hope that helps shed some light on the general subject of electric prices. If it helps I received my Coop bill today and my average price came in at 10.06 cents / kWh. Which means that sense I do not have choice I'm paying roughly 34% more in cost than what I could get if I had choice.

Mister_Mean
Mister_Mean

Looks like gross miss management fueled by greed egged on by our politicians here in Texas. I would gripe to my elected officials but they are the foxes guarding the hen house.

One would think that Enron would have been a warning on this not a business model. KKR-can you say “claw back”? To our politicians can you say long prison terms?

Lights Out
Lights Out

Everybody involved in this needs to go to jail for a long time. You can bet your ass all the TXU meter readers and linemen are about to lose their retirement and their health care while the New York jerks at KKR are toasting themselves at three martini lunches. Kirk and Baker can go fuck themselves for this bullshit.

RebeccaW
RebeccaW

what a load of crap. Just fix your outdated and broken plants/equipment instead of driving around a jalopy like the rest of us non-corporation 'people' have to do. You shouldn't blame the EPA for your issues any more than I should blame Texas when and if I fail my yearly vehicular inspection. Energy companies are not exempt from 'cost of living' expenses and that includes maint., compliance and repairs. And by the way, if companies were worried about polluting the environment as much as they should be, we wouldn't need to waste money on imposing and enforcing EPA regulations. The EPA is awesome.

james
james

excuses are like assholes and everybody's got one. these greedy lazy lyin' worthless assholes have been takin' lotsa money from us for not doin' their jobs.

 
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