But its prospects brightened in April 2011, when Energy Future gained some much needed breathing room. A robust debt market allowed the company to push back by three years nearly $18 billion in loans — the early maturing debt accounting for nearly half of its total — due by 2013 and 2014. The company paid more than a billion dollars in return and was saddled with higher interest rates, postponing what many predicted was inexorable default.

Moody's remained pessimistic. On January 30, the credit rater adjusted Energy Future's outlook from "stable" to "negative." "Absent a sustained improvement to natural gas commodity prices ... we believe [Energy Future's] liquidity will become exhausted, possibly as early as 2014." S&P gave the company the distinction of having the lowest credit rating of any utility in the country.

In February, Energy Future issued $800 million in debt so it could pay inter-company loans to a subsidiary — with an interest rate of 11.75 percent. "You're supposed to use proceeds from a bond offering to pay for a plant, emission upgrade or new power lines. For those capital expenses, which then turn into revenue," said Tom Sanzillo, a financial analyst and former acting comptroller for New York. "Not to pay dividends, or to pay off past debts. And 11.75 percent interest? They should just go find Phil on the corner down there in Austin. He might do it for 10 percent; 11.75 percent is an obscenity. There's no utility in the country that borrows for that."

As the company paid for the sins of its private-equity fathers, it couldn't seem to catch a break. Competition in the retail electricity market stripped Energy Future's retail arm, TXU Energy, of 9 percent of its customers — a loss of some $315 million in annual revenue.

Sources knowledgeable about Energy Future's generation arm, Luminant, say the company has done what any company would as it navigates treacherous financial straits: Cut costs. That could explain why plants costing billions of dollars were knocked offline during the February freeze by otherwise preventable problems with cheap fixes. "The closer they get to meeting their debt time frame, the more cutting back we see, not only in staffing levels, but other things they cut out," says Pierce, the business manager of the local electrical workers union.

"If you look at the fact that the two companies with the most serious cash flow issues [Luminant and Houston-based Calpine] had the most serious problems ... we see that in the refinery business," said David Power, deputy director of Public Citizen and former senior vice president of networks and technology at Reliant Energy. "In lots of big industries, the very first thing they do is cut preventive maintenance."

To ease its tax burden, Energy Future has contested the tax appraisals of its coal-fired power plants in several rural counties. The plants, they argue, are aging and aren't worth as much considering the low price of electricity. Rusk County Chief Appraiser Terry Decker said the county appraised the Martin Lake plant at $1.056 billion. Luminant came back with a figure just over $500 million. Decker says Rusk County has reached a settlement with Luminant for $970 million.

Titus County Chief Appraiser Randy Coppedge valued the Monticello plant at $1.021 billion. Luminant said it was worth $411 million. "It was a lot less," Coppedge said. The county is still in settlement talks with Luminant. Freestone County just reached a settlement to lower the taxable value of Big Brown by $80 million.

KKR, for its part, now values its investment in TXU at around 10 cents on the dollar.

In a letter to his shareholders, Berkshire Hathaway chief executive and investing guru Warren Buffett wrote that he'd written down the company's $2 billion investment in Energy Future by $1 billion in 2010 and $390 million last year. Betting on the TXU buyout and the high price of natural gas was a "mistake," he wrote. "A big mistake."

If natural gas prices don't rise, he warned, "we will likely face a further loss, perhaps in an amount that will virtually wipe out our current carrying value."

Far from rescuing TXU, Texas air-breathers and electricity customers, private-equity greed left the company in an impossible lurch, struggling to pay its debts and adapt to a changing regulatory landscape.

It should surprise exactly no one, then, that when the EPA tells a utility like Luminant that it needs to spend billions scrubbing the pollutants spewing from the smokestacks of old plants it says are now only worth millions, the company wouldn't just roll over.

Yet for all the indignant expressions of surprise that a state ranking as the second largest emitter of sulfur dioxide in America would be subject to a rule limiting sulfur dioxide, it's not like the industry didn't see this one coming.

In 2005, the EPA promulgated the Clean Air Interstate Rule, designed to reduce pollutants blown into downwind eastern states. Specifically, it aimed to limit nitrogen oxide and sulfur dioxide, precursors of fine particulate matter — a type of particle so fine it can travel hundreds of miles on the wind, work its way through the human lymphatic highways and wreak havoc on vulnerable pulmonary systems. By setting an emission budget and allowing the region — including Texas — to trade a finite number of pollution allowances amongst themselves, the EPA reasoned air quality would improve for downwind states.

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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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