Thursday, November 24, 2005

I normally don't look at Deal Book (the online business newsletter) from The New York Times but this story (another link that might not require the survey)caught my eye:
The Deal That Even Awed Them in Houston

Published: November 23, 2005
HOUSTON, Nov. 21 - Texas Genco might lack the flash and fame of Enron, but its low-profile owners have managed to accomplish something rare in this swaggering city: a deal so ambitious in its scale that it has caused jaws to drop in Houston's energy circles while angering and perplexing people who are feeling the sting of surging electricity prices.

The buzz in Houston these days is over the $4.9 billion in profit that four elite private equity firms - the Texas Pacific Group, the Blackstone Group, Kohlberg Kravis Roberts and Hellman & Friedman - stand to make from selling an electricity company for $5.8 billion.

Lured by deregulation of the electricity industry in Texas, the investors acquired the electricity company Texas Genco, which owns several power plants in the Houston area, just last year with $900 million in cash. Now, they are selling it to NRG Energy of Princeton, N.J., for a gain of $5 billion, a flip that will be one of the most lucrative private equity investments in recent memory.

"This part of the deregulation process has transferred billions from ratepayers to investors," said Clarence L. Johnson, director of regulatory analysis at the Office of Public Utility Counsel, a state agency in Texas created to represent the interests of homeowners and small businesses on utility issues. "It seems extraordinary, doesn't it?"

The investors profited largely by exploiting an obscure part of electricity deregulation here that pegs electricity prices to the price of natural gas. Because Texas Genco fuels some of its plants with relatively cheap coal and nuclear power, its operations become much more lucrative in times of high natural gas prices, like now. The profit from the deal is about half the $9.9 billion that Exxon Mobil, the nation's largest energy company, with 86,000 employees, made in the most recent quarter. Such an outcome from deregulation, which made it perfectly legal for a handful of investors to reap fortunes from their control of Texas Genco, a little-known electricity company with 1,200 employees, has stunned some people in Houston, which has some of the most expensive electricity prices in the country.
Electricity prices in Houston, the largest city in Texas, have climbed about 86 percent since the deregulation of the state's electricity industry in 2002. In unusually cool or hot months, when air-conditioning or electric heating are heavily in use, that means monthly energy bills for a three-bedroom home in Houston can easily run $300 to $450.

Electricity cooperatives that are not part of the state's deregulated market have increased their rates only 18 percent over the same period, even though most of them also rely on expensive natural gas, according to the southwest regional office of Consumers Union in Austin, Tex.

"Electricity is a basic necessity," Ms. Junkin of Houston Acorn said. "This kind of profiteering off the misfortune of others should be illegal."

Advocates of deregulated electricity markets see things differently. Energy analysts say it is possible that the Texas Genco takeover might encourage similar deals in Texas and other deregulated electricity markets around the country.

Craig Shere, an analyst at Calyon Securities, attributed this excitement to the "dark spread," or the widening difference between coal and natural gas prices over the last year. Natural gas prices have doubled since September 2004, when the investors led by the Texas Pacific Group of Fort Worth bought Texas Genco from CenterPoint Energy.

A spokesman for NRG, the company that is buying Texas Genco from the private investors, left little doubt in a telephone interview as to why higher natural gas prices made Texas Genco an attractive asset. "This puts NRG in an even stronger position to thrive on this volatile natural gas environment," said Jay Mandel, director of media relations at NRG.

David Crane, the chief executive of NRG, also said the acquisition would enhance NRG's geographic reach.

Representatives of the four private equity firms involved in the deal declined to comment. Thad Miller, the executive vice president at Texas Genco, which has remained generally silent about the takeover, countered the deal's critics by claiming that deregulation in Texas had encouraged companies to build more power plants to meet growing demand for electricity....

Of course, the article didn't say anything about the investment group actually building any power plants to earn its $4.9B, because it didn't build any power plants to earn its $4.9B. No one is suggesting that Texas Genco is the next Enron or that any illegal insider trading took place. But I can't see how anyone can justify a $4.9B transfer of wealth from consumers to speculators, not producers but speculators.

It's just inconceivable that 4 1/2 years after the California Energy Crisis, we still have the kind of deregulation that allows speculators to make billions while consumers get fleeced. I suppose a market worshipper would argue that the system hasn't been thoroughly deregulated and, until it is, they'll always be inefficiencies. That's a valid argument, but I believe it's mistaken. It seems most of the problems, and brown outs in Cal. and $400.00 utility bills in Houston are not minor problems, follow deregulation. Whatever the cause, I can't see any justification for a system that allows consumers to be fleeced so that non-producers can profit.

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