The Texas Observer

All this week electric consumers across Texas have been rubbing their hands together in anxious anticipation, awaiting the imminent arrival of the big, bad TXU buyout. It looked in doubt for a minute there when private equity firms suddenly couldn’t find the easy credit on which they thrive. As all Texans know, when a big utility gets bought out — particularly by private equity capital groups like Kohlberg Kravis Roberts & Co. and TPG (known now as the Texas Energy Future Holdings Limited Partnership — for easy reference), consumers always win (right?).

The $32 million deal was approved by TXU shareholders today in Dallas. With the credit crunch underway, it might be the last of its kind for awhile. Investors were offered a 15 percent premium at $69.25 per share — and it looks like it was an offer they couldn’t refuse. It happened on a day when the market itself is swooning, down over 200 points by 11 a.m. Not a bad day really to get out of the stock market and into the hands of big, private money (right?).

The deal has implications for the three coal-fired power plants left over from Governor Rick Perry’s original 11-plant coal-or-bust power plan. For more on the history see here and here. Suffice it to say that articles in the mainstream press lauding the near-unanimity of the vote always include a small paragraph near the bottom that says something like:

The only opposition left to the deal was from communists and coal-haters and a limited group of liberal tree-huggers as well as weak-kneed consumer activists who predict the price of energy in Texas (already high) could go higher…

However, the Federal Energy Regulatory Commission (FERC) said on Thursday there was no evidence that the deal would hurt consumers. The Nuclear Regulatory Commission still has to sign on, because TXU owns a nuclear plant near Fort Worth. But, for all intents and purposes this deal is done.

The 2 million customers who rely on TXU for power will now join the ranks of millions of others whose lives have been affected by the private equity takeover boom — it remains to be seen how much it will cost, or how bad it will smell.

You probably missed it — hardly anyone was paying attention — but legislators rescued renewable energy in Texas at the end of the legislative session. Lawmakers repealed an obscure provision of a 2005 law that would have gutted the consumer-driven green energy market in the last hours of the session.

Current law mandates that by 2015 at least 5 percent of the energy statewide come from renewable sources. By 2025, the target is 10 percent. But a little-noticed 2005 provision allowed utilities to count consumers’ voluntary purchases of green power towards the state’s mandatory renewable energy goals.

It was an absurd proposition: People’s good-faith efforts to stimulate clean wind, solar, and biomass energy in Texas by signing up for green electricity plans would be rendered meaningless. The only beneficiaries would be the coal-belchers and nuke-purveyors that would have an easier time fulfilling their mandate without having to change their habits.

The EPA saw the problem and stepped in. The agency promised to decertify Texas utilities, including city-owned Austin Energy and deregulated retailer Green Mountain Energy, both enrolled in the agency’s Green Power Partnership.

“Nobody had thought very hard about what that one little provision would do,” said Bee Moorhead of Texas Impact, a faith-based organization that helps churches buy renewable power. During the session, Moorhead warned lawmakers that she was actively encouraging faith groups to not purchase Texas renewable energy credits (RECs) and to instead look out of state. (RECs are stock-like certificates sold by brokers that correspond to actual megawatts.)

Wal-Mart, which bulk-purchases green power and may have plans to sell electricity directly to customers, sounded a similar note.

Lawmakers that did recognize the problem, Reps. David Swinford (R-Amarillo) and Mark Strama (D-Austin) and Sen. Kirk Watson (D-Austin), met with resistance from some utilities and industry players.

Ironically, free-market fanatics and industry heavies have seized upon consumer “choice” as the sine qua non of electricity deregulation but they’ve never been too excited about the burgeoning market for green energy. Reliant Energy tried to zap the voluntary market through the Public Utility Commission last August.

But for consumers or businesses who want to fight global warming and promote clean air, renewable power packages are a sure bet. In Texas, that means wind power.

“You can go out and watch your turbine reducing carbon. For my money it is the most robust carbon credit you can hope for,” said Moorhead. “You are cutting pollution right here in your state, today.”

It could well be one of the great but unnecessary tragedies of the 80th Legislature. Unless action is quickly taken, the Texas renewable energy sector could suffer a serious setback. The reason is an obscure provision called Subsection (m) placed into law in 2005 as part of Senate Bill 20. Intentionally or not, Subsection (m) allows power generators to count consumers’ voluntary purchases of green power towards the state’s mandatory renewable energy goals.

If the double-counting provision is not struck in the next few days, businesses and households who voluntarily sign up for green energy plans, either through companies like Green Mountain or city-run programs like Austin Energy’s green power program, will soon essentially be doing nothing to incent the construction of new wind farms and other sources of renewable power. Yes, power companies will still have to meet the mandated targets (eventually 10,000 megawatts of green power by 2025) but subsection (m) turns those targets into a cap, rather than a floor. For people trying to use their buying power to do something extra for clean air and climate change, they will be rendered powerless. Moreover, the EPA will move to decertify Texas utilities currently listed as Green Power Partners. Any utility still advertising a voluntary renewable power option could run the risk of consumer fraud.

Bee Moorhead of Texas Impact, an interfaith group that promotes faith communities purchasing renewable energy, explains the problem with a clever metaphor. It’s as if, she says, every time someone took a can of food to the food pantry, the government reduced food stamps. But the power industry doesn’t necessarily mind the situation - it makes their lives a little easier that the little guy is doing the renewable power buying for them.

“It’s taking that church’s tithe and turning it into a charitable contribution to TXU,” she explains. Moorehead says she now encourages Texas congregations NOT to sign up for voluntary green power programs.  Instead she tells faith groups to look out of state for renewable energy credits. 

All of this could have been avoided much earlier in the session if a bill by Rep. Mark Strama had made it out of the House Regulated Industries Committee. No luck there but Strama did manage to append the repeal of Subsection (m) to SB 483, a major electricity bill that is currently on life support. That leaves only a couple of other options. Rep. David Swinford says he is working to have the Senate amend one of his renewable energy bills  pending before that chamber. However, time is quickly running out.

Your government in action: Yesterday the House passed 118-21 a bill that would subsidize the nuclear power industry to the tune of roughly $200 million. HB 2994, the brainchild of none other than the increasingly notorious Dennis Bonnen (R-Angleton), is a vulgar piece of corporate welfare crafted explicitly for the benefit of NRG Energy, a major power company with ambitious plans to double the size of its South Texas (Nuclear) Project in Matagorda County. (The City of Austin and the City of San Antonio also have an ownership interest in the nuclear plant).

The bill would allow school districts to sign a tax abatement agreement with nuclear or “clean coal” developers years in advance of a power plant’s completion, offering a giveaway for 8 years after the plant opens. The locals like it because it won’t cost them a cent. That’s because under our new school finance system passed last year the state would have to reimburse the Matagorda school districts for the lost revenue – around $29 million - each and every year, according to the conservative fiscal note estimate. This is money that would otherwise flow to underfunded schools across the state.

Lawmakers raised hardly a peep of protest yesterday with only anti-nuclear warrior Rep. Lon Burnam (D-Fort Worth) taking to the back microphone to call Bonnen’s bonanza “corporate socialism.” Burnam pointed out that NRG has already made a decision to add two units to the South Texas Project, so what, he asked is the point of a handout?

“This is something that is very seriously being considered but it is not on-line and it is not being built,” replied Bonnen. Technically, that’s true, but there’s nowhere else for NRG to go. And, according to their most recent SEC filing, the company is planning on filing a license application to the federal Nuclear Regulatory Commission sometime this year.

Dick Lavine, with the Center for Public Policy Priorities, argues that Bonnen’s approach is an abuse of the system. “The whole point of this economic development act is to compete with other states for [companies such as] Samsung and Toyota,” Lavine told the Observer. “Now in this case it’s to give a break to somebody that’s already decided to build a plant in the obvious place to build it.”

And it’s not as if the nuclear industry is wanting for subsidies. The Energy Policy Act of 2005 offers the industry “$10.1 billion in subsidies and tax breaks, as well as unlimited taxpayer-backed loan guarantees and other incentives,” according to a 2005 Public Citizen analysis.

Luckily, Senate members in committee yesterday expressed a great deal of skepticism towards HB 2994’s companion, SB 1710 by Sen. Glenn Hegar (R-Katy). “The way our system is set up you’re gonna end up costing school districts in Tyler money,” said Sen. Troy Fraser (R-Horseshoe Bay). He left the bill pending.

But Bonnen, like many others, will be loathe to let nuclear power go unpromoted. Texas is being touted as a frontrunner in a “nuclear renaissance” in the United States, with tentative plans to triple the nuke plants in the state. Boosters like Bonnen are pushing nuclear power as a means to curb greenhouse gas emissions and air pollution. “Nuclear is a zero-emission facility,” he told the House yesterday. “This is the most environmentally responsible way we can produce significant amounts of generation and low-cost generation for our constituents.”

Enron had “Fat Boy,” “Death Star” and “Ricochet.” TXU used a less creatively-named scam called “Rational Bidding Strategy,” according to a public PUC filing today. Like Enron’s manipulations in California in 2000-01, TXU knowingly withheld power during the summer of 2005 in order to drive up electricity prices, costing consumers $70 million in direct impacts. This is the fifth time TXU has been found in violation of state utility law or commission rules.

Today PUC officials recommended that TXU be assessed $210 million for market power abuses, $140 million in penalties and $70 million in a refund to customers.

“We are very disappointed that commission staff has recommended an enforcement action based on a fundamentally flawed analysis that is inconsistent with the rules and policies that the Commissioners themselves have expressly adopted,” the Houston Chronicle reported TXU as saying. (No word on whether this was New TXU or Old TXU speaking.)

The 61-page filing offered some detailed insights into how TXU allegedly took advantage of Texas’ deregulated market.

Here’s how it worked: In the summer, during hours of peak demand, a “balancing energy market” comes into play. State grid operators use the market to balance supply and demand in real-time. An auction takes place every fifteen minutes, with suppliers offering power to retailers for purchase. At the end of each auction all generators, regardless of their bid price, get paid based on the most expensive accepted offer price. This is called the market clearing price of energy.

TXU is critical to meeting balancing energy demand because it owns so much generation. In fact, the PUC’s independent market monitor, Potomac Economics, found that TXU’s supply was needed 82 percent of the hours studied. But as a “pivotal supplier” TXU would place bids in the balancing energy market that were absurdly high. Nobody could afford the offer. “TXU could foresee that economically withholding significant quantities would be likely to result in higher balancing market prices,” Potomac found. This “Rational Bidding Strategy” produced profit of $19.6 million and caused $70 million price increases in the balancing energy market.

That $19.6 million in extra profit is only what has been quantified by the PUC. In the filing today, Danielle Jassaud, the director of market analysis for the commission, wrote:

In addition, TXU likely profited indirectly, because balancing energy prices affect the pricing of bilateral electricity contracts, and therefore any bilateral contracts negotiated by TXU during and after the Study Period may reflect inflated prices and bring in additional profits. This indirect effect on bilateral sales profits can affect a variety of contracts over a long period of time. This effect, although real, has not been quantified by the IMM. The balancing energy market serves, at the most, five to ten percent of demand, and TXU’s inflated profits in the balancing energy market therefore do not reflect the full amount of benefit that TXU gained through its abuse of market power.

It’s 10:00p.m. - do you know where your legislators are? Some of them are stuck at the House Regulated Industries Committee. They are hearing from a TXU attorney that two bills - SB 896 and HB 3961 - requiring the Public Utility Commission to do a thorough vetting of the TXU sale are unconstitutional and if passed would likely scuttle the deal.

“The proposed legislation materially impairs an existing contract,” warned Harry Reasoner, a Vinson & Elkins attorney. “You have an arguable case of the violation of the contracts clause of both the federal and state constitutions.” Reasoner said that under the current rules of the game, the parties have the right to seal the deal without an “up or down” vote by the PUC, yet the bills would give the commission the power to block the deal “retroactively.”

Rep. Sylvester Turner’s reaction was interesting. What you’re saying, he said to Reasoner, is “Either we leave this transaction alone and allow it to unfold or legislators, let’s see if you have the courage to re-regulate it. Because either you re-regulate it or stand down. To me, that’s almost a challenge.” Or a threat. After all this isn’t the first time the buyers have warned legislators not to meddle in the transaction. KKR and TPG have generously committed to at least five years of majority ownership under the current regulatory system. Change the system and they walk away from the deal. Look it up: it’s in the buyout agreement filed with the SEC.

Tonight was the first hearing for Turner’s HB 3961. It is similar to SB 896, Sen. Troy Fraser’s more specific bill that was unanimously passed by the Senate last week.

The hearing as a whole certainly had a clarifying effect on just what role government now plays in the Texas utility world. “We’re sort of in a new era…in which people that are unknown to our market are going to invest and purchase utilities,” PUC commissioner Julie Parsley told the committee. For her that wasn’t necessarily a bad thing, just a sign of how successfully lucrative the electricity “market” is in Texas.

Of course that begs the whole questions - for the thousandth time - of why private equity firms like KKR and TPG would post $45 billion for a regional utility company. How do they profit? SB 896, for what it’s worth, partially addresses the concern that they profit by jacking consumers by requiring the buyers to identify any potential rate impacts from the buyout and gives the PUC the authority to impose conditions on the transaction. Forty-six states have similar regulatory powers, according to commissioner Paul Hudson, who of the three commissioners seemed most favorable to a beefed-up review.

But it’s not clear whether SB 896, or similar legislation, could pass in time to affect the PUC process. Chairman Phil King pointed out that the legislation, if passed and signed by the Governor, likely wouldn’t go into effect until September 1, deep into the transaction review. King, who controls what bills get out of his committee, hinted that he may be more interested in seeing the PUC do an aggressive review under existing law.

The prospects for SB 896 did not look rosy tonight. In addition to the usual corporate/lobby types testifying against the two bills, conservative activists from the Young Conservatives of Texas, the American Conservative Union, and Americans for Prosperity came out in force to complain that the Lege was tampering with the free market. Also testifying against the bills were Virginia DuPuy, the Mayor of Waco, a vocal critic of TXU’s coal-fired power plant proposal, and even an elementary school teacher from Dallas who praised TXU for its charity.

Chairman King left both bills pending.

Behold, the day of reckoning: Aug. 9, 2007. The sun shall rise, and our grid shall go dark. Perhaps. While many folks figure the dire predictions are just the electric industry angling to build more plants, even conceding their concerns, the main issue is peak usage. The state’s output is widely acknowledged to be just fine, except during those instances when consumption spikes — that August contains the date of doom is no coincidence.

That’s why one thing really stood out at a press conference yesterday announcing Garnet Coleman’s bill to offer rebates to homeowners who install solar panels. Well, two things — it was that rare press briefing where experts outnumbered reporters, since Coleman invited a baker’s dozen. Anyways, check out this graph:

The hotter it gets, the better solar gets. No duh, I know, but it was a point that never registered until someone put it literally in front of my face. So you can add one more benefit to solar, besides pollution-free energy and lower energy bills: each panel does a little to help reduce peak demand and possibly avert more power plants. Now if only an increase in market demand really would drastically reduce the prohibitive price of home installation, as solar energy company reps claim, we’d be in business.