Are Large Houston Electric Companies in Trouble?

by admin on January 28, 2009

Large Houston Energy Providers Face Credit Crunch

For years it has been understood that the large companies in the United States were the more stable companies that would be able to handle tough economic times and this was proven true the summer of 2008 with some of the smaller electric providers in Houston. Some new fly by night small time electric companies went out of business while Reliant Energy and TXU Energy continued to operate without a hitch. Later on in the year Reliant Energy started to show signs of trouble by having to stop accepting some commercial and industrial business customers because of similar credit related issues [sources (1, 2, 3, 4, 5]. The company that has a billboard on every street advertising their Houston electric rate may be cutting back on taking additional commercial and industrial customers according to Houston Chronicle? Yes. Sounds a bit crazy but it is true according to the Houston Chronicle news story. The credit requirement to sell large amounts of power is too much and Reliant Energy may also be fashioning future renewal energy contracts for commercial and industrial customers where the customer takes on more of the risk. We have a commentor below who says “hogwash” but sources later in the comment section confirm this is true. Riverway Power and National Power Company revoked their fixed electric rates on their Houston customers this summer and soon after went out of business. The reason? They could not meet the financial requirements in regards to credit that ERCOT needs to continue selling power to these electric providers. We also saw Etricity and a few other prepaid electric providers go out of business as well. Bounce Energy remains a good alternative for those needing a guaranteed electric rate with no deposit requirement. If you would like to check this plan out go to Bounce Energy and choose their fresh start plan.

Dilemma With Enron Styled Energy Market Manipulators

The recent 60 minute expose on energy price market manipulation has opened up a can of worms for large Energy companies in Texas. There is no proof that TXU Energy and potentially other large electric companies in Texas have hired energy traders that manipulate the market but industry professionals that sell and distribute natural gas, oil, and gasoline instead blame it on investment companies like J.P. Morgan who have vested interests in energy companies that sell and distribute energy products while speculating and selling energy commodities like they would solicit investments in stocks. Hedge Fund Manager “Michael Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.” 6

Some people believe that many of the electric providers in Houston have hired the exact Enron energy traders that created the market manipulation on prices in California. Of course this is up to debate and who these providers are is left for the public to research and find but there are a few news stories that name names of some of the electric companies that have their energy trading desk run by ex Enron energy traders. These energy traders are assets for electric providers that need to hedge the energy they sell as electricity and just because they once worked for Enron does not make them evil. The truth is these old Enron traders do have inside knowledge and skills that only 10′s of billions of dollars of trading would be able to teach someone.

Buying natural gas futures to insure a Houston electric rate is common practice for providers offering fixed electricity rates. Hedging energy is a good sound practice but sometimes, as history shows, an energy trader can go one step too far.

The conspiracy going around these days with high electricity rates and market price manipulation was really bumped back up in public view by the recent 60 minutes expose on energy price manipulation, [Source 7] Conspiracy’s floating around and what people want to know are if the investment banks are to blame, energy traders, ex Enron employees, large retail energy providers, regulated pole and wires companies using subsidiary companies to move energy prices higher, etc?

So Who is to Blame?

Are large companies like TXU Energy to blame for the 2008 summer Texas electric rate spike? Of course not! They had nothing to do with it and there is absolutely no proof. The 60 minute special does connect a dot though with one of the investment banks that loaned the money to the private equity firms who bought TXU energy. The TXU buyout is said to be the largest leveraged buyout in history. Two private equity firms bought TXU Energy in 2008 and according to a point raised by, Citizen.org. they think that having the energy company owned 100% by private equity companies will allow for the following potential issue to occur:

“Taking a Company Private Removes Key Information From the Public

“Because TXU is currently a investor-owned company–meaning the owners are all the people who hold TXU stock–the company is forced to disclose important details of its business and profits to the U.S. Securities and Exchange Commission. This information is vital to help evaluate the company’s profits and environmental record. But KKR and TPG will buy 100% of TXU’s stock, meaning the new owners will never have to file any details on the company’s operations with the SEC. Removing all this information will keep Texans in the dark about the company’s profits and environmental plans.” source – Citizen.org

These two private equity firms received most of their money through loans from Goldman Sachs, Lehman Brothers, Citigroup, and Morgan Stanley according to Citizen.org. The illegal activities involving some of these companies has been extensively researched and reported on by Citizen.org Click on their link and scroll to the bottom of the article to see the appendix that contains all of their sources.

How Much Debt are We Talking About Here?

80 percent of the 45 billion dollar buyout is leveraged debt according to Citizen.org. This means that TXU Energy is owned by the companies that according to Citizen.org are not the greatest investment banks to be working with if you look at the amount of fees and penalties they have paid in reference to illegal business activities. TXU Energy of course is not to blame for the problems of another company and should not be shunned for another businesses behavior. These same investment companies sell energy commodities as investments just like they sell stocks according to 60 minutes, [Source 8]. The 2008 oil and natural gas price spike has been blamed on these companies. Although some may believe that TXU Energy has a part to play in this unsubstantiated conspiracy there is no proof that TXU has anything to do with the business dealings and decisions of the investment banks that loaned the private equity companies the money to buy TXU.

Most of the information regarding TXU Energy’s buyout was found on Citizen.org from this article –> http://www.citizen.org/documents/TXU.pdf

If there are questions and concerns about information that may not be correct please comment below and or click on the Citizen article and call their number and state your correction regarding any incorrect facts in their paper.