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By Eileen O'Grady
HOUSTON Feb 15 The Texas power grid, already
struggling to attract new generation to avoid rolling outages as
demand grows, now may have to cope with a potential
restructuring of the largest owner of power plants and
transmission lines in the state.
State officials and groups pledge they will be vigilant to
make sure generators and power lines keep humming during any
restructuring of the debt owed by Dallas-based Energy Future
Holdings, which was created in 2007 when a private equity group
purchased TXU Corp. and renamed it.
The company, which relies largely on coal-fired power
plants, has struggled as U.S. natural gas prices have tanked,
squeezing margins for generators fueled by coal.
This has made it harder for Energy Future Holdings to make
payments on its more than $50 billion in debt, The company has
retained advisers to help it with any potential restructuring,
which could still be several months away.
"We now have to make sure the lights stay on in Texas," said
Texas state Sen. Troy Fraser, who opposed the 2007 leveraged
buyout led by KKR & Co LP, also known as Kohlberg Kravis Roberts
"We don't have a voice in what happens in the debt
restructuring, but we have a huge interest in making sure it is
an orderly transaction," he said.
"I want to make sure the generating plants continue to run,
the power is sold to the retail company and that the wires
company stays intact to deliver it," Fraser said.
Unlike other areas of the country, Texas operates as a power
"island" with limited ability to import power from adjacent
states so continued operation of plants operated by Luminant,
the EFH generating arm, is expected.
The 2008 recession and financial crisis slowed development
of power plants to serve the $35 billion power market in Texas.
Extreme weather in 2010 and 2011 strained supplies, forcing the
Texas grid operator to warn that the power surplus was shrinking
and that rolling blackouts could be more common in coming years.
State regulators have responded by raising the price cap for
wholesale power in times of scarcity. But owners and developers
of generators say wholesale prices remain too low to encourage
investment in new plants.
The Texas Public Utility Commission is studying a number of
options, including modifying market rules of the "energy only"
market" to expand programs that pay customers to curtail
electric use when supplies are tight. Also under consideration
is a more drastic plan to change the market's design to a
"capacity market" similar to those in other U.S. regions, that
pays generators to be available in future years whether they are
called on or not.
Consumer Group Public Citizen has said additional revenue
from a capacity market would not help the financial picture at
EFH and would not lead to new investment in viable energy
Fraser is optimistic that EFH units can keep power flowing
to Texans without disruption through any debt restructuring.
But some are worried that whoever ends up with the company's
assets after a restructuring may have too much market power to
raise electricity prices.
"We'd be interested in how it is going to be structured and
who is going to end up owning the assets," said Geoffrey Gay, an
Austin attorney who represents a coalition of cities served by
Oncor in North Texas. Gay's clients have authorized him to
intervene in any bankruptcy filing that may occur.
"The concern would be if any one company buys all those
assets and thereby increases its overall market power in the
state," Gay said.
If another large generating company buys all the Luminant
power plants, it would raise concern about the exercise of
unfair market power, said Gay. "That would have consequences for
On the other hand, Gay said if the plants are sold to
multiple owners, "it could ultimately wind up being good for the
(Texas) market," he said.
Gay said his clients want the bankruptcy court to honor the
ring-fencing put into place at Oncor.
BET ON GAS PRICE
Natural gas is the dominant fuel for power generation in
Texas, and sets the wholesale price of power. As the largest
owner of coal-fired plants in the state, TXU's profits were
climbing in the mid-200s as its plants produced electricity at a
lower cost than gas plants in the state but sold power at the
The investors behind the 2007 deal that created EFH assumed
natural gas prices would remain above $6 per million British
thermal units (mmBtu). The strategy to profit from cheap
coal-fired generation worked well in 2007 and 2008, as average
gas and wholesale power prices in Texas continued to rise.
But in 2009, power prices began to tumble as the nationwide
recession took hold. The 2009 average wholesale price of power
in North Texas slumped to $35 per megawatt-hour, down 43 percent
from 2008, according to Reuters data. Natural gas prices slid,
pressured by booming domestic gas production.
U.S. natural gas prices remain far below $6 per mmBTU,
settling on Friday at $3.15 per mmBtu on the New York Mercantile
Exchange. This has squeezed margins at Luminant's coal plants.
Only an extended statewide heatwave in 2011 gave power
prices a boost as power demand soared in the summer months to
run air conditioners. But in 2012, average wholesale power
prices in Texas were the lowest in 10 years.
Fraser said an EFH restructuring may remove one obstacle
hanging over the state's electric market by allowing companies
to make decisions regarding power-plant investment.
"One of the things that is keeping new power units from
being built is that the largest company is having financial
difficulty," Fraser said. "Once you resolve that issue, it may
(Editing by David Gregorio)