The Texas electricity market has been abuzz the past few weeks after a series of articles have been released speculating about the possibilities of Energy Future Holdings separating their competitive assets (TXU and Luminent, respectively) from Oncor in preparation of possible bankruptcy. There have been several articles in the Dallas Morning News, which you can read here, here, here and here, as well as an article here in Bloomberg. Right now everything being written is just speculation, but people have been predicting for years that some form of bankruptcy or failure of some of the subsidiaries of Energy Future Holdings was simply a matter of when, not if. The leveraged buyout of TXU in 2007 was the largest of it’s kind in history. Unfortunately, the market price of natural gas fell through the floor with the explosion of fracking technology in 2009, and since then TXU has been stacking up consistent financial losses. In addition to that, they have been paying massive amounts of money each year in interest payments on their massive debt, which currently stands at 37 billion dollars, 3.8 billion of which will come mature in 2014.
The statements and articles being released predicting impending bankruptcy are all speculation as Energy Future Holdings (EFH) claims to not be having any discussions about bankruptcy at this time. That being said, market analysts monitoring the situation believe that many of the decisions they seem to be making might be setting the stage for one or more units of EFH to be allowed to declare bankruptcy without effecting other areas of the company, specifically Oncor Electric, which operates the poles and power and transmission infrastructure for much of North Texas. Additionally, at least one credit service has downgraded the bonds of EFH to just two levels above junk bond status.
All in all, things appear grim for both TXU and Luminent.
What Does That Mean for Customers?
On the surface, the bankruptcy of the largest competitive electricity provider and/or the bankruptcy of the largest power generation company in Texas would seem like a cause for concern for electricity customers. If TXU were to go bankrupt, would those customers be without electricity? Or if Luminent went bankrupt, does that mean that their electricity generation plants would go offline, leaving the Texas electric grid without much needed power? The answer to both of those questions, is of course, no. And we need look no further than Dynegy, a company with generation assets that came out of bankruptcy just two weeks ago, and during no time in that process did their generation plants ever stop churning out electricity. The most important thing for Texans to understand is that a bankruptcy or sale of one or more of EFH’s business units would ever result in an interruption in electricity for individual customers.
That being said, this news doesn’t mean there aren’t potential ramifications for customers if one or more of EFH’s companies goes bankrupt. In fact, these articles might already be signalling something for TXU customers. For one, TXU is struggling between dwindling revenues and regular interest rate payments, and it isn’t unreasonable to think that they’ve taken to cost cutting measures wherever possible. In fact, as a website that solicits customer reviews, I see a lot of dissatisfaction with TXU’s customer service. It isn’t unreasonable to think Customer Service might have been an area where TXU has cut spending in light of their financial constraints. Of course, this would seem to be a small contributing expense or cost-saving measure to what amounts to a debt problem larger than most countries in Europe.
If Luminent were to go bankrupt (and/or if it changed hands), it could affect all Texans in one area: electricity rates. It’s very likely that trading costs and the bids with which Luminent puts into the grid will increase. What that means exactly is that groups trading with Luminent will have to pay more for their electricity, and in turn those prices will trickle down to every Texas electricity customer eventually. Because Luminent owns 20% of the generation assets in Texas, it would be impossible for everyone not to be effected by the trickle down effect. Additionally, any retail electricity provider who is required to trade with Luminent because they have a credit agreement (if there are any) would certainly incur higher trading costs. This, in turn, would almost certainly be reflected in higher prices for customers. But, that situation might not even exist, and if it does that is exactly the kind of thing competition brings to the marketplace in customer’s favor.
Of course it is also worth the consideration that EFH could be leveraging this situation and articles such as these released this week to pressure their debt holders to further restructure their debt and buy more time. Just recently one group released an article discussing the idea of a EFH bailout by the government in the “too big to fail” vein. It’s a pretty baseless concept grounded almost solely in the notion that Governor Perry has received lots of campaign contributions from EHF over the years. However, any kind of perception by the public that bad things could happen if TXU or Luminent go bankrupt, or that there would be some kind of interruption of service by Oncor, could conceivably give TXU more leverage at the negotiating table, be it for more money and time or a more favorable position if some of EFH’s assets will be put up for sale to repay debt. Unfortunately many people still don’t understand quite how deregulated electricity works, so the idea of segments of EHF going bankrupt could create a panic or concern that isn’t warranted. But either way, we will almost certainly have an idea of the company’s intentions in regards to fund raising or bankruptcy by the end of 2013, if not sooner, what with that 3.8 billion in debt coming mature in 2014.