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The Deal That Even Awed Them In Houston

Romero, Simon. New York Times, Late Edition (East Coast) [New York, N.Y] 23 Nov
2005: C.1.

Abstract (summary)
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.
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.
Mr. [Thad Miller], a former commodities trader at Goldman Sachs who was brought into Texas Genco by
Texas Pacific, also said that the size of the deal did not necessarily mean people in Texas would pay more
for electricity. And the fact that four investors stand to make a fortune from Texas Genco, Mr. Miller said in
a telephone interview, should not cause consumers in Texas to doubt the benefits of deregulation.

Full Text
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

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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.
''The entire situation is terrible, but this one chapter is obscene,'' said Jayne Junkin, an organizer with
Houston Acorn, a community group that has criticized the impact of rising electricity prices on low-income
families.
Ms. Junkin's group recently held a protest at the downtown headquarters of Reliant Energy, Houston's
largest electric utility, after the company announced it was raising prices by about 25 percent. Reliant buys
its electricity from a statewide power grid supplied by Texas Genco and other generating companies.
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 airconditioning 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.

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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.
Mr. Miller, a former commodities trader at Goldman Sachs who was brought into Texas Genco by Texas
Pacific, also said that the size of the deal did not necessarily mean people in Texas would pay more for
electricity. And the fact that four investors stand to make a fortune from Texas Genco, Mr. Miller said in a
telephone interview, should not cause consumers in Texas to doubt the benefits of deregulation.
''If a baker sells his shop, that doesn't mean the price of bread will go up,'' Mr. Miller said.
The Texas Genco deal has its origins in the fall of Enron. It was Enron that aggressively pushed in the late
1990's, more than any other company, for Texas to deregulate its electricity industry. At the time,
legislators and regulators accepted pegging electricity prices to the price of natural gas, since almost
three-quarters of the state's electricity is produced from natural gas.
Yet when Enron collapsed three years ago, so did the fortunes of energy companies that had adopted
similar strategies. Facing potential ruin and pressure from shareholders, these companies were forced to
sell some assets for a song, which is why the investors were able to buy Texas Genco with ease a year
ago. The fourfold surge in natural gas prices since deregulation in 2002 made the deal all the more
attractive.
''The structure that made this possible is without shame,'' said Carol Biedrzycki, executive director of the
Texas Ratepayers' Organization to Save Energy, a group that lobbies for less expensive electricity. ''We're
creating a new class of poor people who are energy-poor, while devastating prices allow powerful people to
become even more powerful.''
Copyright New York Times Company Nov 23, 2005

Indexing (details)
Subject

Electric utilities;
Divestiture;
Deregulation;
Natural gas prices;
Utility rates;
Corporate profits;
Investment companies

Location

Houston Texas

Company / organization

Name:
NAICS:

Title

The Deal That Even Awed Them In Houston

Author

Romero, Simon

Publication title

New York Times, Late Edition (East Coast)

Pages

C.1

Texas Genco Holdings Inc

221122

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Number of pages

Publication year

2005

Publication date

Nov 23, 2005

Year

2005

Dateline

HOUSTON, Nov. 21

column

Market Place

Section

Publisher

New York Times Company

Place of publication

New York, N.Y.

Country of publication

United States

Publication subject

General Interest Periodicals--United States

ISSN

03624331

CODEN

NYTIAO

Source type

Newspapers

Language of publication

English

Document type

Commentary

ProQuest document ID

433198250

Document URL

http://search.proquest.com/docview/433198250?
accountid=38148

Copyright

Copyright New York Times Company Nov 23, 2005

Last updated

2010-06-29

Database

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