Latest rip off to American consumers...

The war for your electric bill
Private-equity buyout funds are targeting electric power companies in deals that generate massive debt, stop the building of better plants and jack up rates. They take the profits and stick consumers with the cost.
By Jim Jubak

The last time Wall Street applied its best minds to the electric power industry, they brought us Enron, brownouts and wholesale-price-gouging in California, not to mention higher electric bills.
Now, not even 10 years later, they're at it again: Private-equity buyout funds have set their sights on electric utilities. And the result will be? You guessed it, higher electric bills for you and me. As if inflation and the rising cost of oil and natural gas isn't pushing our bills up fast enough already.
You may have heard about the huge sums raised by buyout funds designed to buy public companies and take them private. These funds raised $189 billion in 2006, a record, and look like they're headed for more than $250 billion in 2007.

And you may have heard about the huge deals they've done recently, with each deal bigger than the last: $27 billion for First Data (FDC, news, msgs), $32 billion for HCA, $38 billion for Equity Office Properties and, temporarily the biggest deal on record, $44 billion for TXU Corp. (TXU, news, msgs), a Texas electric utility.
Bad news all around
Other electric utilities are likely to get bids sometime in 2007. A few have already put themselves up for sale: Mirant (MIR, news, msgs), a utility with 24 generating plants in the United States, for example, indicated on April 9 that it wouldn't mind getting a bid. And buyout funds are kicking the tires on other utilities. The buyout funds have lots of money to put to work, and utilities have the kind of big predictable cash flow that these funds like to see.
This is bad, bad news for your utility bill in the short run. In the long run, it's even worse.
In the short run, making a profit on one of these buyout deals depends, first, on "restructuring" the company so that it's more profitable than it was before the buyout. Most of the time, restructuring involves spinning off money-losing operations and outsourcing some part of operations -- and it always involves cutting jobs.
That would be bad enough in the case of a utility, since job cuts are likely to mean a decline in utility service.
But you'll wind up paying more for less service because, second, turning those small gains in corporate profits into big profits for buyout investors rests on building the buyout deal so that borrowed money, known as leverage, multiplies those relatively modest improvements in corporate earnings.
Piling on the debt
A typical buyout deal works like this. To fund its purchase of the soon-to-be-private company, the buyout fund puts up some cash -- say, 25% of the total purchase price -- and borrows the rest by issuing debt backed by the assets of the acquired company. So in buying TXU, the buyout fund might put up $11 billion in cash -- certainly not chump change -- and then sell $33 billion in TXU debt to big institutional investors to complete the purchase. In essence, the purchased company buys itself, but the buyout fund (and its investors) gets 100% of all future profits when the company is eventually sold back to the public.
And that's not the limit of the debt load to be piled on the purchased company's balance sheet. Used to be that buyout funds waited until they dressed up a company and sold it back to public investors before they cashed out. In today's market, buyout funds have added a new wrinkle: While the company is still private, it issues a big cash dividend to the buyout investors, so those investors get part of their cash back in short order. How does the company pay for that dividend? Why, by issuing more debt, of course!
Even before the deal, TXU was carrying a big load of short-term ($1.5 billion) and long-term ($10.6 billion) debt, and paying a sizable interest bill of $784 million in 2006. Adding an additional $33 billion or so in debt will run that interest bill significantly higher. And that additional debt load will put pressure on the company's credit rating, already a relatively low BB from Standard & Poor's.
Who pays? Customers
That BB rating is already one notch below what's called "investment grade," meaning that the big debt-rating agencies such as Standard & Poor's, Moody's and Fitch think there's a significant chance that this debt will go into default and that the borrower won't be able to pay. About 1.2% of BB grade debt (or Ba in Moody's system) went into default within a year of rating, according to Moody's, in the period 1970 through 2001. Down one notch, the historical default rate climbs to 6.53%.
Think investors might want TXU to pay more interest on all that new -- and old -- debt to make up for the added risk posed by the post-buyout debt load? And who's going to pay the interest on all that borrowing? The utility's customers.
Texas residential customers already pay some of the highest prices for electricity in the country. According to the U.S. Energy Information Administration, a residential customer in Texas paid an average rate of 12.09 cents per kilowatt-hour. Only the Northeast and California pay higher rates.
Exploiting the inefficiencies
Which is odd, when you think about it, because TXU generates most of its electricity from coal, and coal is one of the cheapest ways to produce electricity. In the bad old days before utility deregulation in Texas, state regulators would have required TXU to sell its electricity at cost plus a profit set by the regulators. But thanks to energy deregulation in Texas, the "free" market sets the price of electricity, and the free market price is based on the much higher cost of generating electricity from natural gas.
If it were easy to ship electricity from one place to another, that price discrepancy wouldn't exist. Cheaper coal-based electricity from, say, Wyoming would enter the state when the Texas market demanded it and keep prices low. But the national electricity grid has bottlenecks that prevent low-cost out-of-state electricity from meeting Texas demand.
Buyouts like that of TXU work only because of inefficiencies like this, and in the long run, buyout firms have an interest in perpetuating these inefficiencies so that local prices stay high.
New plants canceled
The long-run logic of utility buyouts leads to lower investment in power lines that would eliminate price differences like those that cost consumers money in Texas (and California and the Northeast). And it leads to lower investment in new power plants, since spending cash on new, more efficient plants cuts the utility cash flow so necessary to paying all that post-buyout debt.

So it's no coincidence that immediately after the announcement of the buyout, TXU said it would cancel eight of the 11 coal-burning power plants that it had planned to build. (That also let the buyout funds score big points with environmental groups that had been fighting TXU on its plans.) The additional power from the three plants should meet near-term increases in demand for electricity and avoid the kind of brownouts that bring regulators out in force. And canceling the plants would conserve cash and keep Texas prices high.
There's not a whole lot of risk in the TXU deal for the buyout funds, because they've done this one before in Texas, and it turned out very well indeed for them. In 2004, buyout funds Texas Pacific and Kohlberg Kravis Roberts, the same funds that are leading the TXU buyout, bought Texas Genco, another Texas utility with low generating costs. They flipped that company for a $2 billion profit in about a year.
Higher electricity bills
And, unfortunately for consumers of electricity around the country, the model isn't limited to Texas. It will work anyplace where the national grid has a bottleneck and where a utility can exploit a price inefficiency. For example, to get ready to market itself to buyout funds, Mirant has been selling off its high-cost natural-gas-powered generating plants in the Midwest. That would leave the company with three main markets, the Mid-Atlantic, the Northeast and California, all with high electricity costs and grid bottlenecks and with a generating capacity dominated by coal-fueled power plants.

Ordinarily, I have nothing against investors or companies that exploit pricing inefficiencies in the market. That is, after all, one way that the market eliminates these inefficiencies over time. But in this case, the buyout deals for utilities in these markets will make the inefficiencies worse. The newly private utilities will have no incentive to build new transmission lines to improve the national grid, and they will have no incentive to spend capital on building new, less-polluting and more efficient power plants to meet projected demand, beyond the minimum required to keep regulators on the sidelines.

The bottom line of these deals is high profits for buyout funds and their investors and higher electricity prices for the rest of us.and, beyond the minimum required to keep regulators on the sidelines.

Los Angeles city-owned Dept. of Water and Power consistently has had among the lowest electric rates in the country. During the Calif. energy-gouging, they didn't raise their rates...produced their own power.

Caifl. crises was "free market" operating at its best...against the consumer of power, and a cash grab for the corporate treasuries.

When power producers sell power to one another on paper to show an increased demand to justify a price increase by the minute....just the "free market", right?

I suppose instead of tripling the price, we could have had a ten-fold increase. Shows they operate for the general good, doesn't it?

Electric bill at my monastery went from $150 to nearly $500. Solar systems are being installed as we are able.

Retired Monk