On Sunday the Morning News launched a three-part series that takes a fairly negative view of the proposed sale of TXU. The series is based on a report prepared for the paper by a consultant, GF Energy LLC. Several things strike me as odd about this series. The first is that it’s labeled as an “investigative report” on the paper’s site. Question: if you hire a consultant to write a report and then write stories about that report, is that investigative journalism? Well, no, it’s not, and Bob Mong knows that. He calls it “consultative journalism,” which is a term of art that makes me nervous.
Here’s something else that strikes me as odd about this series: judging from some e-mails that found their way to me, the Morning News sent a draft of GF Energy’s 70-page report to TXU on Monday afternoon. The paper requested a response by Wednesday afternoon. When TXU asked for an in-person meeting to discuss the report with the paper, that request was denied. What might TXU have said about the report if they’d gotten a face-to-meeting? Perhaps some of what follows after the jump.
Here’s an e-mail sent by an economist named Ray Perryman on Friday to Elizabeth Souder, one of the consultative journalists on this series. It’s long, and you’re busy, so I bolded the money graph:
Update: to their credit, the paper, too, posted this note from Perryman. (I initially missed it.)
I was recently forwarded a copy of a study that I understand you commissioned regarding the acquisition of TXU. I should state from the outset that I have consulted over the years with TXU, most of the other large incumbent utilities in Texas, the Public Utility Commission, several competitive generation and retail providers, rural electric cooperatives, municipal utilities, industry trade associations, alternative energy providers, and electric power industry participants in several other states. I have also testified frequently on electric industry matters at the federal and state levels and did several studies that played a role in the movement to a competitive electric market in Texas. Additionally, I have been involved in the analysis associated with numerous large mergers and acquisitions in a variety of industries.
In reading the report, I was struck by the frequent conclusions that were drawn without any associated empirical analysis. I was also surprised at the seeming misunderstanding of how the electric market works in Texas. Many of the examples and discussions used to apparently justify conclusions were based on situations in other states that have not embraced competition and have little, if any, relevance to Texas. There also seems to be fundamental misunderstandings of the functions of the Public Utility Commission (PUC).
As one example, the PUC has rate authority over the transmission and distribution prices (the “wires”), but not over wholesale and retail prices in the competitive areas. This authority is driven by the function and is not affected by the corporate structure of the owners. The rate-making powers over the wires are not impacted, and the notion of requiring the revenues from other activities (generation and retail) to provide for cost recovery or anything else is (other than safety) is not part of the competitive process. Market factors will determine these items. To illustrate this point, note that when the acquiring interests announced they would build fewer coal-fired plants, other firms quickly began to announce their intentions because they perceive a profitable investment opportunity. All of the risks in the competitive segments are borne by providers rather than rate-payers. That basic premise appears to be lost on the analysts performing the study.
Other factors were also inconsistent. For example, the report indicates that TXU has lost customers over the past few years and that their prices have been high (by the way, it is incorrectly reported that TXU’s prices are the highest in the state). That is exactly what you would expect to happen in a market, and exactly what the “price-to-beat” transition mechanism was designed to achieve. Consumers have a choice and many of them chose to switch to other providers.
I am also baffled by the conclusions regarding consumer benefits. Major price reductions have been announced, as well as numerous other benefits. The authors acknowledge that the acquiring interests have done numerous things to make the transaction attractive to broad constituencies. There seems to be some concern that the price reductions may not remain in place after the time period that has been promised. Again, that will be determined by market forces. Other competitors are already responding to the lower prices and will continue to do so. At the appropriate time, pricing decisions will be based on competitive factors. If TXU (new or old) raises prices above other providers, it will lose customers. That is whole idea behind competition.
Texas electricity prices are high by national standards because of our reliance on natural gas for a large segment of our generation capacity. This acquisition has nothing o do with natural gas prices. The report says that utilities have not added much capacity in recent decades. It ignores the fact that we also have wholesale competition in Texas, and that independent power producers have built a lot of new capacity and that efforts are now underway to build more. Unfortunately, a lot of the new capacity was gas-fired and built at a time when gas prices were low.
There also seems to be a notion in the study that only privately owned companies seek profits for their shareholders. Obviously, the primary role of executives in public companies is to maximize shareholder value as well. In Texas, that can only be done by meeting the needs of consumers in a cost-effective manner, irrespective of the ownership structure.
The report is also critical of the legislature for not imposing new restrictions on the transaction. While some positive clarifications were passed, it would be completely inappropriate to change the rules after the transaction was announced. Some of the changes that were proposed would have had a substantial adverse effect on the investment climate in Texas and made it difficult to attract the capital we are going to need to meet future power needs.
In summary, I am concerned that the study reaches conclusions from limited and at times irrelevant evidence and ignores the basic elements of the Texas electric market. I am also troubled by the factual inaccuracies and seeming lack of understanding of basic rules and market premises. When viewed objectively, it is difficult to see how this transaction as it is proposed could be anything but beneficial to Texas consumers.
I appreciate the opportunity to share these thoughts.