You can’t slip a deal past the New York Times in which too much money is being made.
In this article that is clearly intended to decry capitalists taking advantage of deregulated markets, the Times compares the sellers in the pending Texas Genco deal (more accurately described in earlier posts here and here) with the societal pariah Enron and then mischaracterizes the true risk that the sellers took on the deal.
I was going to criticize the Times’ one-sided analysis of the Texas Genco deal, but then it occurred to me that such puerile analysis is utterly consistent with a news outfit that — in the face of the public’s increasing access to free online news sources — responds to its sagging subscription sales by charging for its web content. For a more astute analysis of the transaction, note Dale Oesterle’s observations on the deal over at the Business Law Prof Blog.
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“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. ”
Actually, Centerpoint was required to divest the assets by law.
The problem that I did have with this whole deal was the fact that Centerpoint was going to recover any “stranded costs” it had invested in Genco via a regulated pass-through to me, the consumer. When Houstonians pay an extra couple billion to CNP to compensate them for assets they had to sell below cost, I’m fine with it. But when those assets trade hands a few months later for significantly above cost, I have an issue there. Unfortunately, CNP didn’t have any incentive to recover maximum value from the assets as they were going to be made whole by the rate payers anyway.
Presumably NRG will use the assets to generate (pun intended) even greater returns, so one can argue that the assets are still undervalued. The hedge funds will receive 25% of NRG’s stock as part of the sale which leads me to believe there is more upside.
The real problem with the Texas deregulation program is that it did not disaggregate the energy market into its component risk elements. The owners of the energy producing assets need a selling price that covers their costs plus a rate of return demanded by their investors. Energy consumers want a fix price so they can plan their budgets. Intermediaries purchase the product from the producer and sell the product to the consumer, absorbing the price risk for the product and claiming all the gains/losses for their services.
Unfortunately, the market structure is still wrong and energy is treated as a “right” and not as a “commodity”.