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Feb. 14, 2013

Paying Utilities in Texas to Increase Generating Capacity Would Not Keep Energy Future Holdings Afloat, Public Citizen Study Finds

AUSTIN – Paying utilities in Texas based on how much power they have the capacity to provide – rather than how much they actually generate – will not solve the financial problems of Energy Future Holdings (EFH), a new Public Citizen report finds.

Texas policymakers are debating how to meet the state’s growing energy needs. Under consideration is the creation of a “capacity market” – one that pays utilities for building power plants that could run if they are needed. Currently, utilities are paid based on the power they generate.

The debate also comes as EFH, Texas’ largest electrical generator, experiences severe financial difficulties. Some have suggested that the solution to its financial problems is to shift to a capacity market. A study commissioned by Public Citizen and released today, “Why a Forward Capacity Market Won’t Solve Texas’ Resource Adequacy Problem: The Case of Energy Future Holdings,” found that additional revenue alone will not significantly improve company finances or induce investment in viable energy alternatives, and may have counterproductive outcomes. 

 “Since EFH took ownership and control of TXU Energy in 2007, it has compiled a poor record of financial and energy leadership,” said Tom Sanzillo, analyst with the Institute for Energy Economics and Financial Analysis (IEEFA) and the author of the report. “Its financial ratings are the worst in the nation. The company has squandered an opportunity to invest in Texas and improve the electricity system.”

“EFH is unlikely to use capacity dollars to build revenue producing assets,” Sanzillo added. “The company is so far in debt that it now has little choice but to use those payments to pay off the interest on debt. One estimate of the cost of a capacity market for Texas puts the price tag at $1.1 billion to $2.3 billion. EFH/TXU share would be an estimated $294 million.   EFH’s annual loss for 2012 was $2.2 billion, seven-and-one-half times the estimated value of one year of estimated capacity revenue. More cash to this company would be a classic case of throwing good money after bad.” 

 In 2007, the company incurred more than $30 billion in debt to buy TXU. EFH dealmakers assumed that natural gas prices would rise, causing power prices to increase and EFH revenues in turn to go up. Instead, natural gas prices have declined, and all indications are they will remain low.

 Sanzillo noted that the company’s financial condition is grave and getting worse: 

• Since 2005, the company has lost 500,000 customers ;
• Since 2007, EFH stock has dropped $14.5 billion in value ;
• Since 2008, company revenues have plummeted. The company earned $11 billion  in annual revenue in 2008. By 2012 it earned $5.6 billion,  a loss of $5.4 billion in five years;
• Since 2007, the company has cumulative losses of $17.76 billion ;
• Since 2007, the company’s total assets have declined in value from $64.8 billion to $44.7 billion.  This has occurred even after adding 2,200 megawatts of new coal-fired power generation in 2009-2010;
• Since 2007, the company has gone from paying $830 million in annual interest payments  to $4.3 billion in 2011.  Despite a lower 2012 interest payment, the company paid 62 cents of every revenue dollar collected for interest.  The industry average nationwide is 6.4 cents of every dollar; and
• EFH has the lowest credit rating of any of the 57 shareholder-owned utilities monitored by the Edison Electric Institute on its website.  

The stock of the company is worthless, and the company continues to lose asset value. Although the company has, through the legal and political process, delayed compliance with tough pollution control investments, it has insufficient revenue to manage day-to-day operations of the company and pay down its debt.

 “Texas has a problem with its electricity grid. The first thing you do with a problem of this nature is to stop wasting money,” said Sanzillo. “The state needs resources to keep utility and construction workers employed. They will build the improvements in the electricity grid, not investment bankers.”

 “What’s more, a capacity market likely would worsen air quality in the Dallas/Fort Worth area. EFH’s subsidiary Luminant owns several coal-fired power plants in the area, where air quality is so bad that it has become one of the nation’s pollution hot spots,” said Tom “Smitty” Smith of Public Citizen’s Texas Office. “EFH’s plants are leading contributors to the emissions that have worsened air quality, according to a 2010 analysis. (The plants are Big Brown, Martin Lake and Monticello.) Today’s study shows that even if Texas were to go to a capacity market, it is unlikely that EFH would add the most effective new pollution controls. If the state were to adopt a capacity market, these old and dirty plants would keep on polluting.”
“EFH is unlikely to use money it gets through a capacity market to build revenue-producing assets or to invest in lower-emitting renewables,” Smith said. “Nor is it likely to clean up its coal plants.”

The report is available here.

Note: Tom Sanzillo, report author and analyst with the Institute for Energy Economics and Financial Analysis (IEEFA)  has 30 years of experience in public and private finance. As first deputy comptroller of New York State, he was in charge of more than $150 billion in state and local municipal bond programs and was the head of a $156 billion global pension fund. Over the past six years Mr. Sanzillo has authored reports and testimony on public and private energy finance, coal, coal mining and exports in 20 states, including a March 2011 study EFH’s  Big Brown, Monticello and Martin Lake coal plants. 

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