Rate Impact: If Energy Future Holdings Collapses, what then for consumers?

The potential collapse by EFH

  raises questions for consumers.

Energy Future Holdings, the parent company of TXU Energy, made a bad bet in 2007 — and now the state’s largest electric company may be teetering close to bankruptcy. If Energy Future Holdings goes under, will the lights go out? Will prices go up?

The short answers are “no” and “maybe.” Barring extreme circumstances, individual customers should not lose power. Reading the tea leaves as to prices is a bit more difficult, although under certain circumstances increases are certainly possible. The collapse of Energy Future Holdings also raises a potential new dilemma for the Public Utility Commission. But more on that later.

How likely is an EFH failure? According to the International Herald Tribune, a growing number of analysts and bond investors are expressing skepticism about the company’s long-term chances. As one expert told the newspaper: “The game may not be over just yet, but the prospects don’t look so good.” At the root of EFH’s difficulties is the acquisition of TXU Corporation back in 2007. Investors used $45 billion for that transaction — most of it borrowed — and now that debt has become crushing. Warren Buffet, who invested $2 billion in the deal, has called it a “major unforced error.”

But even if Energy Future Holdings fails, its power plants should continue operating without interruption. That’s why the lights should stay on. The company’s regulated transmission and distribution utility (Oncor) also would continue functioning and customers of EFH’s retail electric affiliate (TXU Energy) would get switched to another company, if necessary. All this points to uninterrupted electric service, no matter what happens to EFH.

Whether a bankruptcy would impact prices is a murkier question. For instance, what happens if EFH comes hat-in-hand to the Texas Legislature seeking a bailout? What if another company buys all of EFH’s power plants and then — by virtue of its larger position in the market — gains an ability to unilaterally influence prices? Also, default electric service in Texas is very expensive. If home customers get switched to a default provider because of a bankruptcy, they would end up paying more for power — at least temporarily.

And here’s another odd dilemma. Under the Texas electric deregulation law, when a retail electric company suddenly exits the market, its customers automatically get switched to default service. As noted above, TXU Energy is the retail electric company for Energy Future Holdings. But TXU Energy also has been selected to serve as the default provider for north Texas. This means that an EFH bankruptcy could lead both to the failure of one of the state’s largest retail electric providers, plus the company that provides backup service. This has never before occurred in Texas history and almost certainly would leave regulators scrambling.

The good news is that such an outcome is highly unlikely. TXU Energy shouldn’t disappear overnight, even if its parent company goes under. A more likely scenario would have EFH selling off TXU Energy’s business, either as a whole or in parts. That means that home customers currently getting served by TXU Energy would not get dumped to default service, but rather have their contracts honored by a third party.

Besides TXU Energy, other companies selected by the Public Utility Commission to provide default service include Reliant Energy Retail Services, WTU Retail Energy, First Choice Power and Constellation New Energy. You can find out more about default service (it’s technically known as “Provider of Last Resort” service) at this link on the PUC website. You can read more about the 2007 TXU buyout in a report from the Texas Coalition for Affordable Power. Here’s a link to the appropriate chapter. And just below I’ve included a bit of information about TCAP, which produces original policy research about the Texas market.

-- R.A. Dyer

Who is the Texas Coalition for Affordable Power?

TCAP is a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.