NCPA - National Center for Policy Analysis

TEXAS TWO-STEP

February 27, 2007

The record $45 billion buyout of TXU Corp. will provide shareholders and environmentalists with big windfalls.  But customers will be left to pick up the tab, says Investor's Business Daily (IBD).

As now structured, the merging companies have agreed not to build 8 of 11 coal-fired power plants TXU has in the works.   While a great concession to environmentalists, this will likely lead to a spike in the price of energy to TXU customers -- maybe not right away, but soon, says IBD:

  • In 2003, the latest full year for which data are available, the price of coal-produced energy was roughly $1.26 per million BTUs; for oil, it was $4.22 per million BTUs, and for natural gas, $5.41.
  • To be competitive, alternative energy prices would have to drop an additional 20 percent, according to a recent study by the Rand Corp; while prices for alternative energy are indeed falling, many technological hurdles remain.
  • Due to its reliance on cheaper coal and nuclear supplies, TXU has a cost edge in Texas' deregulated energy environment; many of its competitors use higher-priced natural gas. But if this deal goes through, it might lose that edge.

The idea that TXU can cut out cheap coal and go to high-priced alternatives and charge less for energy over the long haul just doesn't pencil out.   TXU's new owners will not be able to replace lower-cost coal with much higher-cost "alternatives" like wind and solar power and hold the line on prices, says IBD.  To do so would cut into the utility's profit. Holders will take their money elsewhere and rate payers may do the same.

Source: Editorial, "Texas Two-Step," Investor's Business Daily, February 27, 2007.

 

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