Ten years ago, everything began to change in the power sector. Now there are signs that some things are changing back. In Texas, at least. Witness the once pure merchant company, NRG Energy, reconstituting in large part the former utility in Houston.
Against a backdrop of industry deregulation, in 1999 three local utilities in the upper Midwest -- one was Northern States Power in Minnesota -- were grouped together under a holding company that was given, as was customary at the time, the rather vague name of Xcel Energy. Some of Xcel's generation assets were then hived off, and a new merchant firm was created, called NRG Energy.
In the post-Enron world, NRG, like several other merchants, had problems, and did a stint in bankruptcy. Since then, though, NRG became independent of Xcel, and through acquisitions became an even bigger merchant. Four months ago, Exelon, a so-called "integrated utility," launched an effort to buy NRG's 24,000 MW of generation.
Over the same time frame, the former electric utility in Houston was pulled apart, all in the name of deregulation and, in the case of Texas, in the name of retail power competition.
Houston Lighting & Power, which had become Houston Industries, then Reliant, was broken into three pieces -- a wires and distribution company (CenterPoint), a generation group (Texas Genco), and then a company that was focused primarily on retail electricity (Reliant).
Reliant's retail business in Texas has been operating without any connection to a local generation base. The company did pay over $5 billion in 2002 for the Orion merchant generating business, but all those generators are in the Northeast, not Texas.
In 2004, in an earlier unbundling agreement with the state, Reliant was to buy back a portion of its old generation assets, but because if the debt burden it had piled up buying Orion, its bankers wouldn’t let it buy Texas Genco.
Texas Genco was, instead, scooped up by some fast-moving private equity groups in 2005, who immediately mothballed some of the plants, thus squeezing Reliant's supply of power from capacity it once owned. At the time, some of the comments made by Reliant executives about the private equity managers running Texas Genco were, frankly, not fit to print, the animosity ran so deep.
Then the private equity firms "flipped" Texas Genco, selling to NRG, at great profit, in early 2006. In that deal, NRG doubled its generating capacity, and also got the South Texas nuclear power plant. That plant, which Houston Lighting & Power had spent so much money building and which it commissioned in 1988, is actually one of the newest facilities in the US nuclear fleet and is a key reason that Exelon is interested in buying NRG.
Then, this past Monday, NRG announced it was going to buy Reliant's Texas retail electricity business. Or maybe the better way to say it is that Reliant announced it had finally found a buyer for its retail business.
Either way, it became clear that the Texas experiment to create a big retail electricity market had taken a curious turn. The state's second-biggest retail incumbent, Reliant, wanted out. The folks who had bought Reliant's generation now will take the company's retail customers. NRG will now act as a quasi-electric utility in a deregulated market. It's unclear if that will make NRG more, or less, attractive to Exelon.
If NRG's acquisition of Reliant's retail stands up, and Exelon does indeed buy NRG, then Exelon would become a dominant force in Texas, going head-to-head with Dallas-based Energy Future Holdings -- formerly TXU -- which today is run by the very private equity guys who once ran Texas Genco. (EFH just announced a stunning $8.9 billion fourth-quarter 2008 loss).
Without a whole lot of comment ... it sure seemed earlier this week that some industry players were going back to square one.
The final irony is that the bulk of what would will be left of Reliant after the deal with NRG is complete will be the Orion portion. That would make Reliant one of the more pure merchants left.
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