bankruptcy

Low-carbon and “green” strategies have begun delivering returns for utility shareholders. Whether a company ultimately wins or loses depends on how markets are pricing the risks of possible carbon-control regimes.

Electric utility executives generally view corporate restructuring as a potential source of economic value and a potential partial solution to financial problems that reflect changing business risks. On the other hand, regulatory commissioners attempt to insulate and regulate the utility component of the restructured energy business and to protect the public interest, including reliability of service at reasonable costs.

2007 was a big year for TXU Corp., as it went private in the largest leveraged buyout in history. To sweeten the deal for environmentalists and regulators, TXU made structural and financial concessions. Now TXU’s ring-fencing structure might become a template for future utility M&A and refinancing deals.

Was restructuring a success? Prices provide a dispassionate analysis, showing that restructuring was poorly designed, badly executed, and focused on the wrong part of the grid. With those lessons learned, it’s time to explore ways to move forward.

A motley assortment of naysayers and recalcitrants continue to oppose competitive electricity markets around the world. But the alternative to markets is centralized command economics—a discredited concept that deserves to be consigned to the dustbin of history.

Over the past 15 years, trading’s role at utility companies has evolved substantially from ensuring sufficient power and fuel supplies for ratepayers to taking large, open, and speculative positions and maximizing asset value. Along with that evolution come a host of new business and financial risks for utilities.

During the last few years, the generating asset-ownership structure in North America has gone through a major change. During one of the most severe bust cycles of the industry, and the gradual recovery of the markets, significant amounts of assets have changed hands.

Financial acquirers of utilities face a higher hurdle than traditional acquirers because their reputation for seeking out-sized returns on highly leveraged, short-term investments doesn’t play well. Shaking off that reputation will lead to more effective consolidation.

Severe upward pressure on electric rates after a decade of stability has regulators, legislators, utility executives, consumer advocates, and myriad other stakeholders searching for solutions. Revenue-backed financing can mitigate many of these mandate-driven rate increases significantly. These programs must, however, be designed to eliminate the inefficiencies and inequities that can be associated with revenue set-aside programs.

Professor Mark T. Williams goes in depth on the TXU leveraged buyout.