The Retail Electric Power Market Shakeout in Texas

Michael Giberson

One last Texas electric power post for the day, this one on the upheaval among some electric power retailers in Texas, via Platts:

The shrinking field of retail marketers is not an indictment against restructured power markets but an expected result of the credit crisis and its impact on retailers, Jim Burke, CEO of TXU Energy said Monday morning.

Burke’s comments at the KEMA Executive Forum in Houston came after NRG announced plans Monday to buy Reliant Energy’s retail business in Texas for $287.5 million. Integrys Energy Services’ parent last week said it would wind down or sell IES, which is one of the larger retail marketers operating in competitive retail markets…

Integration of generation assets and retail market assets, as evidenced in the NRG-Reliant deal and in the business strategy of marketers such as TXU and others, also makes sense and may be a future trend, Burke added.

In many states that restructured, unbundling of vertically integrated utilities often simply produced the spin-off of retail and generation units into separate entities still under the same corporate parent, sometimes with limited sales of utility-owned generation to independent power companies. The point wasn’t to break up companies, per se, but to separate the power generation and retail ends of the business from the transmission and distribution wires companies. In Texas, they pushed a little harder than most states on developing a competitive retail sector separate from the former regulated utilities.

Unbundling of electric utilities doesn’t require divorcement between generation and retailing, however, and as the comments above suggest, the combination makes some sense. The combined company finds itself naturally hedged against price risk, and it may be cheaper to hedge the risk in this manner than through contracts.

I recall that Sally Hunt makes this point well in her book Making Competition Work in Electricity.

While many restructured states are not experiencing a similar “shakeout”, it is mostly because they never saw much of a “shake in” in the first place.