Make no mistake, the 500 Luminant employees who will lose their jobs later this year are victims, but not of federal over-regulation.
They are pawns in the ongoing charade of Texas’ deregulated electricity market, which already has left generators financially weakened and consumers worrying about blackouts.
Luminant, Texas’ largest power plant operator, said it will fire the workers and close two large coal-fired power units to comply with stricter air quality standards mandated by the U.S. Environmental Protection Agency.
Dallas-based Luminant is asking a court to delay the EPA rules, issued in June, so it will have more time to comply.
Luminant joins a chorus that includes Gov. Rick Perry and that loving lapdog of polluters, the Texas Commission on Environmental Quality, in lambasting the EPA rule changes.
Meanwhile, NRG, the second-biggest generator in the state, said it expects to comply with the EPA regulations without any jobs cuts, plants closing or material financial impact.
Funny how much difference good financing and a little planning can make. After all, power generators knew that, sooner or later, stricter air standards were coming. While it does seem that six months is a short time to enact the sort of pollution controls the EPA is requiring, it’s a moot point.
Buyout debt
It’s unlikely Luminant has the cash to make the sort of investments it needs to reduce its coal-fired pollution. Its parent company, Energy Future Holdings, is struggling with mountains of high-priced debt from its ill-timed $43 billion buyout by two private equity firms in 2007.
That deal resulted from an unintended consequence of deregulation that made coal a profit machine. Electricity rates are tied to natural gas, and for most of the past decade, coal enabled companies to generate more cheaply, fattening their margins.
That’s why we have 19 coal-fired generating units already operating and nine more than have been granted permits by the Texas Commission on Environmental Quality.
Now, with an abundance of shale gas, prices have fallen below $4 per million British thermal units, making coal a less profitable generating source.
But don’t expect generators to switch fuels.
“They couldn’t afford to switch,” said Ed Hirs, a professor of energy economics at the University of Houston. “A coal plant is a sunk cost.”
Hirs and a group of researchers affiliated with Yale University recently studied whether stricter pollution standards would cause generators to change from coal to natural gas. At most, the study found, 20 percent of the coal-generating capacity in the U.S. might convert.
“You’re not going to see a big change over time,” he said. “Clearly, there’s an issue of inertia in the market.”
That will disappoint environmentalists, and it will disappoint natural gas proponents, who have argued that gas is a cleaner, more economical generating fuel.
More of the same
In Texas, though, it means more of the same. Having created a system of misplaced incentives, deregulation has left us with higher prices, lower reliability and, now, more expensive and dirtier coal generation.
It’s easy – and politically feasible – to blame the EPA, but the 500 jobs Luminant is cutting aren’t being lost to higher air quality standards. They’re simply the latest victims of deregulation’s failed legacy.
Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy. Follow him on Twitter at twitter.com/lsteffy.
I’m sorry, I fail to see how your article actually demonstrates any of the things you claim? For starters, you claim that the big problem here is Luminent’s debt from purchasing two private firms in 2007, and their debt was too massive to convert to cleaner energy methods. How is that the fault of the deregulated market? That’s just bad business. Energy Future Holding’s problems are their own, and due to bad management, bad business decisions, and poor execution. It’s hypocritical for you to somehow condemn deregulation as the cause of Luminent’s problems, while praising NRG for being able to comply with the EPA rules. They’re both operating in a deregulated space, so blaming deregulation for the problems of Luminent is inconsistent. And on top of that, it is flat out wrong.
Also, this statement by you is wildly incorrect and unsubstantiated in turns:
“In Texas, though, it means more of the same. Having created a system of misplaced incentives, deregulation has left us with higher prices, lower reliability and, now, more expensive and dirtier coal generation.”
1.) What misplaced incentives are you referring to? Companies attempting to make a profit or pay their debts by using coal? This is America, this would be happening regardless of regulation or deregulation. It’s called the free market. There’s a reason that plenty of regulated utilities in other states are publicly traded companies – they exist to make a profit. Faulting any company for attempting to do that and blaming it on deregulation is not only silly, it’s flat out naive.
2.)Deregulation has not left us with higher prices. Prices in Houston and Dallas are the same or cheaper than they are in Austin, currently, as quoted by a member of Austin’s very own city council. And they’ll be MORE expensive in Austin when the subsidies are removed next year and the estimated 20% rate hike goes into effect for customers of Austin Energy, which I’m sure you know, is a regulated entity. So prices are not higher.
3.) What does deregulation have to do with Low Reliability? I’m not even sure what Low Reliability you’re referring to, quite frankly. You mean the Grid operation this summer and energy shortages because of the heat? Because the generation of electricity is the same as it always was during regulated or deregulated era. And by the same token, any lack of reliability of the grid would be consistent regardless of deregulation. You’ve failed to support your claim here with any kind of fact, instead you’ve just thrown out a baseless accusation.
4.) More expensive and dirtier coal generation? I’ve addressed this above. it was a business decision, and blaming a business entity for working within the rules of the marketplace is unrealistic. If a regulated entity was heavily in debt due to bad business decisions, do you think they wouldn’t have chosen to construct more coal plants? Again, what exactly is the point you’re trying to make here. Please clarify.
“It’s easy – and politically feasible – to blame the EPA, but the 500 jobs Luminant is cutting aren’t being lost to higher air quality standards. They’re simply the latest victims of deregulation’s failed legacy.”
Actually, it’s not a failed anything. For one, deregulation works, and there’s a reason other states are adopting it and using Texas for a model. Ask residents of New York and Chicago how much they’ve enjoyed they’re drastically lower bills. As for the other part of your claim, it’s pretty simple cause and effect. Those jobs were safe until the EPA changes, which MANY people think are unrealistic, questionable, and have impossible timeline expectations. Then the EPA made changes, and the jobs were lost. That is simple cause and effect. But you seem to think it’s Luminent’s fault for not being able to predict the future and timing of these unexpected changes (Texas was a last minute addition and a borderline admission to the EPA rules in terms of qualifying) and them not being able to predict the future is their own fault.
I’d welcome your response to my comments.
Thanks for an excellent article that points out where the problem really lies… in Luminant’s lap.
BTW, thanks to “deregulation” Texans currently pay 30-40% more for electricity than do the citizens of Arkansas, Louisiana and Oklahoma. I would like to have the electricity companies, Governor Perry and the State Legislature explain that to us.
Strengthof10, it sounds like you’ve been reading some of the wrong blog pages for your facts.
The fact of the matter is, comparing Texas to a state like Arkansas isn’t an Apples to Apples comparison. For starters, many of those comparison rates quoted don’t include additional fees and surcharges that exist in the regulated utilities of those states. They’re just the energy charges. Because regulated entities aren’t required to report all of those charges. Texas, however, does, thanks to deregulation. Additionally, Texas has a huge infrastructure and major metropolitan areas. I’ve done a much more accurate break down of the comparison of electricity rates in regulated and deregulated cities across the country here:
http://texaselectricityratings.wordpress.com/a-comparison-of-deregulated-and-regulated-electricity-rates-2/
You did get one thing accurate, however. The problem is Luminent’s. But not because of deregulated electricity. It’s because of band business decisions.
Steffy, I totally agree with Texas Electricity Ratings and would like you to reply.
In addition, your comment: “While it does seem that six months is a short time to enact the sort of pollution controls the EPA is requiring, it’s a moot point.” No Steffy, it is not a moot point it is THE POINT. The Luminant business situation is a small story. The big story that you choose to not address is what happens to every Tom, Dick and Harry (individuals and businesses alike) next summer with the lost Luminant generating capacity. Why write a small story when you could write a big story? The EPA did not include Texas in the original proposal and allow us (citizens, business, PUC and ERCOT, business newspaper columnists, etc) to respond during the comment period. The big story is where do we go from here if the court challenges are not successful. What are our options? You seem to think we are going to be satisfied sitting around without electricity and air conditioning and blaming Luminant for their bad decisions. That blame game will last about 2 minutes until we start focusing on getting the lights back on. This could be a slow moving disaster that affects you and all of the Chronicle’s readers and Texans statewide. THAT IS THE BIG STORY. GO FOR IT! What are our options and if we don’t have any wiggle room doesn’t that change our perception of the importance of Luminants challenge of the EPA action and the tone of your story here? Do you want you and Luminant and your column on page 3 of the business section or do you want to be on page one of the paper.
It’s indisputably true that electricity prices in Texas have been historically higher than prices in adjoining states without deregulation — and significantly so. The main federal government website that contains the relevant data on this point allows researchers to make apples-to-apples comparisons between states. It’s incorrect to allege otherwise. Government agencies, industry representatives and academic institutions use this federal data for this purpose. Interestingly, the federal website also reveals that prices in deregulated areas of Texas have been higher than prices in areas of Texas without deregulation for every year for which there exists data to make the comparison.
Tex Elec Rat,
It is you who is comparing apples and oranges. According to the US Energy Information Administration the average current cost of residential electricity charged by the electric companies in Texas is 11.28 cents/kw. It is 8.54 (-24%), 8.76 (-22%) and 9.12 (-19%) in Arkansas, Louisiana, and Oklahoma, respectively.
You try to prove your point by including various city and state taxes and fees which are irrelevant to the actual electric companies’ cost of electricity, by far the major item on our monthly bills. I assure you that if the electric companies would give Texans the 20%+ they give to the people of Arkansas, Louisiana and Oklahoma we might be less dissatisfied with “deregulation”.
BTW, who pulls your chain, the owners of Luminant, Reliant, et al?
Who is responsible for the “perfect storm” of upside-down generation of electricity for our Citizens? Well of course, it was all brought to us by our State Legislature! Cities like San Antonio, Bryan-College Station and a few others that kept their Co-Op Electric producer are the real Winners. And Houston? BIG, Big, Big no Gigantic looser; Houston of Course where the cost of electricity is only out paced by the cost of WATER!
Loren,
So the fact that natural gas is now more economical compared to coal to generate electricity is a direct result of deregulation? Explain.
Jon