Texas electricity market lures big investors
Buffett, Gates, Pickens bet that state’s market will bring hefty returns
By Edward Klump
BLOOMBERG NEWS
Tuesday, September 18, 2007
Warren Buffett, Bill Gates and T. Boone Pickens expect to profit from the rising electricity prices paid by the 23 million people of Texas.
Pickens plans a $10 billion wind farm that may become the world’s largest. Gates’ Cascade Investment LLC created a venture to build power plants in the region. Buffett is part of a $3 billion partnership that is building transmission lines.
Power sales in Texas are increasing 21 percent faster than the U.S. average, the North American Electric Reliability Corp. says.
The state’s electricity prices will rise 24 percent in a year, futures markets show. A shortage of power is likely because Kohlberg Kravis Roberts & Co. shelved $8 billion in new generators as part of its planned takeover of TXU Corp., the state’s biggest electricity producer. The grid may stop providing consistent supplies within two years, according to the Electric Reliability Council of Texas.
“It is a huge market that keeps growing,†said Barry Abramson, who helps manage $28 billion in assets at Gamco Investors. There’s also “the perception that regulators and government agencies are supportive of new power-plant development†in Texas, he said.
The presence of Buffett, Gates and Pickens may draw other investors to Texas, said Calvin Crowder, vice president of the proposed Buffett venture with American Electric Power Co., called Electric Transmission Texas.
“There’s a very real opportunity in Texas to earn a reasonable return on investment in utility, and especially transmission utility, business,†Crowder said.
The spot price for electricity in Texas last week was more than $65 per megawatt-hour, and the price for delivery a year from now is $81.25. Power producers sell so-called forward contracts, or agreements to deliver electricity at a set price, to customers.
Buffett and his partner in February proposed building 1,000 miles of high-voltage transmission lines to distribute electricity from the nation’s largest collection of wind farms.
“Transmission business doesn’t provide extremely high returns, but it also does not have extremely high risk,†Crowder said.
The Hunt family of Dallas, through its Sharyland Utilities affiliate, said in February that it would build an 800-mile electric transmission loop in the Texas Panhandle.
“The cost recovery here is virtually guaranteed,†said Pat Wood III, the former chairman of the Federal Energy Regulatory Commission who is working with the Hunt family.
Hunter Hunt, son of billionaire Ray L. Hunt, helped found McAllen-based Sharyland in 1999. Ray Hunt is CEO at Hunt Oil Co.
Gates and Pickens are buying or constructing power-generating plants.
The cost of electricity for Texas’s industrial consumers was 25 percent higher than the national average, at 7.83 cents a kilowatt-hour in the first six months of 2007, compared with 6.25 cents nationally. For residential customers, the average was 12.4 cents, 19 percent higher than the U.S. average of 10.41 cents.
Texas has “the best market structure that I’ve seen in the United States,†said Jeff Sterba, chief executive at PNM Resources Inc., the owner of New Mexico’s biggest utility.
PNM and Cascade, an investment vehicle for Microsoft Corp. co-founder Gates, announced in November a joint venture to build and acquire power assets in Texas and other Southwest states. The venture has two plants in Texas and is involved with NRG Energy Inc. on a generator project in Baytown.
Mesa Power, controlled by Pickens, the Dallas hedge-fund manager who made his fortune in the oil industry, is planning a 4,000-megawatt wind farm in the Texas Panhandle. Mike Boswell, vice president at Mesa, said the project might begin delivering power in 2011.
The need for more power in Texas is greater than ever after KKR and TPG Inc. agreed to cancel eight of 11 planned coal-fueled generators as part of the $45 billion takeover of TXU announced in February. The pledge was needed to win support for the deal from environmentalists and mayors who were concerned about increasing pollution.
The main state grid operator, known as Ercot, said in June that the so-called reserve margin, a measure of surplus capacity, may drop below 12.5 percent, the minimum needed to maintain stable supplies, as early as 2009. The estimate for 2012 is 5.9 percent.
The losers include more than 23 million people in Texas and manufacturers such as Austin-based Dell Inc., the second-biggest maker of personal computers, and Nucor Corp., the Charlotte, N.C.-based steel producer.
For steelmakers, power is among the three top costs, along with raw materials and labor. Nucor has a recycling plant in Leon County, where power costs have climbed more than 80 percent since the retail electricity market was deregulated in 2002.
Nucor decided to build a sheet-steel plant in Arkansas rather than Texas because of the high cost of power.
Austin-based Temple-Inland Inc., the state’s largest forest-products business, pays almost twice as much for power at its East Texas operations as competitors in the Southeast, according to Tony Bennett, chairman of the Texas Association of Manufacturers and vice president of government affairs at Temple-Inland.
“It is going to become more and more critical that we get this cost under control,†Bennett said.
