An electricity firm that has received billions in Texas energy subsidies plans to buy a competing company for $3.625 billion in cash, according to a July 24 Wall Street Journal article. The combined company would serve six million customers.
NRG Energy Inc. announced it will acquire Direct Energy subject to approval by the Public Utilities Commission of Texas (PUCT), shareholders of Centrica PLC, the Federal Energy Regulatory Commission, the U.S. Department of Justice, the Federal Trade Commission and the Commissioner of Competition under the Canadian Competition Act.
“It could add a small amount of generation,” said Robert Michaels, an energy economist and former Cal State Fullerton professor. “Maybe they'll be able to economize more, produce more cheaply simply because they’ve got economies of scale.”
NRG received more than $1.1 billion of federal tax credits for its wind turbines in Texas before announcing its decision to buy Direct Energy for $3.6 billion, suggesting NRG may not need energy subsidies at all but, according to Michaels, things are not always as they seem.
“Cash could mean lots of things,” he said. “It doesn't mean they've got bank accounts sitting there doing nothing. Probably what happened here is a tender offer for it but they could have done it any number of ways.”
A tender offer is a limited-time invitation to a company’s shareholders to sell stock at a specific price.
According to a Texas Public Policy Foundation report, renewable energy, specifically wind, is a $14 billion industry. Yet the American Wind Energy Association (AWEA) is advocating for more subsidies, potentially creating circumstances in which taxpayers foot the bill for large energy corporations.
“NRG and Direct Energy are both tied up with electricity but they really are in different parts of the business,” Michaels said. “If you want to construct a generator like NRG does, there's politics involved and your power gets thrown into the market in competition with power from all the other possible sources. So, it may be that the merger does pass benefits onto the consumer or it may be that the merger does not do good.”
The merging parties are likely to argue before PUCT that the acquisition will not harm competition and will lead to better terms for customers, according to Michaels.
“Even though there's a smaller number of sellers, suppliers and generators, it may well be the case that competition among the survivors becomes stronger,” he told the Lone Star Standard. “Mergers in most other industries take place because there's evidence that it will lower the cost to production and the price to final consumers. Mergers in other industries must also be approved by the Federal Trade Commission or the Department of Justice.”
As noted in the NRG press release, this transaction will require approval from both the DOJ and FTC under the Hart-Scott-Rodino Act.
But in the event PUCT denies the merger between NRG and Direct Energy, it wouldn’t necessarily be the end of the acquisition.
“They could go back, re-apply and ask for a review of opposing testimonies so that they can rebut the arguments of the other side,” said Michaels. “The commission could negotiate. There's politics in it. There's economics in it. You basically just have to wait to see what's coming next.”
