Private equity wants to buy Entergy’s gas assets
1st July 2024 · 0 Comments
By Katie Jane Fernelius
Contributing Writer
(Veritenews.org) — In November, Drew Marsh, chairman and CEO of Entergy Corporation, announced to shareholders that, after 100 years, the power company would cease to distribute natural gas.
“We have significant capital needs to meet our customers’ growing demand for reliable, resilient and clean energy,” Marsh said. “To that end, we are pursuing opportunities to source that capital at a lower cost.”
One of those sources of capital? A $484 million deal with Baton Rouge-based private equity firm Bernhard Capital to buy Entergy’s gas utilities in Louisiana, which distribute natural gas to over 200,000 households and businesses in New Orleans and the Baton Rouge area.
The announcement did not come as a surprise to those on the November shareholder call. Just days earlier, Entergy had published a press release detailing its intent to sell its gas utilities to the firm, which is led by Baton Rouge businessman Jim Bernhard, a former state Democratic Party chair and prolific political campaign donor. Bernhard has created a new company, called Delta States Utilities, also referred to as simply Delta Utilities in company filings, to run the gas distribution business.
But the deal needs to pass regulatory muster with the Louisiana Public Service Commission – the elected board that regulates utility providers in Louisiana outside of New Orleans – and the New Orleans City Council, which regulates utilities in the city. Both are tasked with determining whether a new private equity-owned gas utility will best serve ratepayers.
Bernhard Capital argues that the deal will let both Delta States Utilities and Entergy focus resources and capital on their respective utilities, enabling each to improve their services. But critics of the deal argue that regulators should not support an agreement that incentivizes the natural gas utility to expand its reach and raise rates, especially in light of the documented emissions of natural gas use.
Gas distribution is a small fraction of Entergy’s overall operations, bringing in just $180 million in revenue for the company in 2023 compared to the $11.8 billion in revenue from electricity sales. Marsh told shareholders that Entergy could make some easy money from the sale, which could pay back some of the company’s outstanding debt and support critical capital improvements, like improving the resiliency of the electrical grid or investing in renewable energy sources.
The proposed sale appears to be good for Entergy’s bottom line, potentially infusing it with more than twice as much money as it makes in one year of revenue from natural gas distribution and divesting the company of a business that some analysts project will decline in the coming years, at least in the United States. The sale also appears to be good for Bernhard Capital, expanding its portfolio of utilities, which are known for stable and consistent cash flows.
The question now is whether the sale is good for ratepayers. And the debate over this question raises concerns about the long-term future of gas utilities in the city and state and whether private equity – known for acquiring, dramatically restructuring and then reselling companies – should play a role in that future as the city continues to face the adverse impacts of climate change.
In the months since Entergy first proposed the sale, opposition has begun to form, especially in New Orleans, where the company provides natural gas to approximately 109,000 households and businesses.
The Alliance for Affordable Energy, a consumer and environmental advocacy nonprofit group based in New Orleans, is leading the fight along with the Energy Future New Orleans coalition, asking the City Council to reject or significantly modify the terms of the proposed sale.
They argue that the sale of Entergy’s gas utility would be an undue burden to ratepayers in New Orleans. It would hand over gas utilities to private equity, which would be incentivized to grow its customer base and raise rates to pay back its sizable investments in the utility. Private equity firms frequently advertise themselves as delivering higher returns through private ownership than shareholders would get through publicly-traded companies. Critics also argue that Bernhard Capital has no prior experience in natural gas utilities, and the sale would give residents an additional bill each month and a new company to negotiate those bills with. Currently, New Orleanians receive one bill from Entergy for both electricity and gas.
However, the Alliance argues that more than inexperience and inconvenience, the sale of a gas utility to a private equity firm would undermine the city’s climate commitments to move away from the use of fossil fuels by 2035 and risk leaving the most resource-strapped households footing the bill.
“The idea of creating a new utility whose sole business is selling fossil gas seems just completely contradictory to all of our climate goals,” Jesse George, the Alliance’s policy director, said in an interview with Verite News. “It’s totally antithetical to our climate and clean energy goals and the steps that we absolutely must take to make this city habitable for the future.”
Getting approval
Soon after Entergy announced the sale of its gas utilities to Bernhard Capital, the two companies filed applications with both the New Orleans City Council and the PSC to begin the approval process.
In New Orleans, the process began with little fanfare. At a sparsely attended meeting in January, Bernhard Capital representatives Julius Bedford and Ryan King gave a presentation to a City Council committee outlining the overall sale and its transition timeline.
“We’re really excited to get a chance to give a brief introduction of our company and why we’re so excited about the opportunity here in New Orleans,” Bedford said.
In Bedford’s telling, Bernhard Capital was a hometown firm with a stated commitment to New Orleans and deep experience in delivering utilities to residential and commercial customers, perfectly situating it to take over the city’s gas utility. He pointed to the company’s success with concerning, George said, since the Sewerage and Water Board is moving to electrify its operations. According to some estimates, the Sewerage and Water Board is responsible for approximately 10 percent of natural gas use in the city.
“That shrinking pool of ratepayers who are left behind and who are left dependent on gas in their homes are going to be bearing more and more of the cost of these new expenditures,” George said.
Environmental impact
Beyond whether the deal will make sense in dollars and cents for New Orleanians, there are also questions about how the deal squares with the city’s stated climate goals.
According to New Orleans’ most recently published climate strategies, the city aims to move toward 100 percent clean energy by 2035, in part by curbing natural gas use and making the electric grid cleaner, so it will no longer be powered by fossil fuels but instead by sustainable, renewable energy sources. This goal came after a study showed that natural gas use was responsible for “33 percent of energy-related and 17 percent of total [greenhouse gas] emissions.”
However, the city is constrained in its ability to place limits on natural gas use. In 2020, the Louisiana Legislature passed a bill prohibiting any locality from placing restrictions on the use of natural gas. This has meant that New Orleans has had to lead more by example than by decree by implementing its own “green” policies with city-run buildings and departments.
Still, one of the few levers available to the city is its role as a regulator of Entergy New Orleans. The city has said as much in its own climate report, “Net Zero by 2050.”
“More than half (51%) of the greenhouse gas emissions in New Orleans are derived from how we produce, distribute, and use energy,” reads the report. “The City is uniquely well-positioned to address these emissions because the City Council regulates Entergy New Orleans (ENO) and can align the utility’s goals with those of the City.”
While many of those emissions are tied to the energy used to power the electric grid, such as at the contested New Orleans Power Station, they also include the emissions caused by natural gas use in homes and businesses. Accordingly, George argues that the city’s role as a regulator should empower it to reject the Bernhard Capital deal on account of the city’s climate commitments, especially because Delta States Utilities wants to seek out more customers for its gas utilities.
“They need to seriously consider the implications of approving this deal as is,” George said.
If the city does not want to reject the sale outright, the Alliance argues that councilmembers should impose conditions on the sale, including requiring the utility to develop and implement a plan to work to electrify all residential and small commercial demand for gas while also ensuring an across-the-board rate decrease for at least three years.
But a Delta States Utilities spokesperson said that natural gas is in line with the city’s commitment to being environmentally responsible.
“Natural gas distribution systems play a critical role in reducing emissions and rank among one of the most efficient energy sources,” a spokesperson said in an email, pointing to a recent report by the American Gas Association, a trade group for gas providers, claiming that homes that rely on natural gas appliances have a lower carbon footprint than those that rely on electric.
In New Orleans, the application for Delta States Utilities is still relatively early in the approval process: at this point, the Council is going through several rounds of testimony. Following an evidentiary hearing in September, interested parties will file briefs. And then, once November comes, the decision will be in the hands of the council.
Verite News requested comment from the five councilmembers who serve on the Utility, Cable, Telecommunication & Technology committee. All declined to be interviewed for this story.
This article originally published in the July 1, 2024 print edition of The Louisiana Weekly newspaper.
