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Goldman Sachs The company abandoned its ill-fated foray into consumer banking at the end of 2022, but an investment in a Texas energy retailer means its reach in American households will soon expand.
Rhythm Energy, a Houston-based electric utility overseen and owned by a Goldman Sachs private equity fund, has received federal approval to expand from its home market into more than a dozen states, in where deregulated energy companies operate, CNBC has learned.
This includes energy grids, primarily in the Northeast, that provide power to 190 million Americans, according to federal figures.
The idea that a Goldman-affiliated company wants to make a splash by providing an essential service to Americans could bring scrutiny to the bank and its efforts to boost revenue through so-called alternative investments. It also brings Goldman into an industry, albeit through an intermediary, that critics call a hotbed of consumer abuse.
Bad actors
A wave of energy deregulation that began in the 1990s led to the emergence of a new group of retailers promising savings over existing utilities. Attorneys general, consumer groups and industry regulators have alleged that some of these retailers use deceptive marketing and billing practices to impose higher costs on customers. By one estimate, customers in deregulated states paid $19.2 billion more than necessary over a decade.
Rhythm, which bills itself as the largest independent green energy provider in Texas, is positioning itself as an honest company in an environment with less scrupulous players. The startup, which began offering retail energy plans to Texans in 2021, is avoiding competitors’ teaser rates and hidden fees, it says.
“While some of our competitors like to charge up to 18 hidden fees, we pride ourselves on charging exactly 0,” Rhythm’s website says.
But Rhythm customers in Texas paid an average rate of 18 cents per kilowatt hour in 2022, five cents per hour more than what customers of the state’s regulated providers paid, according to U.S. Energy Information Administration data.
That figure doesn’t take into account the impact of credits given to solar customers that reduce their costs, according to a person with knowledge of the company who was not authorized to speak publicly.
Although there were “bad actors” in the residential energy space, there were also “great retailers with innovative products,” said James Bride, an energy consultant, in an interview. “The realization of the potential there depends on ethical corporate behavior.”
Nothing in online reviews, interviews with current and former customers, and conversations with regulators contradicts Rhythm’s claims of fair dealing and good service.
“Goldman Sachs invests on behalf of its clients across a wide range of industries through its private funds,” a spokeswoman for the New York-based bank responded to this article. “Many of these companies operate businesses that serve retail customers. That’s not new.”
Goldman’s growth engine
Goldman’s record in dealing with American consumers is checkered: The bank has been accused of profiting from the 2008 housing bubble by betting on subprime securities. Years later, the bank called its consumer initiative “Marcus,” partly to distance itself from this memory. But the consumer division has been hit by mounting losses, a brain drain and unwanted regulatory attention.
Goldman CEO David Solomon has now allocated his wealth to the bank’s wealth management division, calling it the “growth engine” after the retail banking bust. As part of that effort, Goldman wants to raise more client money for private equity funds to reach its goal of generating $10 billion in fees this year.
Private equity firms have changed the energy landscape in the nation’s largest energy markets. In the PJM zone, which includes Pennsylvania, New Jersey and Maryland, for example, private capital owns about 60% of the fossil fuel power plants and enjoys less regulatory oversight than legacy utilities, according to a report from the Institute for Energy Economics and Financial Analysis from August.
“Ownership status matters,” wrote report author Dennis Wamsted. “Utilities are monitored by government regulators who have a vested interest in keeping costs in check for ratepayers; private capital is largely spared from this supervision.”
Rhythm, which buys energy in wholesale markets and sells it to consumers, first hit the headlines in November after its filing with the Federal Energy Regulatory Commission surfaced.
The move made Goldman Sachs, through its private equity division, one of the first Wall Street firms to sell retail energy contracts to households, said Tyson Slocum, energy and climate director at consumer advocacy group Public Citizen.
Possible conflict?
Slocum noted that Goldman’s trading arm trades energy contracts and, along with other creditors, owns a fleet of fossil fuel generators along the Northeast Corridor, while a separate division created a solar energy company called MN8 Energy. The ability to influence retail sales, energy production and trading in electricity contracts could lead to abuses, he said.
“Goldman knows how to trade, they own and operate energy assets and are involved in the futures and physical markets,” Slocum said. “You’ll do fine. Will customers also be able to do this? I’m not sure.”
Goldman has “strict information barriers between its public and private companies” that prevent such self-dealing, the company spokeswoman said.
In a statement provided to CNBC, Rhythm CEO PJ Popovic said his company “has never purchased power from Goldman Sachs or any Goldman Sachs-owned or affiliated power generation asset, nor has Rhythm ever purchased any physical or financial power from Goldman Sachs or Goldman Sachs.” “purchased from one of its subsidiaries.” on the commodity markets.”
Rhythm operates “autonomously” from West Street Capital Partners, the private equity fund of Goldman Sachs that is listed as the owner in federal filings, according to the person, who was not authorized to speak publicly for the company.
Still, Goldman Sachs has been affiliated with Rhythm since its founding in 2020, and the bank has appointed at least one director to Rhythm’s board, a typical arrangement in the private equity industry, according to this person.
According to Michael Ewens, a finance professor at Columbia Business School, private equity funds can exert influence over portfolio companies in a variety of ways, including by hiring and firing CEOs and approving acquisitions and corporate sales.
But the primary focus of Goldman Sachs managers — ensuring a profitable outcome for West Street Capital Partners investors and increasing the chances that they will participate in future rounds — should lead to discipline in managing the companies, Ewens added.
“People tend to think a lot of bad things about private equity, but Goldman will always be a priority,” Ewens said. “Will someone buy this company in five years for more than they paid for it?”
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2024-02-02 15:07:45
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