Spectacular fall of transatlantic giant

TXU's fall from grace has been spectacular and has shocked Suffolk's business community. Political Editor PAUL GEATER looks at what caused a blue chip company to be brought to its knees in just two weeks.

By Paul Geater

WHEN TXU announced a series of job losses on October 4, it made big news – but it didn't rock the entire business community.

The company refused to confirm the number of jobs to be lost, but it was thought to be in the region of 200.

Since privatisation in 1990, Eastern Electricity, Eastern Energy and its latest incarnation as TXU Energi has seen thousands of jobs going.

As in previous job loss programmes the company said this time there would be no compulsory redundancies – it would rely on voluntary severance and "natural wastage."

The news would obviously concern staff at TXU – but this was nothing new. Or was it?

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Within a few days it became clear this was no ordinary round of job cuts – the company was in profound difficulties.

A contact advised me to check the share price of the parent company on October 9 – that showed it had fallen from $40 a share to $14 a share in a week.

It's now fallen further – to $12 a share.

At the weekend the American parent company confirmed that it was cutting a $700 million lifeline to its European subsidiary.

This was aimed at protecting the American-based company – effectively writing-off the $4.35 billion it paid for Eastern.

As well as the former Eastern Electricity business, TXU also took over the former Norweb company and transferred all its administration to Ipswich.

In January this year TXU sold its 50 per cent stake in 24Seven, which manages the power network, effectively becoming merely a power broker.

As such it operates in two separate spheres.

Its best-known role is selling energy – electricity and gas – to 5.5 million consumers, both businesses and households.

That is the retail business and it is highly successful.

Its problems have arisen at its other arm – the electricity wholesale business.

About 18 months ago it negotiated long-term deals with power generators to ensure a constant supply of electricity.

Since then, however, the power marked has changed and prices have fallen dramatically.

However TXU has to buy its power at the higher price negotiated in early 2001 – although it can only charge its customers the going rate.

Once its administration costs are taken into account, this means that the company is unable to make a profit.

The company is now trying to separate the wholesale and retail businesses.

The retail side will be sold, with the proceeds going back to the American parent company while the wholesale side will probably be put into administration.

The name TXU will almost certainly disappear from the British energy market as it tries to rebuild its reputation in the USA.

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