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Goldman Sachs It abandoned an ill-fated push into consumer banking in late 2022, but an investment in a Texas energy retailer means its reach into American homes is about to grow.
Rhythm Energy, a Houston-based electricity provider overseen and owned by private equity fund Goldman Sachs, has won approval from federal authorities to expand from its home market to more than a dozen states where deregulated electric companies operate, according to CNBC learned.
That covers power grids, primarily in the Northeast, that supply electricity to 190 million Americans, according to federal data.
The idea that a Goldman-linked company is looking to make a splash by providing an essential service to Americans could invite scrutiny on the bank and its efforts to boost revenue through so-called alternative investments. It also introduces Goldman into an industry, albeit through an intermediary, that critics have called a hotbed of consumer abuse.
bad actors
A wave of energy deregulation that began in the 1990s gave rise to a new group of retailers promising savings over existing utilities. State attorneys general, consumer groups and industry watchdogs have alleged that some of these retailers use deceptive marketing and billing practices to saddle customers with higher costs. One estimate is that customers paid $19.2 billion more than necessary in deregulated states over a decade.
Rhythm, which calls itself the largest independent green energy provider in Texas, positions itself as an honest company in a field of less scrupulous players. The startup, which began offering retail energy plans to Texans in 2021, avoids its rivals' teaser rates and hidden fees, he said.
“While some of our competitors like to charge up to 18 hidden fees, we pride ourselves on charging exactly 0,” Rhythm says on its website.
But Rhythm customers in Texas paid an average rate of 18 cents per kilowatt hour in 2022, five cents per hour more than customers of the state's regulated providers paid, according to data from the U.S. Energy Information Administration. .
That figure does not include the impact of credits given to solar customers, which reduce their costs, according to a person with knowledge of the company who was not authorized to speak on the record.
Although there have been “bad actors” in the residential energy field, there have also been “great retailers with innovative products,” James Bride, an energy consultant, said in an interview. “The realization of potential depends on the ethical behavior of the company.”
Nothing found in online reviews, interviews with current and former customers, and conversations with regulatory bodies contradicts Rhythm's claims of fair dealings and good service.
“Goldman Sachs invests in numerous industries through our private funds on behalf of clients,” a spokeswoman for the New York-based bank said in response to this article. “Many of those companies operate businesses that serve retail customers. This is not new.”
Goldman's growth engine
Goldman's record in dealing with the American consumer is checkered: The bank was accused of profiting from the 2008 housing bubble by betting against subprime securities. Years later, the bank named its consumer initiative Marcus in part to distance itself from that memory. But the consumer division was dragged down by mounting losses, a talent exodus and unwanted regulatory attention.
Goldman CEO David Solomon has linked his fortune to the bank's asset management division, calling it the “growth engine” behind the retail banking crisis. As part of that effort, Goldman aims to raise more money from its clients for private equity funds to help its goal of generating $10 billion in fees this year.
Private equity firms have transformed the energy landscape in the country's largest energy markets. For example, in the PJM zone, which includes Pennsylvania, New Jersey and Maryland, private equity owns about 60% of fossil fuel generators and enjoys less regulatory oversight than legacy utilities, according to an August report from the Institute of Energy Economics and Financial Analysis.
“Ownership status matters,” wrote report author Dennis Wamsted. “Utilities are overseen by state regulators who have a vested interest in keeping costs to ratepayers in check; private equity is largely free of that oversight.”
Rhythm, which buys power in wholesale markets and sells it to consumers, first made headlines in November after its application to the Federal Energy Regulatory Commission surfaced.
The move made Goldman Sachs, through its private equity arm, one of the first Wall Street firms involved in selling retail energy contracts to households, according to Tyson Slocum, the watchdog's energy and climate director. of the consumer Public Citizen.
Possible conflict?
Slocum noted that Goldman's trading arm negotiates energy contracts and owns, along with other creditors, a fleet of fossil fuel generators along the northeast corridor, while a separate division formed a solar energy company called MN8 Energy. The potential for influence over retail sales, power generation and power contract trading could lead to abuse, he said.
“Goldman knows how to execute, he owns and operates energy assets and is involved in the physical and futures markets,” Slocum said. “They will be able to manage this well. Will customers do it too? I'm not convinced.”
Goldman has “strict information barriers between its public and private businesses” that prevent such proprietary transactions, 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 power generation assets owned or affiliated with Goldman Sachs, nor has Rhythm ever purchased physical power.” or financial institution of Goldman Sachs or any of its affiliates. in commodity markets.
Rhythm operates “autonomously” out of West Street Capital Partners, the Goldman Sachs private equity fund listed in federal filings as the owner, according to the person who was not authorized to speak on the record on behalf of the company.
Still, Goldman Sachs has been involved with Rhythm since its founding year in 2020, and the bank has placed at least one director on Rhythm's board, a typical arrangement in the private equity industry, according to this person.
Private equity funds can exert influence over portfolio companies in several ways, including by hiring and firing CEOs and approving company acquisitions and sales, according to Columbia Business School finance professor Michael Ewens. .
But Goldman Sachs management's primary goal — ensuring a profitable outcome for West Street Capital Partners investors and increasing the likelihood that they will participate in future rounds — should instill discipline in their management of the companies, Ewens added.
“People tend to think a lot of bad things about private equity, but Goldman will always have one overriding concern,” Ewens said. “Will anyone buy this company for more than they paid for it in five years?”
