Proposed Texas Utilities Sale Could End Environmental Dispute

Published May 1, 2007

Texas Utilities (TXU) announced in February a preliminary agreement for the largest company buyout in U.S. history, which may bring a resolution to an ongoing dispute over the utility’s proposal to build 11 coal-fired power plants with modern emissions-reduction technology.

The deal, however, faces hurdles from a skeptical state legislature.

TXU projects its 11 proposed power plants will more than double the company’s existing power capacity while reducing its overall emissions by 20 percent.

Environmental activists, led by Dallas Mayor Laura Miller (D), have nevertheless opposed the new power plants, saying the proposed emission reductions are not good enough. They argue the plants should have to run on natural gas or utilize expensive, experimental coal gasification technology.

Tentative Deal Reached

In a February 26 news release, Dave Hawkins of the left-wing Natural Resources Defense Council called the proposed buyout “the largest leveraged environmental deal in history.” The proposed new three-division company, named Luminant Energy for generation, Oncor for transmission and distribution, and TXU Energy for retail business, will scale back the number of new plants from 11 to three, suspending permit applications for the other eight plants.

In addition, the proposed new company will commit to carbon trading. The new alliance opened a Web site at to announce its plans.

According to a statement on the company’s Texas Energy Future Web site, “This scale-back represents a 75 percent reduction in new coal capacity. In addition, the company is committed to continuing its efforts to meaningfully reduce existing carbon emissions and seeks to join United States Climate Action Partnership (USCAP). … As part of our support for USCAP, we are also pledging to support the mandatory cap and trade program to regulate carbon emissions.”

Texas Energy Future said that to breach the shortfall between future power demands and the planned reduction in new generating capacity, “TXU will implement an aggressive demand reduction program through a $400 million investment in conservation and energy efficiency activities over the next five years.”

Legislators Skeptical

Texas legislators, however, expressed concern about the deal. Lawmakers are considering legislation that would delay or nix the deal by requiring the state’s Public Utility Commission to study and approve the deal before it can take effect. Additionally, U.S. Rep. Joe Barton (R) in a March 9 letter asked the Federal Energy Regulatory Commission (FERC) to review the proposed deal.

In light of the legislature’s concerns and potential FERC intervention, Henry R. Kravis, founding partner of Kohlberg Kravis Roberts & Company, which helped engineer the deal, has indicated the proposal may be in jeopardy.

“We did it with the full understanding that the rules were transparent, that the P.U.C. had certain authority, and had we known that the rules would be changed, I think that would have changed our thinking whether we would have made an offer,” said Kravis in the March 20 New York Times.

“I want to ensure first and foremost that the leveraged buyout by KKR is in the best interest of the ratepayers of Texas,” Barton said in a March 12 news release. “If New York investors benefit as well, all the better. I will not, however, stand idly by while investors from New York or anywhere else benefit on the backs of the Texas electricity grid or the Texas ratepayers.”

Higher Costs Looming

Bill Peacock, director of the Center for Economic Freedom at the Texas Public Policy Foundation, emphasized the need for the added capacity originally proposed by TXU.

“The attack by environmental activists on the proposed coal-fired plants will likely have a negative impact on both prices and reliability in our state’s electricity market,” observed Peacock.

“The truth is that we need not just three but all 11 of TXU’s proposed plants to keep the lights on and the state’s economy growing,” Peacock said. “If they don’t build those plants we will have to pay higher prices for energy and we may well have less-reliable power sources.”

John Dale Dunn, M.D., J.D. ([email protected]) is a member of the Science and Policy Advisory Board of the American Council on Science and Health and teaches emergency medicine at CR Darnall Army Medical Center, Fort Hood, Texas.