Why the TXU Buyout Faces More Opposition

The environmental groups protesting TXU's "green" pledges carry ample political and legal cloutand that could signify changes in the deal

It was billed as a coup for both sides in the green vs. industry wars: A large utility agrees to clean up some practices in return for two major environmental groups' blessing of its sale to a private equity group. But the happy story line engineered by TXU Corp. (TXU) and its prospective buyers is proving to have plenty of hitches.

That's why when Texas Pacific Group founder David Bonderman meets Dallas Mayor Laura Miller on Mar. 5, he'll find a strident critic of the deal he helped strike with the Natural Resources Defense Council and Environmental Defense. Miller, a former Dallas city council member, community activist, and newspaper reporter before she was elected mayor in early 2002, says she has fundamental problems with the deal and plans to seek further concessions.

Just a week ago, both environmental groups gave their seal of approval to the Dallas-based utility's $45 billion sale to TPG, Kohlberg Kravis Roberts, and Goldman Sachs Group (GS). In exchange for the groups' approval of the deal, the buyers consented to a 10-point agreement that includes building only 3 of 11 new coal-fired plants TXU had proposed.

A Closer Look

Now, in a new round of talks that could prove decisive in the contretemps over TXU's sale, the Dallas mayor and others are largely united in their view that the utility-private equity consortium got the better end of the negotiations. Miller, who wasn't involved with the negotiations, is blunt about the deal: "TPG says they will be cleaner and more transparent. If you're putting out the green welcome mat, then you have to act green."

Miller isn't alone in her displeasure. Last year, she and Houston Mayor Bill White assembled the Texas Clean Air Cities Coalition, a group of Texas cities that became one of the major forces in galvanizing statewide and national opposition to TXU's previous $10 billion plan.

Last week, Miller burned up the phone lines to gauge the reaction of members of her group, an umbrella coalition made up of some three dozen cities and school boards, along with the coalition's financial backers, who include Ed Bass, the Texas billionaire oilman whose involvement in the fight hadn't been previously disclosed. She also talked to other Texas mayors, a group representing local citizens called Our Land, Our Lives, and a coalition of CEOs called Texas Business for Clean Air. They voiced common concerns about the new management's plans, including the decision to proceed with two plants that use the dirtiest type of coal of the proposed 11. Now the Texas-based opposition groups have arranged a slew of meetings with TPG in coming days to demand further concessions, commitments, and details about their plans.

New Concessions Sought

David Hawkins, the head of NRDC's climate center and one of the deal negotiators, says he'd welcome any further gains. "The fact that some are upset with the fact that [TXU] still wants to build three units, I don't have any reason to be upset with that," Hawkins says. "If anyone is in the position to make them do more, then they should make them do more."

At her office Monday, the mayor says she'll ask Bonderman for four concessions: 1) that the company promise not to reapply for the coal-plant permits in Texas; 2) that instead of building two new traditional coal plants at Oak Grove in central Texas, it use less polluting, albeit less commercially proven, gasification technology; 3) that they clean up TXU's existing plants in East Texas; and 4) that the buyers sign legally binding guarantees to its commitment to reduce carbon emissions to 1990 levels by 2020.

Under its previous plan, TXU had pledged to cut regulated emissions by 20%, voluntarily meeting some federal cuts faster than required. It planned to do this in part though retrofitting existing plants in East Texas.

But in a deposition prior to hearings opposing some of the plants by Miller's lawyers, Mike McCall, chief executive of TXU Wholesale, explained that if TXU didn't get all the new permits, it wouldn't need to cut emissions at existing plants as much. The new management says it will keep TXU's prior commitment. Miller's group is concerned that this means that some communities will remain affected by pollution-causing emissions.

Green Split

One factor in the Texas groups' favor: Unless TXU satisfies critics—and the buyout goes through—the new owners will face fierce opposition from experienced activists in the very state where they're operating. And in contrast to what some news coverage of the environmental split suggested, the Texas opposition groups don't represent mere tiny splinter factions. They include CEOs and mayors who wield clout statewide and who say they plan to continue lobbying Texas legislators on ways to reign in TXU's plans. They also could engage Stephen Susman, the high-powered Houston litigator who says his previous, pro bono work for Miller's case has already stretched into the millions of dollars. Susman was named among the nation's top 10 litigators last year by the National Law Journal.

Miller and the Texas groups say that NRDC and Environmental Defense gave away too much without getting much that's enforceable in return. Before the deal leaked last weekend, rumors were already swirling that TXU—facing entrenched opposition and project delays—was planning to scrap five or six plants. Last Monday, when the deal was announced, TXU CEO John Wilder confirmed that the company had been "in the process of reshaping our development program to focus on a smaller number of plants when we were approached by the new private investor group."

NRDC and Environmental Defense counter that securing a real commitment to cut back from 11 to 3 new plants is different from vague proposals. They argue that by getting the company to change its stand on carbon reduction and agree to not pursue plans to build plants in other states, including Pennsylvania and Virginia, they got the company's new management to commit to better protect the environment than the previous owners. "I think we have a company that's going to do a lot less damage than the company that exists today," says Hawkins of NRDC.

William Reilly, who represented TPG in the negotiations with NRDC and Environmental Defense, says that while it's technically true that the 10-point deal isn't legally binding, the public nature of the agreement and the involvement of people such as James Baker, the former Secretary of State who is serving on the investor groups' advisory board, would make it hard for the new management to back out. "Our word is out there, and a lot of people are involved who are used to keeping their word," Reilly says.

Not a Done Deal Yet

In their meetings, other groups say they will also press Miller's points. David Litman, who founded Hotels.com and who last December helped form Texas Business for Clean Air, a group of CEOs that lobbied the state legislature opposing the plants, says the devil is in the details with this deal. Our Lands, Our Lives, a local group that is based near the Oak Grove units and that opposed them, says they're meeting with the buyers on Tuesday. Although administrative law judges in Texas last year recommended denying permits for the unit's plants, the private equity investors still want to pursue them.

Jim Marston, head of Environmental Defense in Texas who helped negotiate with the private equity investors, says the buyers wanted a global settlement of the plan, including the proposal to build the three new plants. Marston says he didn't have authority do that so he called the representatives for the opposing groups, including Public Citizen and Our Lands, Our Lives. Wendi Hammond, an attorney for the latter, says she told Marston she wasn't going to negotiate with him and offered to fly out to meet directly with the buyers. Marston says that given the need to get something hammered out, the buyers took that request off the table.

Now Hammond plans to push for concessions independently, regardless of what others do. "Settlements happen all the time," Hammond says. "I am not foreclosing that it's a possibility, but unless something changes, we can't embrace that they go ahead and build Oak Grove."

Hawkins and Marston argue that they didn't bless the proposals to build the remaining three coal plants, they simply agreed to support the buyout. But Mayor Miller says that's simply splitting hairs. Now the mayor, who crisscrossed Texas last year to build opposition to the plants, is taking up the gauntlet again.

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