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The Wall Street Journal

March 3, 2007

Environmentalist Groups Feud Over Terms of the TXU Buyout

By REBECCA SMITH and JIM CARLTON
March 3, 2007; Page A1

Just days after two of the nation’s leading environmental groups blessed an investor plan to buy TXU Corp. and take the controversial Texas utility in a new and “greener” direction, a battle has broken out in the environmental community over the terms of the deal.

The Natural Resources Defense Council and Environmental Defense claimed victory Monday when a holding company formed by Kohlberg Kravis Roberts & Co., Texas Pacific Group and other investors announced the biggest buyout in history, a plan to take over TXU for $32 billion plus the assumption of around $12 billion in debt. The environmental groups, two of the most powerful and best-funded in the U.S., said they had extracted a pledge from the investors to cancel a slew of coal-fired power plants, cut emissions and back federal global-warming legislation.

But now, opponents of the deal, in a blizzard of emails and Internet posts, have put the two organizations on the defensive by accusing them of settling for too little. The critics, who encompass a broad range of smaller environmental groups and individuals, say TXU should have been forced to give up all, not just some, of its future plans involving coal-fired power plants. The plants release substantial amounts of carbon dioxide, a heat-trapping gas blamed in part for climate change.

Even worse, some believe that the environmental interests were snookered. Since the buyout was announced, it has become apparent that some of the concessions involve projects that TXU was already planning to shelve for a variety of reasons. And TXU has fueled the skepticism further in recent days by outlining new loopholes in the pledge.

NRDC and Environmental Defense “should be hung for what they’ve done,” fumed Tim Hermach, executive director of the Native Forest Council, a group in Eugene, Ore., whose main mission is protecting public forests from commercial logging and other industrial practices.

The infighting shows that tremendous disagreements remain over how tough green activists should be in their dealings with business. The TXU deal comes at a time when more businesses are choosing to work with environmentalists to avoid costly and embarrassing public fights on issues ranging from global warming to rampant logging. The Rainforest Action Network, for example, in recent years has forged deals with companies such as Home Depot Inc. to quit using wood products from endangered forests in exchange for public endorsements. Some timber companies in the Northwest have also gotten larger environmental groups to agree to forest-protection plans that allow for some degree of logging, despite continuing opposition from other grass-roots activists.

But it can be difficult to determine who is empowered to speak for the environmental movement. As is the case with TXU, these dealings often lead to charges from other environmentalists that their peers have been co-opted by big business in exchange for a seat at the table. “It can be flattering to be invited into this crowd,” says Alan Muller, executive director of a group called Green Delaware, who is also among those criticizing the NRDC and Environmental Defense.

The environmentalists involved in the TXU negotiations scoff at that assertion. “We’ve been around long enough that we don’t flatter very easily,” said David Hawkins, director of the NRDC’s climate center, who helped represent the 37-year-old organization in the deal.

Environmental Defense and the NRDC — both based in New York — are among the best-funded groups in the green world, with annual budgets totaling about $120 million combined. Both have policies against accepting most corporate contributions. The NRDC has a somewhat higher profile, with actors Robert Redford and Leonardo DiCaprio on its board of trustees.

TXU’s would-be buyers also defend the deal. “I think it’s inevitable there are critics to any change,” said William K. Reilly, an administrator of the Environmental Protection Agency under former Presidents Bush and Clinton who now works as a senior advisor to Texas Pacific and led its group’s talks with the environmentalists. “It’s important to recognize that two of the most authoritative and experienced environmental organizations think this is a good deal.”

(Separately, the Securities and Exchange Commission has filed court papers suggesting that it is investigating possible insider trading before the deal was announced. See related story4.)

New details of the agreement suggest it has big built-in loopholes that seem tailor-made for conflict. Under the agreement, the buyers said they’d suspend development efforts on eight of 11 planned coal-burning power plants.

But already, TXU Chief Executive C. John Wilder, who is expected to remain at the utility, is talking about the conditions that would allow TXU to “apply or reapply” for permits to build coal-fired plants in Texas. According to a transcript of a call with investors this week, Mr. Wilder said TXU wouldn’t build plants burning pulverized coal “unless our customers face reliability issues, shortages leading to higher prices, or our competitors propose plants that are expected to have a meaningful impact on market dynamics.”

Those circumstances appear likely to be met, perhaps as early as 2009, meaning TXU could revive construction efforts without breaking the deal if there’s a scarcity of power caused by a dearth of new plants, or if plants come along that challenge TXU’s strong position in the state’s deregulated electricity market. Critics say these and other exceptions make it appear unlikely that TXU’s agreement to move away from coal is as solid as it initially appeared. The state’s grid operator said it fears reserves could slip into a danger zone as early as 2009, given a spurt in demand growth this year.

The environmental concessions were part of a package engineered by the private-equity buyers as a way of clearing political opposition to the TXU deal, which was bound to be controversial under any circumstances. Under Mr. Wilder’s leadership, TXU has become greatly profitable, but also has drawn the ire of consumer and environmental groups for its rate increases and plans to build new coal-fired plants in Texas. Lately, TXU had been talking about building other such plants in other parts of the country.

The concessions announced by the environmental groups and the prospective buyers were worked out in secretive sessions last week, before the proposed deal became public. The agreement involves not just cutting back on coal plants in Texas, but also a pledge to back away from such projects in other regions. The buyers agreed to a general cutback in carbon-dioxide emissions. And the buyers agreed to a rate cut for some TXU customers in Texas.

The environmentalists involved in the deals say these were hard-won victories. For example, Jim Marston, an Environmental Defense attorney in Austin who led negotiations for the group, said that, through tough bargaining, he got commitments from the buyers that TXU wouldn’t build coal plants in Pennsylvania, Virginia and “elsewhere.” TXU’s would-be buyers say the utility also was considering building a coal plant in Maryland, while Mr. Marston says Georgia was another potential site.

But some environmental interests in Texas were immediately bitter that the deal allowed three coal plants in Texas to proceed. Robert and Josephine Cervenka, farmers near Waco, already live within a mile or two of existing TXU plants and within about five miles of six proposed plants, including two by TXU. They formed an organization to fight construction of more plants in an area Mr. Cervenka calls “the ring of fire.”

Initially overjoyed when they heard about the environmental deal with TXU, they quickly soured after learning that the proposed plants nearest them were going forward. Now, with the well-heeled national environmental groups out of the picture, they wonder how long they’ll be able to carry on the fight. “We need money bad,” said Ms. Cervenka.

Negotiators for both Environmental Defense and the NRDC say they wanted the other plants tabled, too, but were told TXU had spent too much on the projects to suspend development efforts. Besides, Mr. Reilly, the former EPA administrator, said Texas would have difficulty meeting rising demand without the plants. “You can accomplish a fair amount by improving energy efficiency in the state, but to say you can do so without adding plants at all isn’t really feasible,” Mr. Reilly said.

What the environmentalists didn’t learn until later was that TXU’s board already was considering killing some of the projects to quiet public outcry and to respond to changing political winds in Washington. In his investor call, Mr. Wilder said the management team and board already were “reshaping our development program to focus on a smaller number of plants” when they were approached by the buyout team.

Mr. Hawkins of the NRDC’s climate center said his group was unaware of that — but he added such a move wasn’t surprising, given all the criticism TXU has faced.

A big point of contention is the givebacks involving plants TXU was targeting for other states. In fact, TXU hasn’t filed for air or water permits in any of these states, nor has it purchased or obtained options on any parcels of land. And, given the firestorm it ignited in Texas with its $10 billion construction program, many observers said they doubted TXU really intended to wade deeper into controversy anytime soon.

Sierra Club officials in Texas said they still will oppose TXU’s remaining three new coal plants and eight more proposed by others, working with consumer and property-rights groups. Sierra Club officials added they have empathy for the bind the NRDC and Environmental Defense were in. “I’ve been there before where…we’ve had to compromise,” said Ken Kramer, the Sierra Club’s Texas director, in Austin.

Write to Rebecca Smith at <mailto:rebecca.smith@wsj.co> and Jim Carlton at <mailto:jim.carlton@wsj.com>

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