TXU Buyout: Anatomy of a Deal

Our Texas Regional Director Jim Marston gives the inside story on the TXU negotiations

Posted on: 03/06/2007

Environmental Defense Texas Regional Director Jim Marston

In late February, Environmental Defense helped negotiate a landmark buyout of the Texas-based energy giant TXU Corporation in a deal that incorporated unprecedented global warming standards.

For a behind-the-scenes perspective on this deal, our Texas Regional Director Jim Marston sat down with us to share his perspective on the negotiations, how the deal was reached and what it says about the future.

Thanks for your time, Jim. First of all, what was it like sitting down across from the Texas Pacific Group and Kohlberg, Kravis, Roberts & Co. teams?

Well, as it's been reported in the papers, we got a call out of the blue – actually [Environmental Defense President] Fred [Krupp] got a call from the former head of the EPA William Reilly, who is now a VP at Texas Pacific Group, asking us if we could meet to discuss our concerns about TXU's plans to build 11 new coal-fired power plants in Texas.

I was literally about to go to a hearing on these plants when I got Fred's call. I scrapped those plans and bought tickets to fly out to San Francisco to meet with the folks from Texas Pacific and KKR.

We were told this had to remain strictly confidential. I literally didn't even tell my wife. I could only tell her that I loved her and that I'd be back.

I got to San Francisco around midnight. 8 hours later I was in a meeting with a KKR rep and 3 negotiators from Pacific Group. There were others who were connected by phone, including Fred and David Hawkins from NRDC.

The negotiations were long and hard. I was struck by what they offered.

We had heard rumors that TXU was considering scaling back it’s plans on the 11 plants, but KKR and TPG were willing to offer more, such as a pledge to drop plans to build other coal power plants outside of Texas. They also said they would not do this deal without the blessing of their climate plans by Environmental Defense and NRDC.

That must have been a lot of pressure – a $45 billion deal hinging on your approval.

It crossed my mind. But it also gave us some leverage. I must have offered 50 or 60 ideas for commitments from them. In the end, they were willing to commit to 10 or so big ones.

Most importantly, they agreed to join US-CAP and to support mandatory national cap-and-trade global warming legislation. This is huge – almost a 180-degree turn from where TXU had been, a vocal opponent of any mandatory controls on global warming pollution.

They also agreed to cut their overall emissions to 1990 levels by 2020 and to double their investment in clean, renewable energy. In addition, they committed to become a leader to solving global warming and to tie executive compensation to climate stewardship.

While we didn't solve every Texas environmental problem extreme this represents huge progress in the national global warming debate.

Speaking of finding fault in this deal, it has been reported that this deal is less than meets the eye – that TXU was likely to scrap some of their power plants anyway and that we played some sort of role in driving down the stock value to make a takeover bid more attractive. How to you respond to these charges?

I am reminded again that no good deed goes unpunished. Anytime you do this kind of negotiation, you run the same risk. How much do you have to give to get what you want? It's the same whether you're dealing with a company or with a politician. You can always find fault. You can always say you didn't get this or didn't get that.

My basic response is that this deal is groundbreaking. The David vs. Goliath story gets used too often, but this really was a big deal.

When we set out to take on TXU's plans for the 11 power plants, many of us thought we'd kick up a lot of dust and we'd get this on the map – maybe make life difficult for TXU. Few people thought it would be possible to actually stop very many of these plants. Maybe pick off 1 or 2, but never 8.

There were rumors that TXU was already planning to scale back its plans from 11 new coal plants to a lesser number. We were certainly aware of those rumors. But, until this deal, that's all they were – rumors.

Our agreement achieved certainty and eliminated plans for a slew of power plants that would have created what we called a "ring of fire" around Central Texas.

But beyond the number of plants, the real story here is what this says about a larger shift in the marketplace. Investors who would have jumped at funding the power plants a couple of years ago had to think twice about it.

Ultimately, it was the pressure we and many other groups including some very good Texas mayors and business leaders were able to bring to bear on this that led to the buyout and to the global warming agreements associated with it.

So, where do we go from here?

As big a deal as this was, there are still 140 or 150 active plans for coal-fired power plants throughout the U.S. Some of them will be replacing older power plants, but many others are new plants.

If they are all built, these plants will spew out hundreds of millions of tons of additional global warming pollution into our atmosphere every year. It will literally accelerate our path toward climate catastrophe.

What needs to happen – and I mean yesterday – is to dramatically change the playing field. We don't want to go down the list of each and every power plant and have a street fight over them one-by-one. We also don't want to get in the business of picking winners and losers or fighting for this technology or that.

What we want – what will fundamentally change the market forces at work – is a national, economy-wide cap-and-trade system for global warming pollution. Without this dynamic, market-based structure in place, we will not succeed in avoiding the worst of global warming's consequences. It's that simple.

That's pretty clear, Jim. Thank you for your time and thank you for your great work on the TXU deal!

Thank you, and thanks to all the supporters of Environmental Defense – especially those who took action on the TXU campaign – for making it all possible.