Missteps led up to TXU dealCEO has focused on shareholders but failed to connect with others
Monday, March 5, 2007
By ELIZABETH SOUDER, SUDEEP REDDY and RANDY LEE LOFTIS / The Dallas Morning News
Three days after rolling blackouts hit North Texas last April, TXU Corp. chief executive John Wilder and Gov. Rick Perry stood together in downtown Dallas to announce a plan to keep power flowing, to lower electricity prices and to clean the air.
TXU would build 11 coal-fired power plants.
Mr. Perry called it "an essential step to meeting long-term challenges."
"We will be part of the Texas miracle," Mr. Wilder said.
But for Mr. Wilder, the plan was meant to be more a miracle for shareholders than for consumers.
He spent the next 11 months focusing so intensely on shareholder returns that he alienated nearly every other constituency – customers, politicians, environmentalists and community groups. The company's missteps included failing to have community relations people in place for all the cities where TXU wanted to build until six months after announcing the expansion plan; failing to recognize the importance of cutting the regulated electricity rate; and failing to pay enough attention to key legislators.
The way Mr. Wilder's company dealt with the public backfired, causing outrage that damaged the share price, killed the coal plan and set the stage for a buyout of the company.
"I will say that I believe that they were aggressively pursuing sound policies," said former TXU CEO Erle Nye. "I think perhaps they were so aggressive that, perhaps the public relations aspect didn't have time to develop. And, you know, that can happen. I don't think there was as good a communication as there could have been, and I think the management felt that way as well."
The buyers, Texas Pacific Group and Kohlberg Kravis Roberts & Co., recognized the pickle Mr. Wilder was in. After they approached him about buying the company for a record $45 billion in November, they asked William Reilly, a former Environmental Protection Agency administrator – and a vice president of Texas Pacific Group – to help.
Mr. Reilly last month negotiated a pact with Environmental Defense and Natural Resources Defense Council. The TXU buyers agreed to build only three of the 11 coal plants TXU proposed, to cut pollution and greenhouse gas emissions, and to continue to listen to environmental concerns, if the two national groups would give the deal their stamp of approval. The groups agreed.
Those are concessions TXU probably would have made anyway. Mr. Wilder, 48, said last week he was already working on shrinking the coal deal back in November, when the buyers made their offer. He saw hurdles to the project: public frustration, rising costs to transport the coal for the plants, rising labor costs, and permitting delays.
"Yes, certainly the opposition [to the coal plants] was a factor, but it was not the only factor. We had several moving parts on this, and when it gets to the point that the balance of factors gets out of sync, it's time to re-evaluate the plan," said TXU spokeswoman Kim Morgan.
The buyers offered $69.25 a share. That's a premium to the depressed value of the shares before the offer.
Since taking over the company in 2004, Mr. Wilder's changes have caused the TXU share price to increase six-fold. The momentum stopped in November, as public outrage about the plants hit a peak, and legislators made it clear they were listening. The share price dropped from $65 a share to $55, and didn't fully recover until the buyout offer became public.
Now the Securities and Exchange Commission is alleging that some people made millions by purchasing options to buy TXU stock before the announcement of the buyout deal. The commission said Friday it won a court order freezing more than $5.3 million in assets connected to the unknown investors and requiring the purchasers to identify themselves.
Much of the consumer outrage started in the autumn of 2005, when TXU sought to boost its standard retail electricity rate 24 percent to keep up with the rise in natural gas markets caused by the hurricanes. As Texas' most important generation fuel, natural gas markets tend to establish wholesale power prices.
But the company didn't reduce rates when natural gas prices fell. That left TXU unable to convince many customers that generating electricity with cheaper coal plants would change the retail price situation.
And when legislators returned to Austin after the November elections, many had a clear mandate from voters to do something about TXU.
Rep. Phil King, R-Weatherford, chairman of the regulated industries committee, said he couldn't go to church or the grocery store without hearing complaints from voters about their TXU bills.
Troy Fraser, R-Horseshoe Bay, head of the Senate committee on business and commerce, was livid. He confronted Mr. Wilder at a joint hearing in November of his Senate committee and Mr. King's committee. The hearing took place on the very day TXU announced third-quarter results that showed 2006 would be the company's most profitable year ever.
"I'm assuming congratulations are in order," Mr. Fraser said when Mr. Wilder took the chair to testify.
"No, Mr. Chairman, our investors were actually disappointed in us. We didn't achieve what they expected us to achieve," Mr. Wilder replied.
Mr. Fraser would go on to propose legislation meant to cut TXU's size and, in turn, reduce electricity prices. And he's not backing down, even though the TXU buyers are offering to drop rates and break the company apart. For Troy Fraser, the situation is almost personal.
"John Wilder sat in my office across from me last March, after they had moved their prices to record levels," Mr. Fraser said Thursday. "I said, 'John, the price of natural gas is going down. ... We're going to be trying to determine if the market's working. And if the market's working that means your retail prices will start sliding down. I'll be watching that.' "
"He looked blankly at me; he had no response," Mr. Fraser said. "Every time I would try to talk to him about it, he would remind me that his loyalty was to shareholders."
TXU did eventually offer discounts to all of its customers as an incentive to stick with TXU. But the company never dropped its standard price.
TXU's relationship with the governor was friendlier than with Mr. Fraser. But it also drew suspicions from the public.
Mr. Perry has received $404,100 in contributions tied to TXU since his 1998 lieutenant governor campaign, according to Texans for Public Justice, the nonprofit group that tracks spending in political campaigns. In the 2006 election cycle, 174 out of 181 state legislators received funding from TXU sources, according to the group.
Further, Mr. Perry struck a deal with TXU to buffer consumers from a second possible price hike. TXU agreed not to seek to raise rates again until April 2006, along with other concessions.
And on Oct. 27, 2005, one day before TXU received permission for its rate hike, Mr. Perry directed state agencies to speed up approval of new power plants. The order slashed in half, from a year to six months, how long outside groups could fight construction of a new plant.
Need for power
Three days before Mr. Wilder and Mr. Perry announced the coal plan in April, temperatures in North Texas hit 100 degrees. Folks started turning on their air conditioners and using lots more juice than expected. Then a power plant unexpectedly tripped, and neighborhoods saw rolling blackouts. Mr. Perry said during the coal announcement that the blackouts pointed to Texas' need for more power.
TXU officials said only natural gas and conventional coal plants could be built quickly enough to meet the need. Mr. Wilder said his coal plan would offer enough capacity to keep Texas electricity reliable until 2015.
But when environmentalists dug into the supply forecast data, many groups found it difficult to believe TXU's statement that, without the 11 plants, Texas would face "widespread blackouts."
Environmental groups suggested conservation could shore up most of the supply need, along with maybe a few new power plants. And that's what the TXU buyers have promised – new investment in conservation and to build only three of the proposed plants. Three plants will keep Texas juiced for now, and the buyers will consider cleaner technology to meet demand growth.
Environmentalists were also skeptical of Mr. Wilder's promise to cut total emissions 20 percent from current levels, even after the new plants were built. When TXU consistently refused to say exactly how, when, or where those cuts would come, critics called the promise a ruse.
TXU would have to make those cuts anyway in a few years just to comply with air quality laws. And when a TXU executive admitted the company might sell the credits the company would earn on the early cuts to other polluters, many environmentalists wondered if the pollution promise would benefit Texas at all.
The sides also disagreed on whether the plan would worsen air quality in North Texas, even without selling emission credits to others.
TXU employees touted a study contending that all of TXU's new plants together would have little or no effect on North Texas smog – based on TXU's promise to cut its existing emissions. But the company refused to release the data that it gave the consultant for the study. An opposition group commissioned its own study that showed the opposite, that the plants would boost ozone levels here.
Throughout the debate, environmental and community groups called on TXU to use cleaner technology. They focused on coal gasification, which eliminates many pollutants and holds the promise – once more technology is developed – to capture and store greenhouse gas emissions.
But TXU executives said coal gasification hasn't proved to work reliably with the types of coal TXU uses.
TXU snubbed a government-funded coal gasification program called FutureGen, which Mr. Perry is trying to bring to Texas. As other coal companies joined the FutureGen board or contributed to the group, TXU declined. TXU officials said they prefer to work on their own proprietary technology, rather than support a public project that wouldn't directly benefit shareholders.
The TXU buyers made a point of promising to consider coal gasification and to support FutureGen.
Still, some opposition groups say the buyers aren't giving up much with the environmental pact. A judge last month declared Mr. Perry's fast-track order unconstitutional. When the permit hearings began the following day on seven plants, the judges delayed formal hearings by four months, causing many observers to doubt TXU would have been allowed to build all 11 plants.
And back in July, the judges hearing the case for Oak Grove units – two of the three plants the TXU buyers still want to build – recommended that the Texas Commission on Environmental Quality deny the permits. The judges found that TXU hadn't proved that Oak Grove could meet its emissions limits. The recommendation for denial went to the TCEQ commissioners, who haven't voted yet.
Debate goes national
When Mr. Wilder announced the coal plan and made his pollution promise, he failed to mention one type of pollution that would put TXU on the front pages of national newspapers. The new plants would poof out 78 million tons of greenhouse gases a year.
And when some shareholders complained about carbon dioxide at the TXU annual meeting in May, Mr. Wilder dismissed the concern. He said it seemed unlikely that Congress would regulate the gas anytime soon. Besides, he said, TXU could simply retrofit the coal units to deal with such limits.
By the end of the summer, TXU had become a national symbol of a carbon dioxide emitter.
TXU executives responded by talking about a new, nebulous plan to spend $2 billion on emissions control equipment, including carbon dioxide controls. And executives promised they would save room at the new plants to add the technology, whenever it was developed.
But the company's arguments that it's detrimental for Americans to limit carbon dioxide if the rest of the world keeps emitting seemed provincial, and tugged on the Texas pride of many business leaders and politicians in Dallas.
"Carbon dioxide is a huge, huge issue for us," Dallas Mayor Laura Miller said during a TXU-sponsored luncheon.
Mayor Miller's group
TXU didn't see Laura Miller coming.
At the end of August, Ms. Miller announced she and Houston Mayor Bill White had formed a coalition of cities that oppose coal plant pollution. They wanted to make sure that TXU's plants wouldn't worsen Houston and Dallas air. Neither city meets federal clean air standards.
The coalition wanted to intervene in TXU's coal plant permit hearings. But TXU lawyers made it clear they would block anyone who wasn't part of the local coal plant communities from participating in the hearings. So Ms. Miller and some staff spent the first few weeks of November traveling around East and Central Texas, scouting for towns near the proposed power plants that would join her coalition.
TXU wasn't ready for her. Six months after announcing the coal expansion plan, the company still didn't have all its community relations employees in place. The company promoted Don Montgomery to lead community relations for the coal plants, and he didn't move to his new job in Waco until the autumn.
TXU's community staff persuaded most towns to steer clear of Ms. Miller's coalition.
But even in the towns that didn't join her, she started a debate that helped rally the grass-roots base of conservationism that's a traditional part of rural life.
"Until Ms. Miller came, it was good news," said Tom Ramsey, a real estate agent in Mount Vernon and a former state representative who welcomed the TXU expansion. "She stirred the pot."
Waco was an important victory for Ms. Miller. City officials joined the coalition because they worried that if TXU turned the nearby natural gas plants into coal plant sites, Waco would no longer meet federal clean air standards. The town became a rallying spot for the group, and environmentalists began referring to the Waco plants as the "ring of fire."
Mr. Montgomery, who attended Baylor University, was in charge of relations with Waco.
"The first thing that you have to do is build trust," Mr. Montgomery said in an interview last November. "We're going to have to prove up. If we can't, there won't be coal plants."
By the time Ms. Miller's group had won permission to intervene in the permit hearings, Mr. Wilder realized he would need to cut his coal plan.
And, he said, when the buyers came to him with an offer for the company in late November, he was already working on a new strategy.
But Mr. Wilder didn't communicate his strategy to the outside world.
Three Dallas businessmen, Garrett Boone, founder of The Container Store; David Litman, founder of Hotels.com; and real estate scion Trammell S. Crow, worried about the coal plant pollution. They saw the fight TXU had with environmentalists, Ms. Miller and others, and wanted to help work out a compromise.
So they gathered an elite circle of entrepreneurs and local executives that supported their efforts. Then the three men met with the head of TXU's coal program, Mike McCall, to ask him to build fewer plants, or slow down, or at least negotiate. He declined.
So the men took their case to the media and hired lobbyists.
The entry of the business leaders to the debate opened an opportunity for TXU's rivals.
One member of the group is Aubrey McClendon, chief executive of Chesapeake Energy Corp., who considers coal a rival fuel to the natural gas he produces. He helped finance a separate group that ran an advertising campaign that called coal filthy.
And a few weeks ago, the chief executive of the state's second-largest power company, NRG Energy Inc. threw a bomb. David Crane offered to build a coal gasification plant in Texas, if the state helps out with the cost. To many observers, his statement proved that cleaner coal technology is real, not a distant hope.
The buck stops here
Mr. Wilder made it clear from the time he took over the company in 2004 that shareholders were his top priority.
The former finance chief at Entergy and longtime employee of oil giant Royal Dutch/Shell had already become a favorite son of utility investors.
To Wall Street, Mr. Wilder was a 180-degree turn from the back-slapping era of regulated utilities with boring returns. He vowed to bring an industrial lean-manufacturing mindset to a 120-year-old business and give TXU industry-leading returns within three years. He cut hundreds of jobs, alienating many employees.
And he quickly upset key legislators with a plan to tie retail electricity prices to consumer credit scores – an idea that lawmakers forced him to reverse. And he left other executives to maintain many key public relationships.
"The decision-makers are paid to make tough calls," he said in a spring 2004 interview. "This is absolutely not a popularity contest."
From early on, Mr. Wilder shunned the public spotlight and didn't care to schmooze around town. Mr. Wilder commuted between Dallas and his home in New Orleans on weekends, and only moved his family to Texas after the hurricanes.
To this day, Mr. Wilder hasn't met the mayor of Dallas. But on Monday, David Bonderman of Texas Pacific Group has an appointment to meet Ms. Miller at City Hall.
Mr. Wilder recognizes that the TXU buyers have better resources to influence public thinking than TXU. He said in an interview last week that his own strength is business strategy. But the buyers, as international firms, have contacts among leading environmental thinkers and influential politicians that TXU, as a regional company, couldn't match.
"They ... bring a reach in political and community influencing that certainly I don't have, nor do I think broadly our management or our company has at TXU," Mr. Wilder said.
WILDER'S WILD RIDE AT TXU
Feb. 23, 2004: John Wilder is named TXU chief executive.
Aug. 29, 2005: Hurricane Katrina hits the Gulf Coast, damaging natural gas operations and driving prices to all-time highs. TXU and other former utility monopolies soon file requests to increase their benchmark electricity prices.
April 20: TXU formally announces plans to spend $10 billion to build 11 coal-fired power plants. Executives hold a news conference with the governor in Dallas.
July 13: Senate Natural Resources Committee meets at Dallas City Hall and hears testimony from Texas Commission for Environmental Quality Commissioner Larry Soward, who expresses deep concerns over flaws in Texas' air permitting rules.
Aug. 31: Dallas Mayor Laura Miller and Houston Mayor Bill White announce a new coalition of cities that oppose coal plant pollution in Houston.
Nov. 9: Joint hearing in Austin of the Texas House Committee on Regulated Industries and the Senate Committee on Business and Commerce, in which Sen. Troy Fraser intensely chastises Mr. Wilder for keeping prices high.
Dec. 12: Texas Business for Clean Air, a group of Dallas business leaders who oppose coal plant pollution, take their concerns to the media.
Dec. 14: Ms. Miller's coalition gains permission to intervene in the coal permit hearings, and hearing judges set a hearing schedule to meet Gov. Rick Perry's fast-track order.
Feb. 6: Anti-coal advertisements appear around Texas, funded by a group called the Texas Clean Sky Coalition. Membership is kept secret, except for natural gas producer Chesapeake Energy Corp.
Feb. 21: Permit hearing officers delay formal hearings for seven of TXU's proposed coal plants, bowing to a ruling that Mr. Perry's fast-track order might be unconstitutional.
Feb. 26: TXU announces the board's acceptance of an offer from Texas Pacific Group and Kohlberg Kravis Roberts & Co. to buy the company.