Whether a group of private equity groups will pursue the $32 billion leveraged buyout of TXU will become clearer on Wednesday as the Texas House of Representatives debates bills that could alter the regulatory framework affecting the transaction.
Last month, Texas senators, citing high electric rates in the state's five-year-old deregulated market, easily passed a trio of bills opposed by the Kohlberg Kravis Roberts and Texas Pacific Group, leaders of the buyout group.
"This is going to be a very important day in the Legislature," said Brett Perlman, a former Texas utility regulator, now head of Houston-based Vector Advisors. "We'll get a better sense of whether the House will go along with the Senate on these bills."
House measures set for debate include a bill to limit the amount of electric generation a company can control and another bill that would penalize companies that don't pursue new customers across the state. Observers say a third bill, giving the Texas Public Utility Commission expanded authority to approve or reject utility sales and mergers, may emerge as an amendment.
KKR's Fred Goltz told a House committee last week that a protracted PUC review would "seriously jeopardize" the TXU deal. "We can't foster a free market while, at the same time, giving the PUC veto power over private ownership," Goltz said.
Texas lawmakers have come under pressure from TXU supporters and a U.S. Representative. The Texas Senate passed its bills in less than three weeks after the TXU buyout was announced. The House bills have been modified to be less onerous than the Senate measures.
"The pressure (on House members) is intense to allow TXU to do this deal," said Tom "Smitty" Smith, Texas director of Public Citizen in Austin, who testified in favor of the bills.
In a release Monday, TXU said it did not expect a better bid to emerge before April 16, a deadline for a go-shop period. The KKR investor group said it would pay $69.25 per share for TXU, the state's largest power company, which owns a transmission company, power plants and a retail unit.
Smith said many legislators are skeptical of TXU's former management and of promises of lower prices and increased investment made by the potential buyers.
"How can you lower rates when increasing the debt on the company from $13 billion to $37 billion," said Smith. "You can't do that with any business model I've ever seen."
The buyout group has tried to address legislators' concerns by agreeing to voluntarily file a notice of sale at the PUC well in advance of the deal's closing. But that isn't enough for some lawmakers.
Rep. Sylvester Turner, a Houston Democrat, said the intent of his bill is not to defeat the buyout, but to "provide us all with a degree of confidence that this is consistent with the competitive markets and what we are trying to do."
"To do nothing, to me, is unacceptable," said Turner in a hearing last week. "I see nothing unreasonable in asking the PUC to review this potential sale."
In afternoon New York Stock Exchange trade, TXU shares were down 35 cents to $63.55.