Air Date: Week of March 2, 2007

William A. Pizer (Courtesy of Resources for the Future)

Host Steve Curwood speaks with environmental economist Billy Pizer, a senior fellow with Resources for the Future, to discuss the investment value of TXU, and what the TXU buyout could mean for the future of coal production and greenhouse gas emissions reductions around the country.

Transcript

CURWOOD: Now, there are still many details to be worked out for the TXU deal. One key question is how compatible the proposed three new coal-fired power plants would be with emerging technologies that could capture their global warming gases. But even having such questions in play indicates a big change in thinking by major investors, including Goldman Sachs, J.P. Morgan and other Wall Street investment banks that are backing up the deal.

For a closer look at this shift in the economic landscape we turn now to Billy Pizer. He’s an environmental economist and senior fellow at Resources for the Future, a think tank in Washington D.C. Hi, there.

PIZER: Hello Steve.

CURWOOD: So walk us through what these two private equity firms are hoping to do by purchasing TXU. Ah, this energy market is a very complicated business.

PIZER: Well, I think they believe that they can rearrange, repackage, manage better in a way that will raise the asset value of the company and that at some point in the future they can sell it and make money. The thinking that they have is that there’s something undervalued there. And that by bringing their expertise they can add value, they can increase the brand value; they can increase the efficiency of the organization. They can do something to change the way the company is run or operated or perceived that raises its value. And that’s what their interest is when they take over a company like this.

CURWOOD: So what’s the strategy on including environmental groups in the negotiations at this stage of the negotiations? And what do you think the environmental groups achieve by coming to the table?

PIZER: Well that’s a good question. I think that, you know, for KKR and the other funders the real advantage of bringing environmental groups in is the environmental groups give them more stakeholders at the table bringing support for this deal. So it just kinda makes sense that if all these people were cheering against TXU before and you can bring them to the table cheering for the new guys then that’s going to put additional pressure to make the deal go through.

In terms of what the environmentalists get they presumably were able to negotiate better pieces of the deal than they would have gotten if they hadn’t been at the table. So you have money being spent on energy efficiency. You have a commitment to renewables. Whether or not those things were originally on the table when the buyers started crafting the deal is not clear. But certainly the environmentalists, I’m sure, got something out of the deal.

CURWOOD: How much of a sea change in our approach to coal fired power plants does this proposed deal represent? I mean is this some kind of watershed event this proposal?

PIZER: I don’t think it’s a huge watershed. I mean, you know, the bottom line is they’re still building three coal plants and they’re going to do some additional renewables. And they’re going to do some energy efficiency, but in a growing part of the country they’re going to need more power. And a really complicated question is what is that power going to look like, that new base load capacity? And fundamentally there are only three choices: there’s natural gas, there’s coal, and there’s nuclear. Um, you can build renewables but you need to have back-up generation when the wind doesn’t blow. You can do energy efficiency but when you invest in energy efficiency you’re not quite sure what you’re going to get. So there’s going to have to be some more capacity built. And when people look at the spectrum of those three choices a lot of times coal still comes up looking good. And I think what the environmentalists are pushing for is just don’t build more than you need. And try to work as much as you can on the renewables. Try to work as much as you can on the energy efficiency. So it’s not so much a sea change as much as I think it is mounting pressure to think harder about how much coal is going to be built.

CURWOOD: Some of the banks that would lend Texas Specific Group and KKR the money for this are putting some of their own equity into the deal. I mean why are banks willing to take on extra risk in this case?

PIZER: Well, I mean, they have to feel like it’s a good deal. They have to feel like there is a profit opportunity for them there. They clearly are attracted I think to the environmental angle. I think it kind of benefits everyone including the environment. And so I think they’re there because they think that the management team the investors are putting together and the strategy they have for saving money and helping the consumers, helping the environment, and helping the investors is a solid one.

And the other thing is I think there is a sense in which these guys are kind of reading the tea leaves in terms of the directions that policies are going and the direction that we’re moving in the country. And the fact that they’ve kind of recognized this and they’re putting their money into it I think has attracted other people’s money. And, you know, when you see other investors realize that this is the direction, you know there are a lot of people out there trying to make money off of this change that’s going on in the United States. I don’t call it a sea change but you know I call it a gradual change taking place as people look towards more environmentally friendly investments and the people who are quicker on the draw are going to make more money than the people who are slow or are not.

CURWOOD: What’s really the most important thing about this proposed buy out for the climate change debate?

PIZER: I think it highlights where the middle is. I think, on the one hand you have a bunch of companies who may be, kind of living in the past a little bit, thinking a lot about coal as being the way of the future and pulverized coal as being the way we’ve done it before and the way we’re going to do it in the future. On the flip side you have the environmentalists who don’t want to see any new coal built from this day forward. And what this deal I think represents is how the middle is going to work. You’re going to build some coal plants but you’re going to spend money on energy efficiency. You’re going to spend money on renewables. And it’s going to be a package of things that leads to less emissions than we would have had otherwise but it’s still going to require some emissions growth especially for the near term. And I think the really valuable message from this is there is a way forward and there is a way that we can compromise between what the two sides are arguing for. And still end up satisfying our customers and satisfying the environment and satisfying investors.

CURWOOD: Billy Pizer is an environmental economist and senior fellow at Resources for the Future in Washington. Thank you sir.

PIZER: Thank you Steve.

 

Links

Texas Pacific Group

TXU Corp

Kohlberg Kravis Roberts & Co.