Dallas / Fort Worth Local News

DALLAS TXU Corp. says it could be forced to shut down some of its power plants if it can't settle charges by state regulators that it manipulated the Texas wholesale electric market.

TXU, the largest power generator in Texas, didn't say how many of its older, natural gas-fired plants it might shutter. But it warned the result would be disruption of the state's wholesale electric market.

Last week, the Public Utility Commission proposed a $210 million penalty against TXU over charges that it jacked up electric prices in the summer of 2005 by selling power at inflated prices.

TXU is contesting the charges, which come as the utility is trying to sell itself for $32 billion to private-equity firms in what would be the largest leveraged buyout ever.

A spokesman for the buyers, led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group, said the dispute would not affect the sale.

Mike McCall, chief executive of TXU's power-generation division, wrote to the commission this week to say that the $210 million penalty raises questions about whether the Dallas-based utility can profitably operate older natural gas-fired plants.

At issue is how to pay companies for running plants that may be needed only a few days a year, when demand for power is highest. At those times, costly gas-fired plants are pressed into duty.

TXU claims that it needs to charge prices that cover the short-term cost of fuel plus the expense of maintaining the seldom-used plants the rest of the year. In some states, generators are paid just for keeping peak capacity available, but in Texas the power grid pays only for the fuel.

McCall said the Texas system leads to volatile price swings because generators must charge rates that also cover their cost of keeping marginal plants in running order. He said an investigation by consulting firm Potomac Economics Ltd. and adopted by commission staff incorrectly analyzed the way the market works in Texas.

"Unless corrected," McCall wrote, the dispute "has the potential to create a great disruption in the wholesale market."

McCall said that in the face of large penalties, TXU and other operators will consider early retirement of some aging plants and decide against renovating mothballed plants that will be needed to meeting growing demand in the next several years.

"As you know, this is at a time when Texas needs the capacity to remain available to serve the reliability needs of Texas," McCall wrote.

TXU officials met with commission staff Wednesday to discuss a TXU plan for operating in the wholesale market while being protected from charges of market manipulation. If the commission fails to approve the plan, TXU will consider notifying grid operators that it will retire or mothball "a number of units" that provide power during peak demand, McCall wrote.

McCall and a TXU spokeswoman didn't say which plants or how many TXU might close.

Jeff Eller, a spokesman for the private equity firms buying TXU, said they are not getting involved in the dispute.

"The investors have an interest in the long-term solution to this problem," Eller said, "but dealing with the commission is a company issue."

Separately, TXU announced Thursday that it has postponed its shareholder's meeting. The meeting was originally scheduled for June 15. The company says it is postponing the meeting to allow shareholders to vote on the proposed buyout by investment firms Texas Pacific Group and Kohlberg Kravis Roberts. The company did not announce the new date for the meeting.

Follow the link at right for more information about the buyout offer.

(© 2007 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)