Rick Perry, John Wilder, and the Doctrine of Unintended Consequences
Mon February 26, 2007 12:50 pm

The governor issued a strong statement today in support of the bid by two private equity firms, Kohlberg Kravis Roberts & Co and Texas Pacific Group, aided by Goldman Sachs, to purchase Texas Utilities:

The sale of TXU to private equity firms maintains TXU's previous commitment to a 20 percent reduction in their statewide emissions, while ensuring a strong investment in a stable, reliable power supply for electric customers across Texas. With an increased commitment to wind energy production, plans to increase the power supply by 3,700 megawatts, and land dedicated to an IGCC [coal gasification] pilot project, this new arrangement will ensure both a cleaner environment and a more stable supply of energy.

Furthermore, with multiple energy companies proposing new projects to expand their energy capacity, and today's announcement that rates will be reduced by 10 percent for TXU customers, we know that market forces are working to ensure our energy supply is both more abundant and more affordable as we look to the future. I applaud this investment in emissions reductions, renewable sources and Texas jobs. This record purchase is a strong indication that the Texas economy remains strong.

The deal is not quite final. There is a 50 day "go shop" provision during which an independent committee of TXU's board can entertain other offers for the company. What an independent board is independent of is management, so there is no deal between the equity partners and CEO John Wilder, who could end up losing his job. If that were to happen, it would be a remarkable twist and a testament to the well known principle of politics known as "The Doctrine of Unintended Consequences." It holds that political actions have a way of having the opposite effect from what the actors intended.

Take Perry's executive order to fast-track permits for eleven new coal plants in East Texas. It was intended to short-circuit opposition from environmental groups so that the new plants could gain quick (a relative term in administrative proceedings) approval. However, the order was such a brazen power play (in more ways than one: Perry is correct that Texas does need more electric generating capacity) that it galvanized opposition, including Dallas mayor Laura Miller, and spotlighted the environmental issues inherent in building so many new coal and lignite plants in north and east Texas. Senator Troy Fraser and other legislators were intensely critical of TXU. The company's competitors saw the plan as an attempt to dominate the deregulated electricity market. By the time an Austin judge ruled that Perry lacked the authority to issue an executive order changing the hearings process, which was put on hold until June, it was clear that TXU was not going to get what it wanted. The company's immediate future was problematical, as it was entangled in legal, regulatory, and political battles in Austin. Its stock, which had risen from the mid-teens to the mid-sixties over the past three years, hit a trough in the mid-fifties during the past two months while the market as a whole was doing well. It is not hard to imagine that a sharpie like David Bonderman, Texas Pacific's founder and a Bass Brothers alum, operating out of Fort Worth, in the heart of the storm over TXU's environmental impact, saw the company's vulnerability in Austin and in the stock market and made his move.

Suppose Perry had just let the process work. The environmentalists would be fighting the permits in a slow-moving administrative hearing. Without an executive order, there would have been no lawsuit. Some legislators would be objecting to TXU's proposal, but the media would not pay a lot of attention until a ruling was made on the permits. I'm certainly not suggesting that Perry killed the company he tried to help--TXU is looking mighty healthy today as its stock shot up by $8 by noon--just that he ended up with the opposite of what he wanted, which was more electrical power and less environmental activism. The private equity buyers plan to build only three new plants and have pledged to explore the use of coal gasification technology. Texas environmentalists have won a rare victory.

Wilder, too, is a victim of the doctrine of unintended consequences. His agenda was the same as Perry's, and he too got the opposite of what he wanted. The difference is that Perry has job security for the next 46 months--and Wilder may not have it for the next 46 days.

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