Texas's big global warming battle

NEW YORK (Fortune) -- In this era of corporate environmentalism, big companies like General Electric (Charts), Wal-Mart (Charts) and McDonald's (Charts) have grown accustomed to working closely with save-the-earth groups like the World Resources Institute, Conservation International, even Greenpeace.

And then there's TXU (Charts).

The Texas utility company has made enemies of America's biggest environmental groups because of its ambitious $10-billion plan to build 11 coal-fired power plants in the next few years.

The environmentalists are up in arms because the coal-burning plants will more than double TXU's emissions of carbon dioxide, a greenhouse gas that contributes to global warming. They are urging the company to pursue greener alternatives, including clean-coal technology, aggressive conservation efforts and renewable energy.

The company says the coal plants are needed to provide a reliable supply of electricity at a reasonable cost. TXU has the support of Texas's Republican governor, Rick Perry, who was just reelected.

At a utility industry conference this week, John Wilder, TXU's chief executive, said the company would invest in new technology to limit carbon emissions from coal-burning plants. But environmentalists were unsatisfied.

"TXU's blowing smoke," says Tom "Smitty" Smith, director of Public Citizen's Texas office and a leader of the anti-TXU campaign. "They're unyielding and unwilling to compromise."

The battle between TXU and its opponents will be an interesting test of public sentiment about the issue of climate change in a state that, unlike California and New York, has taken the position that government action to curb global warming is unnecessary. Texas generates about 10 percent of the nation's CO2 emissions, more than any other state.

Groups opposing TXU's plans include the Sierra Club, Environmental Defense, the Natural Resources Defense Council, the Rainforest Action Network, a coalition of investors called CERES and the Seed Coalition, a network of community groups in the Lone Star State. About 20 mayors and county executives, including the mayors of Dallas and Houston, both Democrats, also have raised objections.

Some of the opposition crosses political lines. Albert Huddleston, a wealthy oilman and developer with strong Republican ties, recently gave notice that he has hired the blue-blood Dallas law firm of Locke Liddell & Sapp to file a federal lawsuit against one of the plants.

"It's amazing who's against this," says Jim Marston, who leads Environmental Defense's Texas operations.

In its defense, TXU says the new plants are an improvement over exiting coal-burning facilities. The company says it will reduce by about 20 percent the amount of regulated pollutants - smog-forming sulfur dioxide, nitrogen oxides and mercury - produced by burning coal.

But there's no doubt that the plants will produce massive amounts of carbon - 78 million tons a year, more than is produced by small countries (Sweden, Denmark, Portugal), according to Environmental Defense, which has built an anti-TXU Web site.

Critics have accused TXU of rushing to get the plants built before the government decides to regulate CO2, but the company says it is hurrying only to meet Texas's short-term need for more electricity.

A lawsuit that will be argued this month before the U.S. Supreme Court asks the EPA to regulate CO2. And the leading presidential candidates in 2008, including U.S. Senators John McCain and Hillary Clinton, favor carbon controls.

Environmentalists are coming after TXU on multiple fronts. Public Citizen and the Sierra Club are organizing Texans to oppose the utility company before the Texas Commission on Environmental Quality (TCEQ), the regulatory agency whose approval is needed before the plants can be built.

Environmental Defense has sued the TCEQ, saying it needs to require TXU to consider the best applicable technology before giving any go-ahead. So eager are the group's donors to stop the project that they are financing anti-TXU ads in Texas and national newspapers.

The Natural Resources Defense Council is doing a study designed to show that the plants are unnecessary. Texas uses electricity less efficiently than other states.

CERES, the investor group, is organizing public and labor pension funds and socially responsible mutual funds who own stock in TXU. "For us, it's all about the financial risks, how it's understanding those risks and what TXU is disclosing to its shareholders," says Dan Bakal, director of electric power programs for CERES.

Some analysts have written that TXU will be vulnerable if the government regulates CO2. Finally, the Rainforest Action Network has met with investment banks Citigroup (Charts) and Morgan Stanley (Charts) which, along with Merrill Lynch, are helping TXU raise the $10 billion it needs to build the coal plants.

RAN's Bill Barclay says the banks - all of which have climate change policies - are "going to have to start declining business" that adds to the risks of global warming. The banks could become targets of activists or social investors.

Can TXU take all that heat? As a utility operating in a deregulated market where consumers have a choice of electricity providers, it won't be easy. Not many companies these days can afford to ignore a sustained assault from environmental groups, local politicians and their lawyers, although TXU's Texas neighbor, ExxonMobil (Charts), has done fine despite long-running noisy protests from the greens.

Jim Marston of Environmental Defense predicts that, at minimum, TXU will have to scale back its plans. In true Texas fashion, he says the company's too greedy: "TXU has violated the rule that pigs get fed and hogs get slaughtered."

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Investors spotlight global warming