THE WALL STREET JOURNAL

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Burning Debate As Emission Restrictions Loom, Texas Utility Bets Big on Coal Planned TXU Plants Raise Global-Warming Concerns; Rivals Try New Technology Mr. Wilder Cites Demand By REBECCA SMITH July 21, 2006; Page A1 Top executives at many utility companies have reluctantly accepted that coal-fired power plants contribute to global warming, and they have begun planning for a more restrictive future. Then there is C. John Wilder, chief executive of TXU Corp. The Dallas-based utility company is racing to build 11 big power plants in Texas that will burn pulverized coal. That process releases substantial amounts of carbon dioxide, the most worrisome of several heat-trapping gases widely blamed for global warming. TXU contends Texas needs a lot more power, and it wants to be the company to provide it. Critics of its $11 billion construction program see another motivation: The federal government may slap limits on carbon-dioxide emissions. If it does, plants completed sooner may have a distinct advantage. That's because the government may dole out "allowances" to release carbon dioxide, and plants up and running when regulations go into effect may qualify for more of them than those built at a later date. TXU opposes such regulations, which could force power companies to build more complicated and expensive plants. Other big utility companies, including American Electric Power Co., Xcel Energy Inc. and Duke Energy, have proposed newer-style plants that release fewer pollutants and make it easier to control carbon-dioxide emissions. The 11 new plants TXU plans to build over the next four years would double its electricity output -- and more than double its carbon-dioxide emissions. The Environmental Defense Fund, an advocacy group, estimates that TXU's annual carbon- dioxide emissions would jump to as much as 133 million tons in 2011 when its new plants are completed, from 55 million tons in 2004, numbers that the company confirms. The increase would make TXU the third-largest emitter of carbon dioxide among U.S. power companies, up from No. 10 today. TXU says it has already reduced carbon-dioxide emissions per unit of electricity produced by adding wind turbines and nuclear power to its mix. Without such efforts, its carbon dioxide output would be 45% greater, the company says. Carbon dioxide is produced naturally when animals breathe and plants decompose. It is a small but essential component of the earth's atmosphere. The burning of fossil fuels such as coal and gasoline also produces the gas. Carbon dioxide is building up in the atmosphere, trapping heat and warming the globe. Currently, the federal government doesn't classify carbon dioxide as a pollutant and doesn't regulate emissions of it. The U.S. produces nearly one-quarter of the world's man-made carbon dioxide. It would be difficult for the U.S. to make meaningful reductions without cooperation from the power industry. Power plants produce 39% of U.S. carbon-dioxide emissions, and four-fifths of that amount comes from coal-fired power plants. Texas is responsible for 10% of the nation's total, more than any other state. J. Wayne Leonard, chief executive officer of Entergy Corp., a New Orleans-based utility holding company where Mr. Wilder once worked as chief financial officer, says the science behind global warming is persuasive and carbon-dioxide regulation is inevitable and necessary. He calls it "unacceptable" for power companies to build lots of new plants heedless of the environmental effect of carbon dioxide. Unless proof emerges that the scientific data are flawed, says Mr. Leonard, "you stop doing what you're doing because you're putting all mankind at risk." Entergy runs some coal-fired plants, but makes most of its electricity from nuclear fuel and from burning natural gas, which produces less carbon dioxide than coal. It intends to develop more nuclear facilities, which it bills as "zero-emission." Other utility companies are investing in new coal-burning technology that is capable of significantly reducing carbon-dioxide emissions. "There's no question we're planning to meet energy needs differently today than 20 years ago," says Peter Sheffield, a spokesman for Duke Energy Corp. of Charlotte, N.C., which has invested in an alternative coal technology designed to reduce atmospheric pollution. "Carbon dioxide is a big game-changer." TXU's Mr. Wilder declined to be interviewed. When he unveiled his plant-building plan in May, he dubbed it a "clean coal initiative." He said it was voluntary and would reduce by 20% TXU's emission of regulated pollutants including sulfur dioxide, nitrogen oxides and mercury, due to the installation of more pollution-control equipment on older plants. Environmentalists say "clean coal" is a misleading label. The reductions, they say, aren't as voluntary as the company claims. TXU is required to reduce its emissions of certain pollutants by 2015, and its plan moves up the timetable to 2010. "I think we should be applauded for it," says Mike McCall, chief executive of TXU Wholesale, the unit that runs TXU's generation business. Critics fault TXU for simultaneously building so many coal-burning plants, each with a 50-year life expectancy. A more responsible approach, some say, would be to build only a few plants now, delaying the rest to take advantage of improving carbon-dioxide reduction technology. TXU says building all 11 plants at once will reduce the cost of each one. In his public appearances, Mr. Wilder maintains that more power generation is urgently needed. At TXU's annual meeting on May 19, he displayed a chart on infant mortality, arguing that countries with high per-capita electricity usage have a lower incidence of early death than countries with little electricity. He argued that Texas' electricity surplus is "literally melting away" and that the state needs TXU's new plants to buttress its standard of living. "We know what we do is a valuable thing to society," he told shareholders. "And part of the debate of this new build program that we have...with some of our opponents...is [that] you have to look at the whole system of benefits and cost to society. There's not a form of electricity today that can be generated without some society harm." Mr. Wilder's stance fits his image as an iconoclast who is determined to transform TXU from a stodgy utility company into a highly profitable one. During his first two years on the job, he sold noncore businesses, nearly doubled utility rates and even outsourced customer service to take advantage to the 1999 deregulation of Texas' electricity industry. For TXU, the planned coal-fired plants hold considerable upside. TXU mines its own coal in Texas and is the nation's No. 10 coal producer. Mr. Wilder projects that the new plants eventually will add $1 billion or more to the company's annual profits. TXU is attempting to raise $11 billion to fund their construction, and has approached banks, investment funds and industrial customers for loans and equity investments. Mr. Wilder recently told analysts that TXU is the only company that can build so many plants in so short a period of time. It is unclear whether the federal government will move to limit carbon-dioxide emissions. President Bush favors voluntary reductions, as does TXU. But support for mandatory reductions is growing in Congress. Earlier this year, two senators from New Mexico -- Pete Domenici, a Republican who heads the Energy and Natural Resources committee, and Jeff Bingaman, the committee's ranking Democrat -- issued a white paper saying the threat of global warming is real and action must be taken. The paper said a program for regulating carbon-dioxide emissions was needed, and it solicited suggestions from the power industry. In its written response, TXU said it opposes regulation because it would "stunt economic growth" and because "there would not be any real environmental benefits." The U.S. should take no action on mandatory carbon-dioxide reductions, TXU wrote, "unless all nations adopt similar programs." TXU executives contend that the current Congress is unlikely to act. "It's easier to stop a bill than pass a bill," says TXU's Mr. McCall. "It will only take 40 senators to block carbon regulation." There are ways to make electricity with coal that make it possible to separate out the carbon dioxide. A process called gasification is one way. Coal is first converted into a combustible gas, then that gas is burned to make electricity. Gasification offers two advantages over traditional coal incineration. When the coal is converted to a gas, many pollutants are left behind and don't go up the smokestack. And it is easier to capture carbon dioxide, which can then be injected into the ground or used in some other industrial process. Two gasification power plants have been operating near Tampa, Fla., and in Wabash, Ind., for more than a decade, built with big federal subsidies. A new generation of gasification plants that are twice as big is on the horizon. There are proposals to build about two dozen such plants in the U.S. in coming years, perhaps one-quarter of the planned new coal-fired plants. Duke Energy, which produces more than half its power from coal, owns the Wabash gasification plant and is considering building a larger one nearby, as well as a nuclear plant in South Carolina. Although it is also planning a new pulverized-coal-burning plant in North Carolina, the company says it favors federal greenhouse-gas regulation. One concern about gasification is that it can add $200 million or more to the cost of a $1 billion coal power plant. But the Department of Energy reported that installing carbon- dioxide controls at pulverized-coal-burning plants could be so costly it would wipe out the cost differential between the two technologies. Bechtel Corp. and General Electric Co. are working together to design a gasification power plant that would cost about as much to build as the type of plant that TXU intends to build. "We think the technology is proven," says Bruce Morton, head of the project for Bechtel, a global engineering firm based in San Francisco. During a recent meeting with analysts, Mr. Wilder said TXU examined gasification and concluded that the technology wasn't sufficiently proven. "It's a gleam in someone's eye," he said. He said it would be financially risky for the company to rely on the technology in its current building program. Other TXU executives say they are interested in gasification down the road, but they want to own the technology. Mr. McCall, who runs the generation unit, says the firm is in talks with an unidentified vendor about a possible gasification design. "We're trying to do it in a proprietary way," he says. For now, gasification plants are being planned mostly in states that are trying to limit carbon-dioxide emissions, and in those where utility-rate regulations make it feasible for builders to recoup their costs. Such plants aren't going to Texas, which deregulated its electricity market more extensively than many other states. TXU's decision to build pulverized-coal plants -- and to build them quickly -- may stem in part from the way the federal government has instituted pollution regulations in the past. A 1990 federal program to reduce emissions of sulfur dioxide, a contributor to acid rain, employed a "cap and trade" system. Existing polluters were given "allowances" -- essentially, rights to pollute -- which they could use themselves or sell to others. The allowances were intended to soften the blow for companies that had made investment decisions without knowing they would later face antipollution measures -- to "grandfather" them. Over time, the number of annual allowances handed out was reduced. That drove up their resale value and provided companies with an incentive to install pollution-control equipment. Many believe the government eventually will adopt a similar system to control carbon- dioxide emissions. In late 2004, TXU consultants advised the company against trying to cut such emissions in anticipation of federal action. In a written report, the consultants said that such "early actions" could reduce the allowances that TXU receives in the future. "The argument in support of grandfathering breaks down when you're talking about plants being built to squeeze in under the wire," says Bruce Biewald, president of Synapse Energy Economics Inc., a Cambridge, Mass., consulting firm that often works for state utility commissions. "It's not intended for guys that are adding to the problem because they've got their heads in the sand." Some companies think allowances should be doled out in a way that rewards companies for early, voluntary reductions. In 2002 the state of California created an organization called the California Climate Action Registry to document and verify reductions of several greenhouse gases by companies and public agencies. The group's goal is to secure credit for companies that take early action. Energy producers such as PG&E Corp., Mirant Corp., BP PLC and the Los Angeles Department of Water and Power are participants. Some states, including Washington, Oregon, California, and Vermont, are factoring in the environmental aspects of proposed new plants when deciding what to authorize. Colorado and Wyoming, big coal-producing states, are pushing gasification projects. Seven Northeastern and Midwestern states agreed last year to create their own regional greenhouse-gas reduction program. Texas gives no special consideration to gasification plants. Late last year, Gov. Rick Perry signed an executive order instructing state agencies to expedite applications for new plants, especially those burning locally mined coal. Write to Rebecca Smith at [email protected]