UPDATE 2-Texas may increase oversight of TXU buyout

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HOUSTON Feb 27 (Reuters) - A Texas Senate committee approved a bill on Tuesday to give state utility regulators expanded authority to review mergers, a day after TXU Corp. TXU.N agreed to be taken over in a $32 billion deal, the state senator who proposed the bill said.

State Sen. Troy Fraser of Horseshoe Bay, Texas, wants it to become law in time for the Texas Public Utility Commission to review the TXU transaction. The utility's private equity buyers have said that no state approval is needed.

"We are concerned about the TXU transaction and the attempt to circumvent the regulatory process," said Fraser, chairman of the Senate Business and Commerce Committee, which oversees utilities.

The bill would give the regulator authority to approve or reject utility asset sales and mergers before deals close. The measure instructs the commission to consider the effect of a transaction on competition in the state's power market.

Under current law, the PUC has "weak" authority to review mergers, said Houston energy consultant Brett Perlman, a former PUC commissioner. "They can investigate, but not stop it," Perlman said.

Another provision of the Senate bill would require the commission to determine whether debt levels are appropriate for companies that operate transmission and distribution lines, such as TXU, Fraser said.

On Monday, Kohlberg Kravis Roberts & Co. KKR.UL and Texas Pacific Group TPG.UL proposed buying Dallas-based TXU in the largest leveraged buyout ever.

Fraser said lawmakers are concerned that new owners will sell some TXU's business units and try to allocate much of the debt from the purchase to TXU's transmission business, which charges regulated rates.

Lawmakers are also concerned that TXU's size already gives it unfair advantage in the Texas power market even after four years of competition.

Fraser said the committee approved several other bills that, if enacted, could hurt the TXU buyout, including a bill that would limit the amount of generating capacity a company can control within the Texas market.

On a call with analysts on Monday, TXU's general counsel, David Poole, said only a legislative change that would force divestiture of generation assets would lead to the deal being called off.

Citing high electric rates, the Texas Association of Manufacturers encouraged legislators to act to ensure the PUC has clear authority to review the buyout.

The PUC "should conduct a thorough review of the transaction and its potential impact on consumers, jobs and economic growth in our state," the trade group said in a statement.

Officials reached from TXU and the investor group would not comment immediately on the pending legislation.