UPDATE 1-Texas law won't derail TXU buyout-KKR

(Recasts, adds detail, legislator's comment)

HOUSTON May 23 (Reuters) - A compromise worked out in the Texas Legislature over measures to regulate electric company sales will not derail the proposed $32 billion buyout of TXU Corp. <TXU.N,> the state's largest power company, by a private equity group led by Kohlberg Kravis Roberts & Co. a spokesman for the buyers said on Wednesday.

The Texas House and Senate have passed different versions of a bill that could have forced TXU to sell some business units or power plants. Executives from KKR were watching the legislation closely, warning that changes that would force divestitures or give state regulators expanded authority to reject the sale, could jeopardize the offer.

A compromise proposal agreed to Wednesday by all 10 members of a conference committee requires functional separation of TXU's three business units -- power generation, power delivery and retail sales -- without requiring any sales, according to the conference committee report.

The compromise includes a House bill provision giving state regulators oversight over future sales of electric delivery companies while exempting the pending TXU deal, according to the report.

"We are going to move forward on closing the transaction," said Jeff Eller, a spokesman for the private equity group. He declined to comment on the specifics of the compromise.

The size of the TXU transaction, soaring power prices in the state's five-year-old deregulated market and allegations of market abuse raised concern among elected officials about the takeover of TXU by private equity firms.

Sen. Troy Fraser, sponsor of the original bill, said the new language gives the Public Utility Commission oversight over future sales of electric delivery companies as well as increased authority to penalize companies that manipulate the wholesale power market.

"It's not a reregulation" of the industry, Fraser said. "We're putting controls in place to make the market even more competitive."

The bill increases penalties for market violations up to $1 million, Fraser said, and would allow the commission to order a company to auction some of its generating capacity to offset its dominant market position.

"It puts a lot of teeth" in the commission's ability to penalize market-rule violations, Fraser said.

The PUC also will gain authority to audit TXU's books to ensure its business units do not share information or favor each other in any transactions.

Executives of each TXU unit will be required to sign annual statements to affirm compliance with the separation rules, under criminal penalty, Fraser said.

The compromise legislation is expected to be voted on by both houses on Friday, Fraser said, just three days before the legislative session ends May 28.

Before the buyout was announced, TXU had attracted significant opposition to its plan to build as many as eight coal-fired plants in the state. Legislators had criticized the company's high electric rates in north Texas.

They also cited allegations by regulators that TXU violated Texas market-power rules as a reason to allow more scrutiny of the sale. TXU has disputed the allegations.

In response, KKR made numerous concessions to legislators to smooth the way for the buyout, including a drastic scaling back of TXU's coal-building program and agreeing to submit details of the sale to the PUC months in advance of the scheduled closing date.