Any investment group considering the purchase of a large corporation will carefully perform due diligence to ensure that the transaction can pass expected legal and regulatory review.

Now consider a disturbing twist. After a deal is announced, what if a government decides the new owners can afford to help the government with its policy objectives even more than the previous owners and tries to change the law accordingly?

Welcome to Texas: In one of the largest leveraged buyouts in history, Kohlberg Kravis Roberts & Co. and Texas Pacific Group are purchasing TXU Energy Corp., the largest electric utility in Texas. After the deal was announced, some members of the state Legislature attempted to impose conditions on the acquisition, only to see their time expire last week with the end of the legislative session.

TXU, based in Dallas, owns both electricity-generating plants and an electric grid that runs throughout much of Texas. Last year, before the private equity buyout, TXU faced fines of more than $200 million from the Public Utility Commission of Texas for various regulatory violations. Moreover, TXU planned to build as many as 11 new coal-fired electricity-generating plants to meet its ever-increasing demand.

Environmental groups cried foul and made blocking TXU’s building plans a prominent environmental cause, both in Texas and internationally. Protests were organized in many cities against both TXU and the institutions helping to finance the new plants.

In February, KKR and TPG announced their buyout of TXU. The buyers offered not only new financing, but something potentially more precious: better public relations. KKR and TPG were clearly prepared for the battle before them.

The statement announcing the deal to the press was filled with sensitive environmental themes including, amazingly, endorsements by two environmental groups: Environmental Defense and the Natural Resources Defense Council. Their approving nods were likely the result of the acquiring parties’ agreeing to drop plans for all but three of the 11 new power plants.

Aware of the state’s displeasure with TXU, the buying consortium also proposed a package of concessions, including reducing rates for many residential users. The concessions would reduce the operational flexibility of TXU, but would also increase the likelihood that the state would approve the transaction.

If TXU were part of a relatively unregulated industry, the transaction would have quietly closed. But electricity is one of the most overregulated industries in the country. So to help with regulatory matters, including gaining approval for the transaction, KKR and TPG announced new board members for the new company that would include a former chief of the Environmental Protection Agency, William Reilly; a former commerce secretary, Donald Evans; the current chairman of the University of Texas Board of Regents, James Huffines, and a former ambassador to Sweden and Texas legislator, Lyndon Olson Jr. A former secretary of state, James Baker, would serve as an outside adviser.

These gentlemen collectively have little if any experience in running an electric utility. Each, however, has run a large business or government organization. Even more important, each has a great deal of experience with the government’s exercise of discretion.

Faced with a large transaction as well as unresolved electricity consumer issues, many Texas legislators did what other legislators have longed to do: They introduced legislation linking the approval of the transaction with the resolution of various industry issues.

Competing bills were crafted to test exactly how many concessions could be extracted from KKR and TPG without causing the buyers to walk away: A complete divestiture of the generating plants from the electricity grid would have been a deal breaker; so, too, would review of the deal by the Public Utilities Commission of Texas. Weaker forms of structural separation and accounting safeguards between generation and distribution units within the firm would not have caused the deal to collapse.

Ultimately, however, the legislation ran out of time. The failure to pass electricity legislation in Texas removes one of the largest stumbling blocks to the TXU acquisition. Some observers describe it as a smashing victory for KKR and TPG. That view overstates the case.

Someday the Legislature will be back in session and not, one hopes, with a vengeance. More important, the Texas Legislature has demonstrated that it has the power to size up new owners of companies and change the laws accordingly. That should frighten all investors, not just in Texas, but around the country.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He is organizing the seminar series at the Hudson Institute and can be reached at hfr@furchtgott-roth.com.