Two administrative law judges have recommended TXU be denied a permit for its proposed Oak Grove coal-fired power plant.
The facility is planned in Robertson County, near Franklin.
The recommendations now go to the Texas Commission on Environmental Quality.
The judges in Austin say Dallas-based TXU failed to demonstrate that the plant would use the best available control technology for reducing pollution.
TXU says it disagrees with the recommendation and will continue to make its case with regulators.
The site for the proposed unit is about 55 miles southeast of Waco.