Texas Regulators Approve Billionaire’s Plan to Buy Oncor

On Thursday, Texas utility regulators approved Dallas billionaire Ray Hunt’s proposal to buy Oncor, the state’s largest transmission and distribution utility, against warnings from consumer groups that it could harm ratepayers.

The Hunt-led group’s plan for Oncor has been controversial from the start, with Public Utilities Commission (PUC) staff, consumer advocate groups such as the American Association of Retired Persons and Texas Coalition for Affordable Power warning that the group plans to charge customers for taxes that the company ultimately will not have to pay. Critics also say the deal opens the gates to future rate increases and added costs for customers.

The deal is the latest in nearly a decade of turmoil with Oncor’s parent company, Energy Future Holdings. EFH is currently facing bankruptcy, the result of a private equity buyout in 2007 predicated on high natural gas prices. The Oncor-Hunt deal is a key part of EFH’s Chapter 11 plan. As an investor-owned utility, Oncor is regulated by the PUC. Major changes to its business operations and increases in rates must first be approved by the commission.

PUC’s approval, granted with certain conditions, allows Hunt and a consortium of investors including Fidelity, an investment firm, and the Teacher Retirement System of Texas to purchase Oncor, which distributes and transmits electricity to more than 10 million Texans.

Oncor’s new owners plan to split the utility company’s assets into two separate businesses. One company will own the poles and wires and other physical assets, and the other will lease those assets. This corporate structure, called a “Real Estate Investment Trust,” or REIT, is uncommon in the utility industry, but is frequently used by real estate companies to reduce their tax burden.

By placing Oncor’s assets in a REIT structure, the Hunt consortium stands to save $250 million in federal taxes, which they say they will pass on to shareholders.

Advocates who say they are looking to protect the interests of Oncor’s customers have countered that ratepayers have “nothing of significance” to gain from a deal that passes on $250 million in federal tax savings through dividends to shareholders. The PUC’s own staff and a coalition of cities also opposed passing such a deal, citing harm to ratepayers. The staff said it’s possible ratepayers could be on the hook for another $295 million in additional costs.

In 2007, a group of private investors bought TXU and divided it up into three companies — Luminant, TXU Energy and Oncor — to be structured under the parent company EFH. That $45 billion buyout was the largest in history and set events in motion that eventually brought Oncor before the PUC on Thursday.

EFH’s investors initially believed natural gas prices would stay high, making the company’s nuclear and coal-powered plants competitive. But gas prices tanked and in 2008, the national economy stumbled, reducing EFH’s profits and pushing the company into the red.

In restructuring Oncor, the Hunt group has said the $250 million in tax savings will help the company attract more investments and provide benefits down the line.

But the PUC has delayed determining how much, or whether, those savings should be retained by the company or refunded to customers, since the scope of the Oncor case was limited strictly to the company’s restructuring. For now, the commissioners have requested the company create an accounting mechanism that tracks the federal tax savings.

At a particularly tense moment during a packed meeting at the PUC’s Austin headquarters, commissioner Brandy Marquez suggested requiring the company to set aside $100 million in order to reassure taxpayers that “we have their interests in mind.”

But that proposal was quickly shot down after chairperson Donna Nelson objected, saying the commission was already holding the company to several other requirements that protect consumers.

“If we’re going to deny it, why not just deny it,” Nelson said. “If we keep attaching all these things, it’s going to die any way.”

The savings issue will likely be discussed in a separate rate case that will be filed in the coming months.

Consumer advocates also raised concerns about the use of the REIT — a relatively uncommon and complex corporate structure — on such a large scale. Sharyland Electric, a South Texas utility also owned and operated by the Hunt family, currently operates as a REIT, but the utility’s power line network is just one-tenth the size of Oncor’s.

Other Texas utilities are keeping a close eye on the Hunt deal, which creates new precedent for the way energy companies are structured. In February, Houston’s CenterPoint Energy announced that it will explore the use of REIT and “monitor developments, including related regulatory proceedings.”