Texas regulators on Thursday approved the Ray L. Hunt family’s high-stakes plan to purchase and reshape the state’s largest electric utility. But they added major revisions, prolonging the battle to own Oncor.
The Texas Public Utility Commission granted the Dallas oil family permission to transform the utility into a real estate investment trust, a corporate structure that would pass hundreds of millions of dollars in tax savings directly to shareholders and spur other utilities to follow suit.
But the approval carried major stipulations, leaving the roughly $18 billion deal — the cornerstone of Energy Future Holdings’ plan to emerge from its epic bankruptcy — shrouded in uncertainty. Energy Future filed for bankruptcy in 2014 with nearly $50 billion in debt, mostly from the record leveraged buyout of TXU Corp. by KKR, TPG Capital and Goldman Sachs.
It is unclear whether Hunt’s investors, who promised to pour billions of dollars into the deal as written, will agree to the terms.
“Everything we need to take back to investors, in any event,” Hunter L. Hunt, CEO of Hunt Consolidated, told the commissioners.
Thursday’s order added a litany of complicated conditions seeking to minimize risks for Oncor and its roughly 3 million power line customers in North and West Texas. The commission also delayed answering the most contentious question related to the deal: whether the new Oncor would be forced to share with ratepayers a piece of the roughly $250 million in annual tax savings, and if so, how much. That became a matter for a separate proceeding.
It sounds like you’re punishing them.
Donna Nelson, Public Utility Commission chairwoman
The approval came just days before a Sunday deadline. The commission, which regulates monopoly utilities, found the rewritten deal “in the public interest.”
Chairwoman Donna Nelson dissented from the decision to kick the issue of tax sharing to a separate proceeding.
The proposal drew close scrutiny throughout months of hourslong meetings of commissioners, punctuated by the clicking open of thick binders. Throughout the process, concerns came from several consumer and industry groups, officials at Oncor, former Gov. Rick Perry and even commission staffers.
Critics called the new corporate structure risky, partially because it’s nearly unprecedented for a utility. The highest-profile objections were over this question: Should regulators allow Oncor, as a real estate investment trust, to collect hundreds of millions of ratepayer dollars — normally earmarked for federal taxes — that the company wouldn’t actually have to pay?
The plan would divide Oncor into two companies. One would own the assets (power lines, trucks and transformers, for instance), and the other, much smaller “operating” company would rent the equipment. In Oncor’s case, the “asset” company would hold about 97 percent of the income — largely untaxed.
Federal law requires these trusts to pay out at least 90 percent of their income to shareholders through dividends.
Hunt’s camp argues that the tax savings would draw more investment in Oncor and make for a healthier company in the long run — potentially lowering rates. And it says investors would walk away if Oncor isn’t allowed to continue collecting rates normally earmarked for federal taxes.
Company officials noted that some utilities also save on taxes by taking on other corporate structures, and the officials call it unfair to treat real estate investment trusts uniquely.
On Thursday, the commission answered the tax question with a reluctant yes.
Its order allows Hunt to transform Oncor into a real estate investment trust, designed solely to save on federal taxes. But it makes clear that the commission, when it next reconsiders Oncor’s rates, may force the utility to share some of those tax savings directly with ratepayers, potentially lowering their bills.
The commission will also craft a new rule about dealing with such tax savings industrywide. At least one other electric utility, Houston-based CenterPoint, has expressed interest in becoming a real estate investment trust.
Commissioners Ken Anderson Jr. and Brandy Marty-Marquez have backed the sharing idea, saying the deal would not fit the public interest unless it promised savings for ratepayers.
Nelson has suggested that the tax issue is less of a problem, since some utilities pass tax savings to investors in other ways.
Minutes before the vote, Nelson said the commission risked torpedoing the deal by adding so many restrictions.
“It sounds like you’re punishing them,” she said as her colleagues were considering requiring the new Oncor to immediately credit ratepayers $100 million — some of what the utility would save on taxes in the gap between the deal’s ultimate approval and a new rate proceeding. “If we’re going to deny it, why don’t we just deny it,” she said of the deal as a whole.
Richard Nolan, an attorney for the Hunt group, reaffirmed that uncertainty continued to swirl around the deal.
“There’s a number of things that can happen. There’s a number of contingencies and developments that we can’t affect,” he said. “This at least provides us a path forward.”