Staffers Say Texas Regulator Should Nix Oncor Deal

Experts at the Public Utility Commission of Texas are urging its three commissioners to reject plans by a Dallas oilman and real estate tycoon to take over the state’s largest electric transmission company, a recommendation that could loom large for Texas' ratepayers and electric grid. 

“The proposed transaction is not in the public interest and I recommend that the Commission reject the Applicants' application,” Darryl Tietjen, who oversees rate regulation for the agency, wrote in public testimony submitted Wednesday.

Tietjen was weighing in on a proposal from Ray L. Hunt and other investors to buy Oncor, whose 119,000 miles of transmission and distribution lines deliver power to more than three million homes and businesses in North and West Texas.

A consultant hired by the agency joined Tietjen in calling for a rejection. 

To avoid paying federal income taxes, Hunt wants to transform Oncor into a real estate investment trust, a nearly unprecedented structure for a utility that has worried consumer advocates.

His $18 billion-plus bid for the company is the lynchpin of a broader push to deliver Energy Future Holdings, Oncor’s parent, from one of the biggest corporate bankruptcies in American history. 

A Delaware bankruptcy judge last week approved Energy Future’s reorganization plan after 19 months of wrangling between Wall Street firms and other creditors. For it to become reality, however, Texas regulators must sign off on Hunt’s Oncor deal.

The Texas agency set a hearing for January, where its three commissioners must decide whether the plan fits the interests of everyday Texans.

On Wednesday, agency experts offered their view: No.

Jeanne Phillips, a Hunt spokeswoman, declined to comment on the proceedings.

Tietjen wrote that Hunt’s plan to avoid paying income taxes would amount to a “substantial transfer of wealth from ratepayers to shareholders” totaling nearly $250 million each year.

Hunt’s plan is complicated, and it’s never been tried for a utility this big.

As a real estate investment trust, Oncor would essentially split into two companies, with one owning the physical assets such as power lines, trucks and transformers and the other renting and operating the equipment and dealing with customers.

The unorthodox structure, more commonly used for shopping malls and elsewhere in the real estate world, would help Oncor borrow money at lower rates, proponents say, which could ultimately translate into lower electric rates for customers. 

But it makes some watchers nervous, particularly consumer advocates who want Hunt to pass his tax savings directly to ratepayers.

With the monopoly utility paying virtually no federal income taxes under the proposed structure, Tietjen wrote, Oncor’s shareholders would earn a rate of return of so high that it “could not be considered acceptable under any reasonable application of economic and regulatory standards.”

A consultant analyzing the plan for the agency also recommended that the commissioners reject it.

Craig Roach, president of Boston Pacific Company, wrote of “significant potential harm to ratepayers” in testimony submitted Wednesday.

“While there is general benefit to resolving the [Energy Future] bankruptcy, the resolution simply cannot come at the expense of ratepayers as it does with the applicants’ proposal,” he wrote.

When Energy Future was formed eight years ago, the state Public Utility Commission insisted on a financial "ring fence" around Oncor to keep Energy Future’s debt from dragging it down. It worked, keeping the power line company financially healthy even as its parent sank into a $42 billion bankruptcy.

Among other concerns, Roach suggested Hunt’s proposal would leave Oncor unprotected.

Hunt owns the only other U.S. utility organized in such a trust: Sharyland Utilities, which serves just 50,000 customers in small patches of rural West and North Texas. It charges the highest rates in the state following a recent spike that sparked a flood of complaints from customers. 

Hunt’s camp points out that a host of unique factors caused that utility’s rates to spike — beyond the fact that delivering power to sprawling, rural communities tends to cost more. And it suggests that the unique structure may have kept conditions from getting worse.

The agency will weigh hundreds of comments and other filings when it kicks off the January hearings, expected to last two weeks. It could approve the plan while adding stipulations.