Across one full wall of Brandy Marty Marquez’s cozy state office, a whiteboard covered in multi-colored scribblings diagrams a complex maze of real and proposed corporate financial structures, along with arrows showing where billions of dollars of debt might finally land.

For the past month, Marty Marquez, one of the Texas Public Utility Commission's three Republican-appointed commissioners, has been updating the board, trying to make sense of the effect one of the largest bankruptcies in U.S. history might have on the electric bills of millions of Texans.

Why? Because bankrupt Energy Future Holdings, saddled with more than $40 billion in debt and struggling to reorganize in court, owns all or part of three crucial pieces of the Texas electric grid.

Luminant is the state's largest generator, with a fleet of 14 coal, natural gas and nuclear plants that can power nearly 20 percent of the grid. TXU Energy is one of the state's largest retail electric providers, serving more than 1.7 million Texans.

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And, of most importance at the moment, the company is the majority owner of Oncor, a monopoly utility whose 119,000 miles of transmission and distribution lines deliver power to more than 3 million homes and businesses in North and West Texas.

In the coming months, the commission— charged with regulating monopoly utilities  — is expected to consider an unprecedented plan to deliver the conglomerate from its financial mess, with huge implications for the electric grid and Texas ratepayers. Along with the financial world, consumer advocates will closely watch the proceedings.

“This is so novel…the adrenaline is pumping,” Marty Marquez said, gazing at that board. “This is what you read about when you’re finished working.”

Energy Future – known as TXU Corp. before a massive leveraged buyout in 2007 – is mired in debt after betting big on natural gas prices that later plummeted. It lost about $7.6 billion from 2011 to 2013, according to federal filings.

When it filed for Chapter 11 protection in April 2014, the conglomerate suggested it could complete the proceedings in less than a year. That didn’t happen.

But a proposal emerged this month that could help it emerge from Wilmington, Del. bankruptcy court proceedings that have cost Energy Future roughly $1 million each day in legal fees.

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Joined by several partners, Ray L. Hunt, the Dallas oilman and real estate mogul, has proposed a deal that would give them control of Oncor – the only Energy Future asset that’s consistently making money. The deal would also involve spinning off the conglomerate’s electric generation side to its creditors, allowing them to be paid in full. 

“Today’s filing is a significant step forward in helping to ensure that Oncor has the resources and Texas-based management required to continue meeting the needs of its customers and its communities,” Hunt said in a statement on August 10.

Now, Energy Future expects to wrap up business in court by spring of 2016, “although we will strive to beat that,” it said in a recent email to its employees.

But first, U.S. District Judge Christopher Sontchi must approve the deal. He’ll formally examine the details during a two-day hearing beginning Sept. 17.

If the judge signs off, the Public Utility Commission would next step in, balancing Hunt's interests with those of Texas ratepayers and the electric grid. Those following the saga expect Hunt to file his plan with the commission this fall. Once that happens, the panel has 180 days to sign off.

The commission must sign off for the plan to go forward, and it could add stipulations of its own.

Hunt’s financial plan for claiming Oncor is complicated, and it’s never been tried for a utility this big. That's making some watchers nervous.

To save on federal income taxes, Hunt wants to reorganize Oncor into a “real estate investment trust,” essentially dividing it into two companies: One owning the assets (power lines, trucks, transformers, for instance), while the other rents the equipment, operates it and deals with customers.

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That financial structure has long served the real estate world well. Shopping malls, for instance, commonly use it, as investors back a broad entity that rents space and other assets to individual stores.

The unorthodox structure would help Oncor borrow money at lower rates, proponents say, which could ultimately translate into lower electric rates for customers.

But it’s nearly unprecedented in the energy world. 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 and has much higher rates than Oncor.

The deal’s experimental nature makes some consumer advocates nervous, and it has prompted questions about whether it will still be protected from the debt of its parent company.

When Energy Future was formed eight years ago, the commissioners insisted on a financial "ring fence" around Oncor to keep bankruptcy from dragging it down. It worked, keeping Oncor financially healthy even as its parent sank. Under the mechanism, a minority investor owned 20 percent of Oncor, which also had separate leadership.

Hunt's plan could eliminate Oncor's minority investor. 

“The generation side triggered a bankruptcy, and we’re now putting together a very complicated and experimental deal to impose on the monopoly side of the business to cover the mistakes made by those fools who loaned money,” said Geoffrey Gay, general counsel for the Steering Committee of Cities Served by Oncor.

With other consumer advocates, Gay is calling for a solid ring fence around Oncor this timeand assurances that any tax savings in the reorganization will translate into lower rates for consumers.

Though details of the proposal are still fluid, Moody's Investors Service says the plan as a whole appears “credit positive” for Oncor – meaning investors should find it appealing. That’s largely because it would fully divorce Oncor from Energy Future’s power plants on the riskier competitive market.

“They no longer have a parent company that has competing interests, trying to balance competitive market interests with its regulated businesses,” said Jairo Chung, an analyst with the credit ratings service.

But Moody's said that several elements of the proposal – including the real estate-style restructuring – look “credit negative.”

“The current ring fence provisions have been tested. It prevented Oncor from going into bankruptcy,” Chung said. “But if that ring fence is taken out…now we have untested provisions.”

With the proposal not yet officially before them, the commissioners are refraining from opining on its specifics. But in a memo last week, Commissioner Ken Anderson Jr. said he planned to closely scrutinize every aspect of the deal.

“A starting point for me is that Oncor’s ratepayers ought not to bear any real risk associated with the pre-existing EFH debt or [real estate investment trust] structure unless they receive at least commensurate benefits over the long run for that risk,” he wrote. 

Marty Marquez agreed with that thinking, and said commission staffers have for months been poring over past court cases, legal definitions and other materials in preparation for a looming mad-dash at the agency.

“This is a case that’s going to be taught in law classes for the next several years,” Marty Marquez said.

But for now? “The only certain thing is nothing is certain.” 

Hunt’s conglomerate said in an emailed statement that it looks forward to “having an open, honest, and transparent dialogue with the Public Utility Commission of Texas and other stakeholders in the coming months,” and pointed to Sharyland as evidence that its plans for Oncor should work.

“We are committed to helping ensure that their questions are answered and that in the end, they will be comfortable knowing that Oncor will continue to remain a sound, financially stable company meeting the needs of fellow Texans,” the statement said. 

Disclosure: Oncor was a corporate sponsor of The Texas Tribune in 2012. A complete list of Tribune donors and sponsors can be viewed here. 

Reference Material

Commissioner Ken Anderson Memo
(481.2 KB) DOWNLOAD

Moody's: Energy Future Holdings bankruptcy plans
(1.2 MB) DOWNLOAD