As Texas regulators weigh the Ray L. Hunt family’s plan to buy Oncor, the state's largest electric utility, and reorganize its corporate structure to save on taxes, at least one other giant utility is considering a similar move.
That's stirring concerns among critics who say it would essentially reroute hundreds of millions of dollars from ratepayers to company shareholders.
Houston-based CenterPoint Energy announced this week it’s considering shifting to a real estate investment trust “for all or part of” its electric and natural gas utility businesses. The investor-owned utility delivers electricity to the Houston region and distributes natural gas in six states — including swaths of South and East Texas.
“The structure has recently received significant attention in the regulated utility industry in Texas and could have substantial potential for CenterPoint,” CEO Scott Prochazka said in a statement. “We will continue to study the possibilities and monitor developments.”
CenterPoint is closely watching Hunt’s $18 billion bid for Oncor, whose 119,000 miles of transmission and distribution lines deliver power to more than 3 million homes and businesses in North and West Texas.
Hunt, a Dallas oil and real estate mogul, needs approval from Texas Public Utility Commission, which regulates and sets rates for electric utilities with monopolies in certain areas. The likelihood of that decision to ripple across Texas is worrisome to a host of critics who consider the complex structure risky for ratepayers.
“My assumption is that a lot of utilities will want to move to the [real estate investment trust] structure if the Oncor acquisition is blessed by the commission,” said Geoffrey Gay, general counsel for the Steering Committee of Cities Served by Oncor, a consumer group. “I think it will be horrible for consumers and for regulators.”
That financial structure has long served the real estate world. Shopping malls, for instance, commonly use it, as investors back a broad entity that rents space and other assets to individual stores.
But such trusts have never been tried at a large utility.
The idea would divide a utility into two companies. One would own the assets (power lines, trucks and transformers, for instance), while 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 thorough dividends.
One of critics’ biggest complaints: Hunt calls for the new Oncor to keep charging ratepayers what it normally collects in federal taxes — even though the company would no longer send that money to Washington.
Proponents say those tax savings make for a healthy company that can borrow money cheaply as it makes costly improvements to the electric grid.
Also, the Hunts promise that the deal won’t increase rates, and they consider it the best option for delivering Energy Future Holdings, Oncor’s parent company, from one of the largest corporate bankruptcies in American history.
“I can see it’s desirable from the utility perspective," Gay said. "From the consumer perspective, I see absolutely no benefit and a lot of complexity and difficulties.”
In December, written testimony from Darryl Tietjen, who oversees rate regulation for the commission, characterized the Hunt plan as a “substantial transfer of wealth from ratepayers to shareholders” totaling nearly $250 million each year.
Approving that shift, he added, would likely spur Oncor’s peers to follow because of the “very obvious tax benefits that would accrue to shareholders."
And if all investor-owned utilities morphed into such a trust? The sector would reap about $530 million each year in “excess returns,” Tietjen wrote.
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 delivery rates in the state following a recent spike that sparked a flood of complaints from customers. (The Hunts say factors unrelated to the corporate structure increased rates, and a commission study appears to back that up.)
Now CenterPoint Energy is interested, though it says it has only kicked off its study.
“Ultimately, any decision will have to create shareholder value,” Leticia Lowe, a spokeswoman, said. “We can’t say how long it will be before we have anything additional to share.”
Disclosure: CenterPoint Energy is a corporate sponsor of The Texas Tribune. Oncor was a corporate sponsor in 2012. A complete list of Tribune donors and sponsors can be viewed here.