Editor's note: This story has been updated with additional comment.
Texas regulators are expected to vote Thursday on the Ray L. Hunt family’s $18 billion plan to purchase and reshape Oncor, the state’s largest electric utility.
But if the three-member Public Utility Commission approves the deal, its decision may very well include major stipulations.
The vote would resonate beyond the more than three million North and West Texans who rely on the utility to deliver their power; Approval would help end one of the largest corporate bankruptcies in U.S. history — that of Energy Future Holdings, Oncor’s heavily indebted parent — and bring more certainty to the Texas energy world.
But a signoff on the deal as written would almost certainly spark protests from a host of critics, including consumer advocates, big electricity users and even staff experts at the agency who call the deal a windfall for Hunt’s investors at the expense of everyday Texans.
The commission, which regulate monopoly utilities, has spent more than five months considering whether turning Oncor into a real estate investment trust as Hunt intends fits the public interest, and they are nearing a March 27 deadline to formally approve the proposal.
The panel meets Thursday, and observers are expecting they will vote. Three broad options sit on the table: approval, denial or approval with key stipulations — the last of which appears increasingly likely.
In a memo late Tuesday, Commissioner Ken Anderson wrote that he saw “real benefits associated with the transaction,” alongside “clear risks and costs that could significantly and adversely affect Oncor's customers.”
Hunt would get his vote, he wrote, only if it accepted dozens of new conditions he laid out in the memo, which touched on its governance and other regulatory questions, and included guarantees that the new Oncor wouldn’t charge future ratepayers for various costs associated with the restructuring.
Less clear Wednesday was whether Hunt — or investors who promised to pour billions of dollars into the deal as written — would find the stipulations worth it.
Geoffrey Gay, general counsel for the Steering Committee of Cities Served by Oncor, a consumer group that opposes the deal, called Anderson’s conditions “excellent,” for the most part. If approved, he hoped they would prompt Hunt’s investors to walk away.
Hunt would not directly weigh in on Anderson's memo.
“In our view, Commissioner Anderson has consistently worked to foster a thoughtful dialogue about our proposed transaction," Jeanne Phillips, a spokeswoman said Wednesday in a statement. "We look forward to the commissioners’ discussions tomorrow.”
Oncor, which has scrutinized various aspects of Hunt's proposal, declined to comment for this story.
Perhaps the biggest remaining sticking point is this question: Should the Dallas-based oil family allow Oncor, under the new corporate structure, to collect hundreds of millions of ratepayer dollars — normally earmarked for federal taxes — that the company wouldn't actually have to pay?
Transforming the utility into a real estate investment trust would allow Hunt to save on federal taxes, and it would likely spur other major utilities to follow suit. Houston-based CenterPoint Energy has already said it’s exploring the idea, worrying consumer advocates.
The plan would divide Oncor 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.
The idea has drawn fierce pushback from a host of groups, even including former Gov. Rick Perry.
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, and critics call it risky.
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.
Hunt argues that the tax savings would draw more investment in Oncor and make for a healthier company in the long run. And in a filing this month, the family proposed additional provisions that, by its estimate, would deliver “tangible benefits” to ratepayers of more than $500 million by 2021.
That would include offering a one-time $100 million direct credit to ratepayers (spread out over the next three years), and to ask regulators for less money — 30 percent less — to cover depreciation rates in 2017 and rebalancing its debt structure.
Critics argue the concessions are far too small to compensate ratepayers for the roughly $250 million per year in tax collections that Oncor would send to its investors, and contend that some of the new provisions would actually inflict more harm on new ratepayers.
Lowering collections for depreciation in 2017, for instance, would merely delay such payments, shifting the burden to future ratepayers, critics say.
“The Purchasers' recent filing is backtracking, creates new harm for customers, and does not approach the types of commitments or financial benefits to customers that would be needed to find this transaction in the public interest,” the Texas Industrial Energy Consumers and the Texas Office of Public Utility Counsel wrote last week in a joint filing.
Staff at the Public Utility Commission generally agreed, pegging the net cost of Hunt’s proposed “benefits” at $295 million through 2021.
That’s separate from the more than $1.2 billion in tax savings that the utility would reap during that period.
“The Commission should deny the Purchasers' application and the proposed transaction,” commission staffers wrote last week.
In a filing Monday, Hunt took issue with critics’ calculations.
In his memo Tuesday, Anderson said Hunt’s offer was “problematic for several reasons.”
“It may be standard operating procedure in certain other jurisdictions, I have always found it to be offensive. A transaction should stand upon its own merits and be approved or denied as such,” he wrote. “Regulatory agencies should not hold up approvals in exchange for one-time payments.”
He added: “What I am prepared to do is to acknowledge that Oncor's current rates will remain in place until the next rate case proceeding is completed.”
Though less explicit, the other commissioners have expressed varying degrees of comfort with the tax question.
At the panel’s last meeting in February, Commissioner Brandy Marty Marquez said she was uncomfortable with an idea that seemed like a “windfall” for the Hunts “on the back of those ratepayers.”
Chairman Donna Nelson suggested that the structure carried some risk, but she did not consider it a “windfall."
Still, each of the commissioners agree that they like the Hunts, and would love to see an end to Energy Future’s bankruptcy, which has stretched nearly two years and eaten up plenty of the agency’s time.
Key in bankruptcy
Energy Future Holdings – 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. As the state’s largest energy company, it 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.
Energy Future also is the majority owner of Oncor, the only piece that’s consistently making money.
A Delaware bankruptcy court last December approved the company’s plan to shed its debt, which would include selling Oncor to the Hunts — the lynchpin of the deal. Now, it’s up to the commission to decide whether it passes muster.
If the commissioners reject Hunt's plan or add stipulations investors won't agree to, Energy Future Holdings could be thrust back into bankruptcy negotiations that cost it an estimated $1 million a day in legal fees.
Though approval Thursday would help Energy Future Holdings clear a major hurdle, it still wouldn't guarantee a done deal. The federal Internal Revenue Service has yet to formally sign off on two key tax issues — including Oncor's proposed trust status.
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.