*Editor's note: This story has been updated throughout.
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 Oncor parent Energy Future Holdings’ plan to emerge from its epic bankruptcy — shrouded in uncertainty. It is unclear whether Hunt’s investors, who promised to pour billions of dollars into the deal as written, will agree to those the terms.
“Everything, we need to take back to investors in any event,” Hunter L. Hunt, CEO of Hunt Consolidated, told the commissioners.
If Hunt's investors stick around, the company expects to close the deal by late this year.
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.
The approval came just days before a Sunday deadline. The three-member commission, which regulates monopoly utilities, found the re-written deal “in the public interest."
Chairwoman Donna Nelson dissented on the decision to kick the decision on 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.
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 the highest rates in the state.
The highest-profile objections to Hunt's latest plan 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), 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.
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 weren’t allowed to continue collecting through rates money normally earmarked for federal taxes.
Company officials noted that some utilities also save on taxes by taking other corporate structures, and they 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 industry-wide. At least one other electric utility, Houston-based CenterPoint, has already 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 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 (the commissioners ultimately dropped that idea). “If we’re going to deny it, why don’t we just deny it,” she said of the deal as a whole.
Richard Noland, 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.”
Though Nelson split with her colleagues on several issues, all three commissioners say they like the Hunts, with their Texas roots, and would love to help end Energy Future Holdings' bankruptcy, which has stretched nearly two years and eaten up plenty of the agency’s time.
Energy Future Holdings — which was 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, including Oncor, the only piece that’s consistently making money.
A Delaware bankruptcy court in December approved the company’s plan to shed its debt, which would involve selling Oncor to the Hunts — the linchpin of the deal. But the sale hinged on regulatory approval and agreement from investors.
If investors walk away from the new terms, Energy Future Holdings could be thrust back into bankruptcy negotiations that cost it an estimated $1 million a day in legal fees.
The Texas Legislature could further complicate the matter if it wades in during the 2017 session, as some insiders expect. Several lawmakers have voiced concerns about the issue, including: Sen. Kelly Hancock, R-North Richland Hills; Sen. Royce West, D-Dallas, and Rep. Dan Flynn, R-Van.
“Those dollars are not supposed to be going toward the benefit of shareholders,” West told the commissioners Thursday in a crackling phone call.
Following the vote, Oncor promised to accept its fate, however it looks.
“While there are a number of hurdles left to clear, we look forward to working with the parties involved to reach a conclusion in this change-in-control proceeding," spokesman Geoff Bailey said Thursday in a statement.
Disclosure: CenterPoint Energy and Oncor are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.