Texas lawmakers raised tough questions Wednesday about plans by the the state’s largest pension system to invest up to $250 million of teacher retirement funds in the Ray L. Hunt family’s bid to buy and reshape Oncor, the mammoth electric utility.
The Teacher Retirement System of Texas has set aside the $250 million for a stake in the Dallas oil family’s closely watched — and controversial — effort to remake Oncor into a real estate investment trust, Brian Guthrie, the fund's executive director, told the Senate Committee on State Affairs at a hearing.
“We thought that the deal, as characterized, would be beneficial for the teachers with a stake in it,” Guthrie said.
The system manages the nation’s sixth-largest public pension fund and serves about 1.46 million public and higher education employees and retirees.
“I urge you to follow the proceedings because I have concerns that we’re protecting our investments for our teachers,” Fraser said.
Schwertner probed whether any conflicts of interest prompted the pension fund to eye the Oncor deal. Guthrie said a few of the private companies that manage a portion of the pension’s investment had joined the Hunt consortium, but none of those advisers had put state money toward the consortium. The $250 million recommendation came from agency staff.
“There are no conflicts that I’m aware of,” he said.
Last month, the Texas Public Utility Commission granted the Hunt-led consortium permission to transform Oncor into a real estate investment trust, a corporate structure that would pass hundreds of millions of dollars in tax savings directly to shareholders.
But it added a host of stipulations that has left the deal 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 new terms. That includes the teacher retirement system, which is waiting to see how the commission ties up several loose ends, Guthrie said.
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. Company officials note that some utilities also save on taxes by taking other corporate structures, and they call it unfair to treat real estate investment trusts uniquely.
But critics call it unfair for a utility to collect hundreds of millions of ratepayer dollars — normally earmarked for federal taxes — that the company wouldn't actually have to pay.
Public Utility Commission staffers say those collections would total about $250 million each year.
Fraser brought up both the tax savings argument and another: that the corporate structure would be 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.
While approving the new corporate structure, the Public Utility Commission last March said it will consider, in a separate proceeding, whether to force the utility to share some of the tax savings with ratepayers, potentially lowering their bills.
Asked if that requirement would make the investment less attractive, Guthrie said yes.
“Whatever is ultimately determined by the PUC,” he said, “will allow us to take a look at the economics as to whether we will proceed.”
The Oncor deal is the linchpin of an effort to deliver the utility's parent— Energy Future Holdings — from one of the largest corporate bankruptcies in American history.
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.
Disclosure: Oncor and Energy Future Holdings are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.