Hunt deal to buy Oncor will fall apart without changes, buyers say

The proposed sale of Texas’ largest utility will fall apart unless onerous regulatory requirements are removed, the potential buyers said in a new filing this week.

Last month, the state’s Public Utility Commission ruled that a consortium led by Dallas billionaire Ray Hunt could buy Dallas-based Oncor power line company for $18 billion and restructure the utility into a tax-friendly structure, a real estate investment trust. But the deal was only allowed if the $250 million in annual tax savings are set aside for potential refund to ratepayers, and not just pocketed by investors.

The Hunt group balked at that requirement and other details in its new filing. The sale cannot go through under the existing stipulations, the consortium bluntly wrote. The “regulatory liability” of setting the tax savings aside represents a “significant financial penalty” to investors and would represent “retroactive ratemaking,” according to the filing.

The stipulation “lessens its attractiveness to investors, creates significant uncertainty as to the amount and timing of financial return and, as a result, makes it less likely that the transaction will close,” the consortium argued in seeking a new hearing.

The pending sale has attracted attention beyond the Dallas-based power transmission company, because it may set precedent for other utilities to become real estate investment trusts, called REITs, including Houston’s CenterPoint Energy.

CenterPoint CEO Scott Prochazka said in February he would consider restructuring CenterPoint into a REIT if the Oncor deal goes through. CenterPoint owns and runs power lines and transmission systems in the Houston area. Consumers pay for transmission fees as part of their bills via their retail power providers.

But, even if the sale goes through, the federal tax savings would remain in limbo until longer-term power transmission rates for Dallas-area customers are set at a later time. The tentative plan is for any tax savings to be shared among ratepayers and Oncor investors, according to the utility commissioners.

Likewise, the PUC staff in a new filing said the commission should strengthen the wording of its previous ruling to require the Hunt group set up a formal “regulatory liability” to hold the tax savings in escrow.

The matter could be expedited somewhat because many of the municipalities in Oncor’s service area have said they plan to initiate rate cases this fall to push for lowered electricity transmission rates.

The Hunt consortium had hoped to close on the sale by the end of November, presuming all parties involved want the deal to go ahead. However, the buyers could opt to pull out of the deal as soon as the end of April.

The commission next meets on May 4.

 

The sale of Oncor to the Hunt group is the only offer on the table for Dallas-based Energy Future Holdings to emerge from its current state of bankruptcy. EFH owns the state’s largest power producer, Luminant, as well as TXU Energy and Oncor. Energy Future Holdings has the right to pull out of the Hunt deal by the end of June. Some of EFH’s creditors are among the Hunt group’s investors.

The consortium warned, if the sale fails, the case will “return to the bankruptcy court for an indefinite period of time, with all of the uncertainties inherent in a lengthy and contentious proceeding and no assurance that a new plan will be superior to the one before the commission in this proceeding.”

The REIT structure is long-standing but commonly used for real estate deals like shopping malls, not public utilities. Such trusts pay out about 90 percent of their income to investors through dividends.

The proposed Hunt-Oncor deal has drawn a large and diverse group of critics including former Gov. Rick Perry, AARP, the PUC staff, and some cities and customers in the Oncor market.

In part, they think a REIT is too risky to be in charge a significant portion of the state’s electricity transmission and that the result would be higher rates so investors could pocket more money. They also believe the structure is financially unstable and would result in too low of a disaster-reserve fund.

But the Hunt consortium contends the deal will provide local leadership and stability for ratepayers.

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