Reliable electricity is the expectation of Texas consumers. The strength and reliability of the electrical grid are the lifeblood of our strong Texas economy.
As the Public Utility Commission (PUC) considers a bid by Hunt Consolidated Energy to purchase the state’s largest electric transmission and distribution company, Oncor, I am very concerned the Hunt proposal, if approved, could compromise reliability and potentially increase costs and risk for Oncor’s more than 3 million North Texas customers.
One can’t view the proposed purchase in a vacuum. It is the outgrowth of the failed leveraged buyout of TXU by Energy Future Holdings. They risked billions in hedge fund investor money, only to see it lost when natural gas prices plummeted. I was governor at the time of the buyout, and I supported it. I have learned my lesson. And the lesson is this: the electrical grid is too important to be entrusted to hedge fund investors who are more interested in making huge profits than running an electric company.
The saving grace of the TXU leveraged buyout is that PUC regulators insisted that the transmission and distribution portion of the TXU business be ring-fenced from the retail and generation arms, providing protection for Oncor and its customers. So today, Oncor continues to provide service and is protected from bankruptcy. But I fear the protections for Oncor that exist today will be eroded if Hunt Consolidated’s proposal is approved.
The Hunts’ name is a good name, and not just in Dallas but throughout Texas. And for good reason. Their name is synonymous with success. But it is worth noting that the vast majority of the investment capital for the purchase of Oncor comes not from the Hunts but from hedge funds and other financial firms, some of which were involved in the failed buyout of TXU. Many of those funds are back, and they have come up with a creative scheme: to reformulate Oncor as a Real Estate Investment Trust (REIT).
REITs are common for strip malls and hotels. But it has never been tried for an electric utility the size of Oncor. I have several concerns about the proposed Hunt REIT. First, a minimum of 90 percent of taxable income collected must go to shareholders of any REIT. Despite this, Hunt and its financial backers propose to collect hundreds of millions of dollars in non-existent income tax expenses through customer rates, and send that money to shareholders rather than the IRS.
Second, though the Hunts and purchasers have said they are reducing billions in debt obligations held by Energy Future Holdings, the reality is obligations above Oncor will increase because new investors in the REIT require distributions of 90 to100 percent of taxable income. Because of this, it is important the current ring-fence remain in place or be strengthened.
Third, with the REIT structure, Oncor would be split up into two companies: an asset company owning $11.8 billion in physical assets, and an operations company that would lease those assets — and assume the large percentage of Oncor’s payroll — with only $150 million in capital. There are serious questions as to how Oncor could respond to a major weather event, and resulting massive outages, with such thin capitalization at the operating company.
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