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Texas Commissioners Raise Competitive Concerns on NextEra Acquisition of Oncor; Retail, Generation Affiliates

Commissioner "Offended" By Termination Fee Provisions

September 23, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Texas Public Utility Commissioners have expressed competitive concerns regarding NextEra Energy's proposed acquisition of Oncor, particularly in light of the structure of termination fees payable by Oncor parent Energy Future Holdings if the deal is not consummated for certain reasons (NextEra has not yet formally filed at the PUC for a change in control).

Commissioner Kenneth Anderson noted that it appears that the merger agreement requires NextEra to be paid a $275 million termination fee if the Commission approves the transaction with "burdensome" conditions that prompt NextEra to drop the deal.

"One of the reasons that I'm concerned about this, is I think one of the major issues in this case that is likely to come up is issues around the fact that this acquirer has substantial competitive assets in ERCOT, both on the load side and on the generation side," Anderson said.

In EFH's acquisition of Oncor, Anderson noted that the Commission dealt with such concerns by mandating a "robust" ring fence around Oncor, and an independent Oncor board.

Just the code of conduct isn't enough to address these concerns, Anderson said, and it wasn't in the EFH case.

Anderson noted that under the merger agreement, an independent board at Oncor would be a "burdensome condition" allowing the acquirer to terminate the transaction but still collect a termination fee from the seller. Another such burdensome condition per the agreement would be restrictions on dividends from Oncor

Chairman Donna Nelson agreed with the concerns

"As this transaction has progressed, it does feel in many ways like a step backwards in the Oncor area," with respect to ownership, restructuring, and competitive affiliates, Nelson said

Nelson is concerned about the impact that ownership of generation and competitive retail customers will have on the ultimate TDU

Anderson said that the presence of a termination fee for a transaction itself is not objectionable, as it is common to prevent sellers from accepting higher bids. Also not objectionable is the ability for the acquirer to walk away in light of regulatory conditions imposed on the sale, as such conditions may change the economics of the transaction

However, allowing a termination fee to be collected from the seller when the acquirer itself decides to abandon the transaction in light of regulatory conditions is an extraordinary requirement, Anderson said

The mechanism, "appears to be an effort to tie the Commission's hands in the proceeding," and an, "improper attempt to constrain the Commission from it statutory duty," Anderson said

Anderson said it appears that the acquirer recognized the concerns the Commission may have concerning competitive affiliates and Oncor independence under the merger, and added the termination fee provisions related to "burdensome" conditions, "trying to force it down our throats, and give us a Hobbesian choice."

"I, frankly, have been offended by it," Anderson said

Anderson noted that the issue of the termination fee is problematic especially since Oncor is EFIH's only asset. In any event, Oncor customers should not and can not pay for the termination fee, Anderson and Nelson agreed

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