Citing "Substantial Transfer of Wealth" Under Proposal, Texas Staff Recommend Rejection of Hunt Companies' Proposed Acquisition of Oncor

Staff of the Public Utility Commission of Texas have recommended that the Commission reject the as-proposed application of various Hunt Consolidated companies to acquire Oncor, citing, among other reasons, "the substantial transfer of wealth from ratepayers to shareholders," that would occur under the as-filed transaction.

Specifically, the Hunt companies have proposed to form a real estate investment trust (REIT) to limit their tax liability as owners of Oncor. However, the applicants proposed to retain any such tax benefits, and not flow such lower tax liability to Oncor customers.

"The proposed transaction is not in the public interest and I recommend that the Commission reject the Applicants' application. I base this recommendation on, among other things, the substantial transfer of wealth from ratepayers to shareholders -- in the form of income-tax-related amounts of nearly one-quarter of a billion dollars annually -- that would occur under the proposed REIT structure," a witness for Staff testified

"This result would ensue because a utility operating within a REIT business structure pays essentially no federal income taxes, and continued inclusion of a federal income-tax component in Oncor's Commission-authorized revenue requirement (as proposed by the Applicants) would therefore result in charges to ratepayers for costs that do not exist," Staff explained

"By their very nature, such non-existent 'costs' do not meet the most fundamental regulatory standards that determine whether an item is properly includable in a utility's regulated revenue requirement: Is the cost a reasonable and necessary expense of providing service, and does inclusion of the cost in a utility's Commission-authorized revenue requirement result in just and reasonable rates," Staff said

Furthermore, Staff warned that other Texas utilities will seek to duplicate the tax advantages of the REIT structure if ownership is allowed to enjoy the tax benefit while TDU rates reflect a higher, non-REIT tax liability

"If the Commission approves the transaction as proposed, other utilities in Texas will be strongly motivated to pursue similar conversions to REIT-based structures because of the tax benefits that will accrue to the utilities' shareholders. Based on data from PUC earnings reports, the estimated amount of these shareholder benefits -- which would be paid for by ratepayers via rate charges for non-existent federal income-tax expenses -- would be well over one-half billion dollars per year," Staff said

Staff also opposed the applicants' proposal not to continue certain ratepayer protections established in the 2008 acquisition of Oncor by private equity, and expressed concerns with the lease structure proposed by the applicants, in which one company would own the Oncor assets, and lease them to another company which would operate them

Staff said that it was not opposed to the Hunt companies' acquisition of Oncor through alternative means which meet the statutory public interest standard (such as one that occurs outside the existing Oncor ring fence), but said that the as-filed proposed acquisition does not meet these standards

Docket 45188

Related: Texas Staff: PUC Should Require Oncor, Hunt Companies To File Report On Feasibility Of Consolidating Oncor and Sharyland Utilities