Oncor-SaleA consortium led by Ray L. Hunt, the Dallas billionaire, is making a bid to buy Oncor, the state’s largest transmission and distribution utility. The proposal has been roundly rejected by consumer groups, who say it will create significant new risk for ratepayers.

One of the most controversial aspects of Hunt’s bid is his proposal to place the utility into a Real Estate Investment Trust, a complicated corporate structure that will shield it from taxes. AARP, Public Utility Commission staff and others have warned that under the plan, the utility will continue charging ratepayers for taxes, although the utility will pass little or none of that money onto the IRS.

Darryl Tietjen, director the PUC’s Rate Regulatory Division, estimates that ratepayers would be on the hook for a non-existent tax expense that could reach nearly a quarter billion dollars annually. This “substantial transfer of wealth from ratepayers to shareholders” would drive the company’s returns to a level “that could not be considered acceptable under any reasonable application of economic or regulatory standards,” Tietjen wrote in a Dec. 8 filing at the PUC.

But that’s not all. Tietjen also warns that if the PUC approves the Hunt deal, other Texas utilities will soon follow suit. The result?  “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 a half billion dollars per year.”

commentary-buttonIt seems that Mr. Tietjen is prescient. The PUC has yet to decide whether to authorize Hunt’s takeover bid and already Houston-based CenterPoint has announced it also is considering a Real Estate Investment Trust

In a communication this week to shareholders, Scott M. Prochazka, president and chief executive officer of CenterPoint Energy, said the REIT structure might make sense for the utility, the state’s second largest after Oncor.

“The REIT structure has recently received significant attention in the regulated utility industry in Texas and could have substantial potential for CenterPoint,” he said in a prepared release. Prochazka said the utility will monitor ongoing regulatory proceedings — presumably those at the PUC — and “will present any findings to our shareholders at the appropriate time.”

We hope the appropriate time is never. The use of REITs in this fashion by big monopoly utilities is a rip-off for ratepayers. The PUC should reject the use of this corporate structure for Oncor, and bar other utilities from ever following suit.

You can read more about the proposed Oncor transaction at articles posted here and here.

— R.A. Dyer

What is the Texas Coalition for Affordable Power?

R.A. Dyer is a policy analyst for TCAP, a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.