Oncor Electric, the state’s largest transmission and distribution utility, could soon change owners.
Why should you care? Because approximately 10 million Texans absolutely depend upon the utility for electric service.
A consortium of investors led by Ray. L Hunt proposed the deal in September and now the Texas Public Utility Commission must decide whether it’s in the public interest. The PUC should make a ruling early next year.
Not surprising, the deal is complicated. In the next few weeks we’ll take a look at some of its key provisions. Today we examine one of the most controversial — Hunt’s proposal to place Oncor in a “real estate investment trust.”
What is a REIT?
Real Estate Investment Trusts are corporate entities that own income-producing real estate, such as shopping malls. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends. The Hunt consortium wants to place Oncor into a REIT.
How would the REIT work in Oncor’s case?
The plan is for Oncor’s assets to be placed in a REIT, which would be publicly owned but controlled by Hunt. In addition, a separate operating company would be created. This separate operating company would maintain the Oncor name, but own none of Oncor’s current assets. Instead, the REIT would lease the utility’s substations, transmission and distribution towers and other equipment to this separate Oncor operating company. Oncor’s existing management team and employees also would be transferred to the newly formed operating company. Hunt will have control over both the REIT and the operating company.
Are there risks for ratepayers?
Very possibly. Some critics warn that employing a REIT structure for Oncor creates a corporate structure that is unnecessarily complex and that increases the potential for higher rate requests by the utility in future PUC proceedings. Questions also have been raised about the Hunts’ ability to manage a utility the size of Oncor. PUC Commissioner Ken Anderson has warned that ratepayers must not shoulder an undue amount of risk in the Hunt/Oncor deal.
Are there other consumer concerns?
Yes. The REIT structure has been proposed as a method for the utility to reduce its federal tax payments. Oncor’s ratepayers should expect a fair share of that tax savings in the form of discounted rates.
Has a REIT structure been employed previously with a utility the size of Oncor?
No. REITs more typically involve less substantial real estate holdings, such as shopping centers or hotels. The only other electric utility that has employed a REIT is Sharyland, also controlled by Hunt. But Sharyland, with fewer than 12,000 miles of transmission and distribution lines, is much smaller than Oncor. Oncor has a wires network ten times larger.
How long have REITs been around?
REITs were created by the U.S. Congress in 1960 to encourage individuals to invest in large-scale real estate projects. The idea of employing a REIT structure for utility holdings has been credited to Kirk Baker, the former general counsel for Hunt Consolidated. Baker now serves as board chairman for the Sharyland REIT. The Texas PUC approved that unusual Sharyland REIT arrangement in 2010.
Is a policy analyst consultant for TCAP, a coalition of political subdivisions in Texas that purchase electricity in the deregulated market for their own governmental use. Because energy costs are typically a significant budget item to our members, TCAP is consistently looking for ways to save our members money, through cost-saving contracts, energy efficiency or demand response programs.