Oncor, the state’s largest electric transmission and distribution utility, could soon have new owners. A consortium led by billionaire Ray L. Hunt has made a bid to acquire the giant company — and it’s now up to Texas regulators to decide whether Hunt’s offer is in the public interest.
Oncor serves 10 million Texans. It’s also a regulated monopoly. That means that if Oncor’s rates go up or its service falter, then it’s the customers who suffer. They’re captive. They have nowhere else to turn.
I recently wrote about a complicated “Real Estate Investment Trust” structure that the Hunt consortium wants to use in the transaction. You can read that report here.
Today I want to focus on something called the “ring fence” — which already exists as part of Oncor’s current corporate structure and which should continue in some fashion if Hunt acquires Oncor. The ring fence is crucial because the proposed deal involves debt. Lots of it.
What’s a ring fence? The explanation from Wikipedia is as good as any: “Ring-fencing occurs when a portion of a company’s assets or profits are financially separated without necessarily being operated as a separate entity.” This strategy makes sense for a number of reasons, such as when business owners use a ring fence for tax sheltering purposes. But ring-fencing takes on special meaning when it comes to regulated utilities.
Again, from Wikipedia: “One common form of ring-fencing is when a regulated public utility financially separates itself from a parent company that engages in non-regulated business. This is done mainly to protect consumers of essential services such as (electric utility service) … from financial instability or bankruptcy in the parent company resulting from losses in their open market activities.”
Get that? Oncor, a regulated utility — a company that transmits electricity across approximately 119,000 miles of transmission and distribution lines — was ring-fenced in 2007 to protect it from the financial ups and downs of its parent company, Energy Future Holdings. And Energy Future Holdings went bankrupt in 2014, so … good thing. It’s now very important that the 2007 ring fence hold — and that another strong one replace it as part of the Hunt deal to acquire Oncor.
The ring fence around Oncor exists today, in part, because cities and regulators insisted upon it. The ring fence was created as part of the deal eight years ago under which the former TXU Corp. was acquired by a group of investors led by Kohlberg Kravis Roberts, and from which Energy Future Holdings was born.
Energy Future Holdings is comprised of Oncor, the monopoly utility, as well as the Texas Holdings Group that includes its competitive wholesale and retail power units — Luminant and TXU Energy respectively. The ring-fencing measures mitigate the company’s credit exposure and reduce the risk that Oncor’s assets would be consolidated into the EFH bankruptcy now proceeding in a Delaware court.
According to a recent Oncor 10-K report, the ring-fencing provisions include:
- Oncor’s sale of a 19.75% equity interest to a separate entity in November 2008.
- Maintenance of separate books and records for the Oncor Ring-Fenced Entities.
- Oncor’s board of directors being comprised of a majority of independent directors.
- Prohibitions on the Oncor Ring-Fenced entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.
Also, according to the 10-K: “the assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group. Oncor does not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa. Accordingly, Oncor’s operations are conducted, and its cash flows are managed, independently from the Texas Holdings Group.”
These are complicated details, but they’re important details. The failure of that ring fence — the one created in 2007 — would have created uncertainty and instability with Oncor. Rates could have gone up to satisfy the debts piling up in other parts of Energy Future Holdings. Theoretically, Oncor could have been sold off piecemeal to satisfy those debts.
The ring-fence also has kept Oncor out the bankruptcy proceedings in Delaware. Our experiences with EFH make it clear that a strong ring-fence must remain in place as part of the proposed Hunt transaction. Ratepayers must be protected against future economic upheaval.
One key regulator already has focused on this issue. In a recent memo, Texas Public Utility Commissioner Kenneth Anderson stated that about $5.5 billion in borrowed money will remain with the restructured utility.
“Throughout EFH’s travails, the Oncor Ring Fence has been successful in protecting Oncor’s financial integrity and its ratepayers,” he wrote Aug. 20. “The (Hunt buyout plan) contemplates that a substantial amount of debt that was created to finance or refinance the purchase of TXU Corp. in 2007 will remain. … This strongly suggests that the Oncor Ring Fence must continue and even be strengthened irrespective of how Oncor may itself be restructured.”