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Assessing NextEra-Oncor deal, Texas regulatory staff focus on debt, taxes

Testimony by Texas regulatory staff weighing in on NextEra Energy Inc.'s proposed acquisition of Oncor Electric Delivery Co. LLC indicate the relationship between taxes and customer rates will be a key issue, but perhaps present fewer hurdles than in the last foray by a buyer for the Texas wires utility.

The Public Utility Commission of Texas' director of the rate regulation division, Darryl Tietjen, asserted in testimony that by making clear decisions about the rate treatment for Oncor of federal income-tax expense in the NextEra merger proceeding, the PUCT could "reduce uncertainty about the issue and decrease the potential for controversy in Oncor's next rate proceeding."

But he also noted that the recovery of federal income-tax expense through rates is an issue "best evaluated" in Oncor's next rate case, and that NextEra's status as a traditional C-corporation makes the question of how federal income taxes should be treated in Oncor's rates "consistent with the treatment of income-tax expense in recent rate proceedings."

That issue largely derailed the last Oncor merger attempt. In March 2016, the PUCT approved the acquisition of Oncor by an investor group led by Hunt Consolidated Inc. that had planned to convert the utility into a real estate investment trust, or REIT. The acquisition was, at the time, the linchpin in the bankruptcy reorganization plans of Energy Future Holdings Corp., which owns an approximately 80% share of Oncor. That deal fell apart after certain EFH creditors backed out due to conditions placed on the Oncor transaction by the PUCT. Among those conditions was the PUCT's decision to defer until a later rate case a ruling on how much, if any, savings should be shared with Oncor customers, who would be charged on their bills for income tax expenses that the utility's upstream parent, as a REIT, would not have had to pay.

The question of tax savings for REITs in Texas is also before the PUCT as they take up a rate case for Sharyland Utilities LP. Publicly traded InfraREIT Inc. is the majority owner of Sharyland Distribution & Transmission Services LLC, which leases its transmission and distribution assets to Sharyland Utilities.

Other experts for the PUCT staff raised concern about the level of debt NextEra is taking on to finance its $18.7 billion acquisition of Oncor. Randall Vickroy, a consultant for the PUCT staff, found NextEra's proposed acquisition of Oncor, as filed, was not in the public interest, and recommended stronger ring-fencing provisions in the deal to protect Oncor from debt liability as NextEra pays down $5.4 billion in debt at EFH and Oncor's direct parent, Energy Future Intermediate Holding Co. LLC. Without stronger ring-fencing provisions, Vickroy also raised concern about Oncor's exposure to debt at NextEra as it finances the acquisition with more than $16 billion in debt, and exposure to "risky business segments" like NextEra's competitive generation subsidiary, NextEra Energy Resources LLC.

Constance McDaniel Wyman, PUCT director of engineering in the Infrastructure and Reliability Division, did not make a recommendation for or against the deal, saying it should not impact Oncor's reliability or quality of service, and that NextEra's commitments "represent a continuation of the status quo within Oncor's system."

Hearings on the transaction are scheduled to begin Feb. 22, with a decision likely in April. (Texas Docket No. 46238)