Without substantial changes, a proposed deal to transfer the state’s largest transmission and distribution utility to an out-of-state company should be rejected, according to Texas regulatory staff and others.

At issue is the proposed sale of Oncor, the massive north Texas utility, to Florida-based NextEra. Oncor was put on the auction block after the bankruptcy of its former parent company, Energy Future Holdings. The proposed NextEra deal is worth an estimated $18 billion, but it can’t move forward without approval from the Texas Public Utility Commission.

And that approval remains in doubt.

Several experts — including experts hired by PUC staff — have said the deal as currently proposed is bad for consumers.   “Based on my evaluation, I conclude that the transaction, as filed, is not in the public interest without making substantive changes,” said utility corporate finance expert Randall Vickroy in testimony on behalf of PUC staff.

Because Oncor is a monopoly utility (with 3.4 million captive customers in Central, North and West Texas) any change of ownership must meet the “public interest” test — that is, the PUC must find that it provides tangible benefits for customers, or at least does not harm them. But Vickroy says as currently proposed, the deal fails that test.

He said the deal potentially exposes Oncor to more financial risks incurred by NextEra, while at the same time weakening a financial “ring fence” around Oncor to guard against such risks.

Ring Fence protections are intended to protect a monopoly utility’s captive customers from financial losses incurred by the utility’s parent company — especially when those losses are the result of open-market activities. Such a ring fence was placed around Oncor in 2007 as a condition of the then-acquisition by Energy Future Holdings.  Those ring fence protections largely held when Energy Future Holdings later went bankrupt and they kept Oncor out of bankruptcy.

It’s those protections that could be weakened as a result of the NextEra transaction, Vickroy testified. “Despite the risk that NextEra Energy will pose to Oncor, (NextEra Energy) proposes to eliminate … key ring-fencing measures that have successfully protected Oncor,” he said.

Other experts also have urged the PUC to exercise caution. For instance Lane Kollen, an expert representing a coalition of cities, said the PUC should extract a number of additional commitments from NextEra. “The additional conditions are necessary to ensure that Oncor’s customers are not adversely affected through increases in customer rates,” he said in testimony on Jan. 11.

NextEra has argued that its proposal is in the public interest, and that Oncor customers would benefit because the deal would reduce the overall debt looming over the electric utility. But experts, including PUC expert Vickroy, said those supposed benefits have been overstated.

The PUC’s three commissioners are expected to conduct a hearing on the NextEra proposal next month, and then render a decision sometime before May.

— R.A. Dyer