There is an interesting transition underway. According to the WSJ, investors are attempting to acquire Oncor and form a REIT out of an ordinary electric utility.

Here is some background:

1. The Electric Reliability Council of Texas (ERCOT) is a regional Independent System Operator (ISO) that manages transmission systems within the state of Texas. It is the largest of four ISOs currently operating in Texas. Its operations do not cross state lines (no electric power ever moves in or out of ERCOT). It is not engaged in interstate commerce. It is a non-profit organization.

2. Oncor is a local distribution company (LDC) that operates within the State of Texas. It is a wires-only utility. It owns no power plants. It is not engaged in interstate commerce. It's assets are regulated by the Public Utility Commission of Texas. Oncor is one of the nation's ten largest LDCs.

3. Oncor also owns transmission line assets (a transmission line company is not a LDC). Those transmission assets also operate exclusively within ERCOT's system. ERCOT feeds wholesale power into Oncor's retail distribution system.

4. Dallas-based Hunt Utility Services (Ray L. Hunt family) pioneered REITs for transmission and distribution utilities. They received a private letter ruling from the IRS in 2009 and approval from the FERC. Their transmission and distribution REIT is called InfraREIT. It was formed in
2010. InfraREIT operates within Texas and within ERCOT.

5. To my knowledge, no other regulated transmission or LDC company outside of Texas has formed a REIT. Many would like to use the REIT structure. However, most non-Texan electric utilities are engaged in the interstate commerce of electric power.

6. The Hunt family and others (see WSJ's article are attempting to buy Oncor from Energy Future Holdings. If successful, they intend to move Oncor's assets into a REIT. Since they are replicating actions taken by Hunt Utility Services to the letter, they should be successful on the REIT front.

It is reasonable to assume other companies would attempt to form REITs out of regulated utility assets (this may include natural gas systems). Intrastate systems are likely to be the early adopters. Interstate systems could face the most scrutiny by federal and state regulators.

One challenge for regulators could be rate setting. There is potential overlap in regulatory interests that can be resolved within Texas as intrastate issues. In the rest of the country, those issues may not be resolved without new challenges.


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