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Barbarians at the Gate?

Oct. 12, 2015
Did you ever think you’d see the day when a utility as big and well thought of as Oncor would be swapped around like a used car and end up as a real estate investment trust?

“Barbarians at the gate” was a phrase used to describe the various non-Roman cultures that were trying to invade the Roman Empire as it gradually weakened. But maybe there’s an analogy here with the utility industry ‘empire’ and the new hordes of imaginative investors who’d like nothing more than to turn our companies into cash cows. It’s not that the idea is unworkable or that financier­s are somehow ‘evil.’ It’s just that in the history of the U.S. electric utility industry, we have quietly made money through less obvious means.

Truth be told, most of us worker bees didn’t fully understand the process, nor did we care. We just wanted to provide our community with low-cost, reliable electric power. A noble quest, but naive. Even more naive was the belief that we could do all this outside the protection of regulation.

In the 1990s we decided we were going to deregulate, by golly, and become competitive just like a real business. Bring it on!

Instead, the industry became distorted, confused and confabulated about what was thought to be its deregulated future. Suddenly the protective gates of regulation and stodgy, laminated business structure opened and we were in the crosshairs of oil and gas companies, bankers and other high rollers looking for a new herd of cash cows in which to invest for a reliable return. As a result, electric utilities (particularly in more ‘progressive’ states) became ripe for some financial picking by the ‘barbarians’

But then (who can forget?) a Houston company, ENRON, sneaked in and quickly showed us how the cow ate cabbage (as my father would have said). As an industry, we quickly learned that we didn’t have the experience or, particularly, the risk tolerance, to truly compete with a free market (much less a rigged market). So we shut the gates, ENRON execs went to jail, and deregulation crawled to a stop. We decided that maybe what we had been doing for over a hundred years – keeping the lights on – was nothing to disrespect, even if our industry salaries were a little on the low side and we seldom flew first class.

But – the electric utility industry hasn’t disappeared from the cross hairs of, for example, Warren Buffett. He continues to buy companies that meet his requirements.

And it looks like the gates are opening even more.

From the Dallas Business Journal:

“A group of investors led by Hunt Consolidated Inc. on Tuesday filed an application to the Public Utility Commission of Texas seeking regulatory approval to buy Energy Future Holdings' ownership stake in Texas’ largest power utility, Oncor.

In the PUC application, the Hunt group spells out its plans to buy the utility from bankrupt parent company EFH in a deal that values Oncor at between $18 and $19 billion.

If approved, Hunt and its consortium of investors would acquire EFH's current stake in Oncor and restructure it into a real estate investment trust, and Hunt would assume full operational control of Oncor by mid-2016. ...”

Did you ever think you’d see the day when a utility as big and well thought of as Oncor would be swapped around like a used car and end up as a real estate investment trust? (REIT) – with a financial structure similar to the owner of a string of apartment buildings?

But why can’t we just say no to the financial ‘barbarians,’ close the gates and go back to the way we’ve always done things? That worked well for over a hundred years.

At least two reasons: 1) The electric infrastructure needs an almost total and enormously expensive redo and 2) because of lower load growth, the old strategy of build big, collect ROI and build even bigger no longer works. We need money, lots of it, and conventional utility financing methods are not sufficient.

By the way, you may have fallen asleep in your econ class and you are just now realizing that your buddy who majored in business just may know a few things you don’t. If so – take a look at Trends in Utility Infrastructure Financing – a great, quick read that summarizes the issues and options.

So, could a major financial model shift come to your company? Maybe. Particularly if your state’s regulatory gates have been opened through deregulation of some sort (as was the case with ONCOR). Or maybe your company is being eyed by Warren Buffet because it meets his published utility investment criteria.

Is it a good thing? You tell us! Give us your opinion in this month’s opinion poll.

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