By Jim Polson (Bloomberg)
The Texas law that opened the state's electricity markets to competition limits the Public Utility Commission to assessing the effect of mergers on TXU's regulated business, TXU General Counsel David Poole said today on a conference call. The company's only regulated business owns transmission and distribution. It is smaller than the power generation unit.
``It just shows how far Texas has gone in deregulating the electric industry,'' said Gregory Phelps, who owns TXU shares among $5 billion managed at MFC Global Investment Management in Boston. ``It almost doesn't matter who it is so long as they're not loading debt into the regulated business, and that's not part of the buyout plan.''
Concern about the role of state regulators arose because both KKR and Texas Pacific were stymied in previous attempts to take over utilities elsewhere in the U.S. The largest proposed utility merger before today's deal was also derailed by state opposition.
TXU's buyers will need approval from the Federal Energy Regulatory Commission, the U.S. Nuclear Regulatory Commission, the Federal Communications Commission and federal antitrust approval, company spokeswoman Lisa Singleton said.
Rates
Texas commissioners can only ``disallow the effect'' of a change of ownership when weighing proposed rates for the transmission and distribution business, according to a copy of state law provided today by commission staff. They could, for example, find that increased costs were unreasonable because of the buyout and reject a request to pass them along to customers.
Sales were $1.87 billion for TXU's transmission and distribution unit for the first nine months of 2006, compared with $7.5 billion at TXU's wholesale power and retail electricity businesses. Profit from the regulated unit was $282 million, versus $1.88 billion for the power supply unit. The company is scheduled to report fourth-quarter results tomorrow.
Still, KKR and the other companies in the buyout group may face smaller hurdles at the Public Utility Commission or roadblocks from the state legislature concerned that the takeover will raise electricity prices, Paul Fremont, a utility analyst at Jefferies & Co. in New York, said in an interview.
Regulators, Lawmakers
A December report by the utility commission urged new laws to assure that TXU, the state's largest power supplier, can't push up prices. The commission itself could tighten scrutiny of the company's competitive business or curtail some profitable practices, Fremont said.
The legislature also may change the law, he said. Jefferies has a ``hold'' on TXU and Fremont doesn't own the shares.
The buyout firms, joined by Goldman Sachs Group Inc. and three other investment banks in the purchase, will split the company into separate generation, electricity delivery and retail businesses once they take it private, TXU Chief Executive Officer C. John Wilder said today on the call. The businesses will be run more independently than allowed by federal laws governing publicly traded companies, he said.
TXU separated its power-generation and retail power sales businesses from its regulated power-line operations to comply with the Texas competition law.
Failed Buyouts
A KKR-led investor group abandoned an $880 million offer to buy UniSource Energy Corp., owner of the Tucson-Arizona-based utility, after the Arizona Corporation Commission rejected its terms in December 2004.
Texas Pacific Group quit a $1.4 billion offer for Portland General Electric, a utility owned by bankrupt energy trader Enron Corp., after rejection by the Oregon Public Utility Commission a year ago.
Oregon regulators said the takeover would have hurt customers by saddling the utility with $1.7 billion of debt, imperiling its credit rating and raising borrowing costs that eventually would have been passed on as higher bills.
``The funding of the transaction will not result in new debt incurred at the regulated utility business,'' TXU, KKR, Texas Pacific and Goldman Sachs said in a statement today announcing their agreement.
New Jersey
The largest U.S. utility takeover ever attempted, Chicago- based Exelon Corp.'s $17.8 billion offer for Newark, New Jersey- based Public Service Enterprise Group Inc., collapsed in September over terms demanded by the New Jersey Board of Public Utilities.
New Jersey officials, concerned that the buyout would raise electricity prices, had asked Exelon to sell more plants than it had planned to assure competition.
``There's always regulatory risk when you're talking about regulated assets being sold,'' said Phelps. ``Here, it's not another utility buying the company. There's no market-power issues because it's not another big generator.''
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