February 12, 2005

Ripping off PGE Ratepayers

Earlier this month I noted how Enron, in cahoots with the bought-and-paid-for governor, legislators and PUC, put in place a scheme that ultimately allowed Enron to massively ripoff the California ratepayers. Well, today, let's review how the Oregon PGE ratepayers are being setup for yet another fleecing.

In Oregon, there is a major political battle over who will ultimately own PGE, the last real asset of the bankrupt Enron. On one side is the City of Portland which is angling to buy the utility for the citizens of the region. On the other is another Texas company, Texas Pacific Group, who is staking out the Oregon utility as one more in their stable of acquisitions. So who is Texas Pacific Group?

Investment firm Texas Pacific Group (TPG) has staked its claim on the buyout frontier with a reputation for roping in companies other firms wouldn't touch with a ten-foot pole. TPG is an active investor, often taking control of the firms in which it invests. It profits not only from the rise in value of its holdings, but also from fund management. Texas Pacific Group invests in brands, buying and resuscitating consumer and "luxe" labels, as well as less-recognizable technology and telecommunication companies.

The referees in this battle are the Oregon PUC who will decide by the end of the month whether or not TPG can go ahead with their purchase of PGE.

When California was setting up the legislation that led to the disasterous deregulation scheme, it was done by ignoring numerous warnings about why the deal sucked for Californians. In Oregon, there are also numerous warnings about why allowing TPG to buy PGE would be a terrible deal for Oregonians. Yet there seems to be an inevitability that the deal will go through largely because the Oregon PUC seems to be in bed with the vultures waiting to pick the bones of the PGE ratepayers.

Numerous Warnings

The Oregon PUC says they can be trusted to regulate TPG if they purchase PGE. But this week the Willamette Weekly reported that through most of the 90's the PUC sat back while Enron ripped off the rate payers by overcharges significantly more than was the mandated high rate set by the PUC.

One of the PUC's functions is setting electric rates. Periodically, it reviews industry conditions and sets rates at a level that allows utilities a reasonable profit. Over the past decade, the PUC allowed PGE to earn returns of between 10.5 percent and 12.5 percent annually.

But the confidential document prepared by Texas Pacific when it was determining whether to purchase PGE shows that during a nine-year period ending in 2000, PGE earned nearly a quarter of a billion dollars more than the "maximum" return the PUC allowed.

PGE Chief Financial Officer Jim Piro takes issue with the way Texas Pacific calculated his company's earnings, but he acknowledges that PGE earned significantly more than allowed during several years in the '90s. (PGE's figures show that it over-earned by about $150 million during the same period.)

So, what has been done since the 90's that makes one believe that the PUC is going to do a better job this time?

Furthermore, in January the Willamette Weekly broke a major story on the pending deal which for the most part had been shrouded in secrecy. The independent weekly was passed a memo that had been prepared by TPG for what they planned to do to make their investment worth their while. What this memo showed was that the public testimony of TPG was significantly at odds with their internal memos. (Reminds me of Enron's insider vs public statements.)

In public testimony, TPG says they are buying PGE for the long term. Yet the memo says they are planning to turn a pretty profit by slashing the operations and maintenance budget, and by significant cuts in their customer service (over 25% of PGE's customer service reps would be out of a job) and then by selling it to the highest bidder.

One might also wonder why TPG, a company that is known for taking over risky businesses to wring out big profits going for PGE? According to the memo that WW received, it's because the utility looks like a steal.

In business jargon, the Tahoe team summarized the opportunity as follows: "Unprecedented confluence of dislocating events presents 'once in a franchise' opportunity to purchase regulated opportunity at compelling valuation."

That's an awkward way of saying PGE is dirt-cheap, and as a consequence it will be virtually impossible, according Texas Pacific's analysis, for the firm and its investors to lose money. "Very low probability downside case still returns $251 [million] in profits," states one of the Tahoe reports.

A far more likely outcome, according to four dozen scenarios assembled by Texas Pacific's number-crunchers, is that the firm will make somewhere between $800 million and $1.2 billion profit in just five years.

If things go according to plan, the projections show, Texas Pacific will generate annual returns of between 20 and 30 percent.

Part of that return will come from cost-cutting and other efficiencies; the rest of it will come from the profit generated by buying PGE cheap and selling it at a price more in line with other recent utility takeovers.

When Enron controlled PGE, another way they ripped off Oregonians was in collecting federal and state taxes from the ratepayers and then using that money for other things. Even Republican Senator Gordon Smith thought this was an outrage. So one would think that perhaps this anomoly would be fixed now? Think again.

According to the Portland Tribune, this loophole is alive and well and Texas Pacific General is planning to take advantage of it.

For the bankrupt Enron Corp., which currently owns PGE, the strange and perfectly legal benefit meant extracting more than $400 million from PGE ratepayers between 1997 and 2001 for state and federal taxes that Enron never paid. For Texas Pacific, the loophole would mean about $15 million a year for at least the first several years that Texas Pacificís holding company might own PGE.

...In the meantime, opponents of Texas Pacificís purchase say Texas Pacific and Oregon Electric should agree to a PUC condition that PGEís rates would be based on an estimate of the taxes that Texas Pacific and Oregon Electric actually will pay.

Texas Pacific has said it would not agree to such a condition.

Texas Pacific Group is waiting for their chance to gouge the Oregonian ratepaters and as the internal memos show, they are more than prepared to get started. The only thing standing in the way is the Oregon PUC who show every sign that they are in the pocket of the corporate bandit. When our public watchdogs like the PUC and the representatives we elect are in bed or bought off by the Robber Barons, one thing is true: we lose, and we lose badly. And, indeed, we see once more, greed and corruption are alive and well in this, the Gilded Age Redux.

Posted by Mary at February 12, 2005 04:47 PM | Corruption & Graft | Technorati links |
Comments

That's all we need, another Texass company contolling this vital part of the infrastructure. You could tell it was a bad deal because Niel Goldschmidt was involved. In addition to dealings with TPG he was trying to give the state hiways to Bechtel Corporation before his downfall. Remember Bechtel? They are the ones who built that lemmon nuclear power plant on an active fault.

Posted by: Ron In Portland at February 13, 2005 05:58 PM

Look behind the curtain, as in the Wizard of Oz. The Oregon Investment Council had a large ownership interest in Enron, which owned PGE, and the OIC will again have a large interest in PGE via the Texas Pacific deal. The OIC, together with other large public pension fund managers, pull the strings.

Isn't it comforting to know that local teachers, judges and all sorts of public attorneys personally benefited from Enron's games; at least until that game was over. Same for Marsh McLennan. accused of rigging insurance bids.

TPG could have gotten the idea from the OIC. We, our state treasurer and the beneficiaries of his investment, learned the ropes of leveraged buyouts from KK&R with respect to Fred Meyers more than a decade ago. It is just routine business today . . . which is why it is considered a done deal.

Posted by: ron (a different ron) at February 13, 2005 11:44 PM