The Oregonian — Business News

City builds case for PGE buyout

06/09/03

GAIL KINSEY HILL

The city of Portland is firming up details of how it would run Portland General Electric if it succeeds in buying the utility from bankrupt Enron.

City and county officials recently completed a draft proposal that for the first time lays out a management structure, and they have been lobbying for support as Enron's June 30 deadline for filing its bankruptcy restructuring plan approaches. The plan should shed light on Enron's attempt to sell PGE.

It remains unclear whether Portland stands much of a chance of pulling off a deal that would create the third-largest public electric utility in the nation. Confidentiality agreements have kept negotiations with all bidders under wraps.

What's more, recent comments by Enron management raise the possibility that the Houston company might judge all bids inadequate and distribute stock in the utility to creditors instead.

Even so, Erik Sten, the city commissioner leading the acquisition charge, insists Portland's intentions are real and feasible.

"We've concluded that a public purchase is viable," Sten said. "It's very achievable."

The stakes are huge. If the city succeeds in the multibillion-dollar purchase, it will own a public electric utility trailing only Los Angeles Department of Water & Power and Long Island Power Authority in New York in size, measured by customers served.

It would own a utility that last year recorded revenue of almost $2 billion, assets of $3 billion and payroll of roughly $112 million. It would take over a utility that serves 743,000 customers and accounts for 40 percent of all retail electricity sales in the state. And, it would consume a business that wields considerable political clout and contributes substantial sums to community endeavors.

In short, the city would take on a responsibility like none attempted to date.

The undertaking worries a lot of interests, from county commissioners wary of the city's influence to other public utilities protective of preference rights to cheap federal power.

"Just the size poses a concern," said Sandra Flicker, executive director of Oregon Rural Electric Coop Association, which represents 16 rural cooperatives, many with small numbers of customers in remote eastern stretches of the state.

Currently, about 25 percent of Oregon electricity customers are served by public utilities. The rest receive their electricity from PGE, PacifiCorp's Pacific Power and Idaho Power.

Sten remains unfazed by the task. He said he's traveled all over the state talking to county commissioners, state legislators and public power advocates, intent on gathering support.

"We've been very methodical and thoughtful about how we've looked at and come up with our strategies," he said. "There aren't as many moving parts as you might think."

Counties are becoming more comfortable with the idea of a city-owned, regionally governed utility, said Tom Brian, chairman of the Washington County Board of Commissioners, and the point man for discussions between Portland and the largest counties served by PGE -- Multnomah, Washington, Clackamas and Marion.

"There's been substantial progress in working with Portland," he said.

The recently completed draft proposal outlines some of the details:

The city would finance the purchase by selling revenue bonds, with the debt repaid through utility rates. Depending on the structure of the newly formed government utility, the bonds could be tax-exempt. In any case, Sten says, they would carry a relatively low interest rate, giving the utility a distinct cost advantage.

A governing board of regional representatives would oversee management and operations, including rate-making and power purchasing. Portland's mayor would appoint the nine-member board from a pool of nominees selected by an advisory council. The City Council would confirm appointees. The board would have a staff of between 10 and 50 public employees to help with administration and policy-making.

An outside operator would handle the day-to-day workings of the utility and likely would retain many of the 2,700 employees working for PGE. The city already has solicited preliminary proposals from interested companies and might issue formal requests later this summer.

Replacing Enron The intent of a public purchase, Sten said, is to "extract PGE from Enron" and protect the interests of the utility's customers.

Sten says the financial advantages and the absence of shareholders would allow the public utility to run more cheaply and could reduce rates by as much as 15 percent.

PGE ratepayers, hit by rate increases of 30 percent and more in recent years, are eager for relief.

But rate reductions are far from certain. Several studies that tried to pinpoint savings generated more controversy than conclusions.

"I've never seen someone sharpen the pencil and end up with lower rates," said Fred Miller, executive vice president of PGE.

PGE officials won't comment on whether they support the idea of city ownership. Last summer, they criticized the prospect but then recanted after Enron warned them of saying anything that might discourage potential bidders.

PGE openly opposes another move to take it public. This one, from the Oregon Public Power Coalition, would create a public utility district in Multnomah County, the heart of PGE territory. Backers gathered enough petition signatures to put an initiative on the ballot for a public vote, probably this fall.

Weighing options So far, neither Enron nor PGE are offering many clues of the utility's likely fate. Strict confidentiality agreements between Enron and any interested parties have severely limited disclosures.

In general terms, Enron says there are two options on the table:

A sale of PGE to anyone with a "viable offer." Enron began entertaining bidders in August when it announced it would auction off core assets. Enron executives involved in the bankruptcy process say "multiple" parties are interested in the utility, but a series of delays in announcing a winner have raised questions about whether suitors are willing to pay an acceptable price.

State regulators have pegged PGE worth at $1.7 billion. Enron paid $3.1 billion for the utility in 1997.

A distribution of PGE stock to unsecured creditors. If Enron can't nab a good price for PGE, it will parcel out the utility's stock -- Enron owns all 42,758,877 shares -- to unsecured creditors. This, Enron executives say, would create a stand-alone investor-owned utility, with shares traded on a major stock exchange.

Portland, as a public entity, can't participate in the auction directly, but it can make its intentions clear to Enron restructuring executives in side discussions.

Enron's restructuring plan likely will clarify which route the company intends to take.

Even if Portland is snubbed, the battle isn't necessarily over. The city could make a bid directly to creditors or it could go directly to the bankruptcy court, claiming a better deal for all involved. In the extreme, Portland could exercise its powers of eminent domain and attempt a takeover through condemnation of PGE assets.

Sten says it's premature to comment on these possibilities, but he doesn't rule any of them out.

"We want to evaluate possible outcomes and take whatever action is appropriate to protect the public interest," he said.

The next phase Any additional steps on the city's part will take more money. The city burned through $500,000 that commissioners released when they agreed last summer to look into buying the utility. The city spent the money on legal and negotiating counsel as well as a valuation of PGE's assets.

The city hired Goldman Sachs & Co. as senior managing investment banker but hasn't yet paid it any money. Instead, the company would collect fees from underwriting the deal if one goes forward.

A Goldman Sachs spokesman wouldn't comment on the feasibility of the city's effort.

Multnomah, Clackamas, Washington and Marion counties have kicked in $275,000, which they're spending on economic studies and community outreach efforts.

"This is much larger than one entity," Brian, the Washington County commissioner, said of the complex array of interests involved. "We need to find out what constituents are thinking."

Gail Kinsey Hill: 503-221-8590; gailhill@news.oregonian.com