The Oregonian — Business News

Power struggle for PGE's future

07/23/03

GAIL KINSEY HILL

A few weeks ago, Portland City Commissioner Randy Leonard met privately with top executives of Portland General Electric and uttered the word they didn't want to hear: "condemnation."

His insistence that the city might launch what amounts to a hostile takeover of PGE caught executives Peggy Fowler and Fred Miller "completely off guard," Leonard recalls.

"But I'm dead serious," he said. "If they think I'm bluffing, it's to their detriment."

Leonard has taken the lead in dropping not-so-subtle hints that the city might exercise its powers of eminent domain as a way to wrest control of PGE from its parent, bankrupt Enron, and protect ratepayers. Fellow commissioner Erik Sten, long an advocate of government-owned utilities, also is leaning toward the option. Mayor Vera Katz hasn't ruled out the possibility.

The ramped-up talk of condemnation came after July 11, when Enron filed a Chapter 11 restructuring plan with few details about the utility's future ownership. It has touched off powerful political forces, sent proponents and opponents scrambling for lawyers and strained relations between City Hall and PGE, Oregon's largest utility and one of Portland's most influential businesses.

Recent comments by PGE that condemnation might force it to move its headquarters out of downtown Portland only increased the tensions.

State statute and the city charter give Portland powers to condemn utility assets both inside and outside city boundaries. Although several communities have exercised their condemnation authority on utilities, the state statute has not been used on this scale.

PGE executives are adamant that condemnation would prove disastrous for the community. They contend the process would be long, expensive and contentious. They say the results could split up a system covering eight counties, raise rates for the utility's 743,000 customers and harm an economy struggling with a recession.

"With condemnation no one benefits," Miller said.

Commissioners Leonard and Sten say Enron's treatment of PGE could prove worse than the disruption of condemnation. They contend that public ownership would lower rates, guard against a piecemeal breakup of assets and create a governance system more responsive to local concerns.

They haven't yet advocated condemnation, they cautioned. Instead, they support looking further into the possibility, analyzing the pros and cons and gauging public opinion.

"I'm certainly open to it, but I'm not there yet," said Sten, who took the early lead in advocating a public purchase of PGE.

Options narrow The city has been trying to buy PGE for almost a year, but negotiations broke off more than a month ago. Confidentiality agreements prevent city officials and Enron from discussing details, but Enron's interim Chief Executive Stephen Cooper confirmed negotiations had faltered.

Sten said the rejection pushed him to consider "more extreme choices."

The reorganization plan laid out two options for PGE: Enron would either sell PGE or it would distribute newly issued stock to creditors.

This wasn't news to city officials, who for at least two months had known of Enron's two-pronged strategy. But they had hoped for more detail, even an indication that Enron would consider the city as a potential buyer of PGE assets.

Sten has grown increasingly suspicious of the stock distribution plan, which he claims could saddle the utility with liabilities from lawsuits and regulatory penalties and force rate increases for PGE customers.

"I think they're up to no good," Sten said of Enron's intentions. "But we need to prove it."

Condemnation would allow the city to gain control of the utility's assets, but not its liabilities, Sten said.

"In this context, condemnation becomes more attractive," he said. "It becomes a surprisingly clean way to get out from under liabilities."

Miller called the city's concerns "mystical."

All lawsuits and potential hits to the utility's bottom line are listed in financial documents filed with the federal Securities and Exchange Commission, as required by law, he said. If necessary, PGE would set aside reserves to cover unexpected costs, such as those associated with uncollectible debts or unfavorable court rulings. The money would come out of shareholder equity and not affect rates, he said.

"The implication is there's something out there we aren't talking about, and that's not true," he said. "You have to have little confidence in existing people and institutions to get to that conclusion."

Mayor, execs meet

PGE executives Fowler and Miller met with Katz on Monday to explain Enron's reorganization plan and try to calm anxieties about any subversive intentions.

Katz said Tuesday that she remained concerned about the potential liabilities. In the meeting, she asked if PGE officials would answer a series of questions submitted by the city.

Fowler, who described the meeting as cordial, agreed, although she thinks the city's worries are overblown.

"It doesn't do any good to be fighting with each other," Fowler said.

Katz, too, is softening her language from past statements.

"They're not the enemy," she said of PGE. "Our concerns should be theirs."

Fowler said Katz assured her that condemnation was not in anyone's best interest.

In a telephone interview with The Oregonian, Katz declined to discuss her position on condemnation.

"I don't want to go there," she said. "That conversation right now creates far more attention, far more finger-pointing, far more rhetoric than necessary."

Exploring the process Yet, the talk hasn't stopped. And it's prompted both city and county officials to look more closely at precisely how Portland would initiate a municipal condemnation and the issues certain to arise.

To get the process going, the City Council would pass an ordinance explaining the need for a public takeover. The city would appraise the utility's assets, set what it considers to be a fair market price and submit the offer to the owner, Enron.

Enron and PGE could then raise objections to details of the acquisition and to the price. A circuit court would preside over any objections Enron might raise regarding the details of the proposed acquisition. If the parties couldn't agree on a price, a jury would make the final ruling.

The breadth of the city's authority to condemn remains far from clear, and litigation is certain, say attorneys familiar with condemnation issues.

Condemnation of PGE's distribution system -- the network of poles and wires that sends electricity to customers' homes and businesses -- is a "no brainer," said Tim Sercombe, an attorney with Portland's Preston Gates & Ellis.

From there, questions arise. The city might run into legal problems condemning gas-fired power plants, for example, attorneys say. Legal challenges also could erupt if the city tried to take over hydro plants, some of which are partially owned by Native American tribes, or if the city tried to assume some of PGE's long-term electric power contracts.

"No one questions it can condemn some of the pieces," said Greg Mowe, an attorney with Portland's Stoel Rives who has provided legal advice to PacifiCorp on condemnation issues. "But the whole system? There are some real issues there."

PGE recently retained Mowe to provide advice on condemnation issues, PGE officials said.

Determining value Sercombe, of Preston Gates, said the valuation process could prove even more complex.

PGE's book value is close to $2 billion, according to the most recent estimate by state regulators of the depreciated value of the utility's properties. Fair market value could take the price to $3 billion, 11/2 times book, attorneys said, but the appraisal process is far from clear-cut.

"It could be a long period of valuation," Sercombe said.

Sten acknowledged the process could take years, but he's not deterred by the legal challenges.

"We've got the charter, the statutory authority and the political makeup to win this fight," he said. "We believe we have the authority to condemn the whole system."

He said the city wouldn't go ahead with condemnation if such a takeover broke up the system or if it increased rates for PGE customers.

The city recently hired Henry Lorenzen, a Pendleton attorney experienced in condemnation litigation, to aid its analysis, Sten said.

Lorenzen's former clients include the city of Hermiston, which successfully took over the portion of PacifiCorp's electric distribution system that lay within city boundaries. Mowe represented PacifiCorp.

While PGE is worried about the city's plans, its immediate attention is focused on a separate condemnation effort -- a request on the Nov. 4 election that asks Multnomah County voters to form a peoples' utility district to operate PGE.

PGE already has begun an ad campaign condemning condemnation, and it is channeling money into Citizens Against the Government Takeover, a committee expected to launch attacks next month on the PUD measure.

Dan Meek, a key backer of public power, on Tuesday called on the city to immediately approve a condemnation ordinance. Although he supports the public utility effort, he said the city should move more quickly to protect ratepayers from what he thinks are Enron's plans to sell off pieces of the system.

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