New York Times
Enron's Havoc Spills Over to a Utility in Oregon
February 2, 2002
By DAVID CAY JOHNSTON
SALEM, Ore., Feb. 1 ù Enron, desperate for cash, hopes to raise $1.4 billion by selling its electric utility here in a deal that the utility's biggest industrial clients say enriches executives at the expense of customers big and small.
Electric rates would remain high here, corporate and consumer critics said, because the money for this deal would carry high junk-bond interest rates and require rapid repayment both to investors and to lenders led by Merrill Lynch and Credit Suisse First Boston.
The sale would also impose costs that would, in effect, force the average customer to lend the company $260 interest free, indefinitely, according to a group of industrial energy users; the buyer of the utility disputes that estimate.
Since Enron bought the utility, Portland General Electric, five years ago, electric rates in the Portland area, which had been among the lowest in the country, have risen to among the highest. The terms of the sale of the utility to a smaller local utility, Northwest Natural Gas, will mean high rates for years, critics say.
As such, Portland businesses and residents are now counting themselves among the victims of Enron's collapse. The troubles at Enron have already cost many of the 2,800 employees of Portland General their life savings, because their retirement savings were in Enron stock.
Enron's Dec. 2 bankruptcy filing is likely to cost Portland General customers an average of more than $500 each in excess payments already made that the utility eventually would have had to refund, according to a consulting firm, Regulatory and Cogeneration Services of Vancouver, Wash.
An alliance of companies like Intel, BoiseCascade, Georgia-Pacific and Fujitsu, as well as advocates for residential customers, say the damage could spread. Businesses say that the high electricity rates will discourage business investment and further retard the economy in Oregon, where the unemployment rate of 7.5 percent is the highest in the nation.
Opponents of the sale, which was announced last May, passionately made their points Tuesday in a hearing by the Oregon Public Utility Commission.
Many details of the deal, including its impact on customers and the size of the executives' bonuses, are unknown because Enron sealed most of the documents it filed with the utility commission.
Melinda Davison, a lawyer for major industrial customers, waved a large sealed envelope at the hearing and said that inside were details of the bonuses. She obtained those documents as a party to the case but was not permitted to disclose their contents. "There are more dollars in this transaction for P.G.E. executives than for ratepayers," Ms. Davison said. "P.G.E. executives get paid first and customers get benefits years from now."
Bonuses to retain important executives are common in mergers, but keeping them secret is unusual.
John Ambler, an Enron spokesman, described the sale of Portland General as a change of strategy, rather than a sign of desperation. Enron, he said, "got involved in Portland General Electric to better understand the utility market, as it appeared there would be opportunities in an environment of deregulation." But, he continued, "as time went on, P.G.E. was not as important to Enron."
"While the returns were good with P.G.E.," he added, "our cash could be better placed in other areas.`
Executives of both utilities said customers would receive some immediate benefits from the deal. Pamela Lesh, a Portland General vice president, said that rates would drop at the end of this year, though not by as much as major customers and consumer advocates wanted. The biggest benefits will come beginning about 2008 to 2010, once debt from the deal is paid off, she said.
"The industrial customers and the consumer advocates are complaining because this deal will save costs through synergies and they want to benefit right away, not in eight years," she said.
Bruce DeBolt, the Northwest Gas chief financial officer, said that rates would not be any higher because of the merger. But Northwest Gas shareholders, he said, would benefit substantially from the leveraged buyout.
Enron, which bought Portland General in 1997, has been trying to sell it at least since November 1999. Usually, the sellers in such deals receive payment in shares of the acquirer, an arrangement that would have little effect on a utility's customers. But Enron has been seeking to sell Portland General for cash ù reflecting, local critics say, its deteriorating financial condition.
The deal has come under fire from both corporate customers and consumer groups who say its terms would violate longstanding principles of utility rate-making law by putting the burdens on ratepayers and giving virtually all the benefits to the gas utility's shareholders.
"Because of Enron, Oregon ratepayers are seriously in harm's way," said Dan Meek, a lawyer for the Utility Reform Project, a consumer group.
Higher rates over the long term will shrivel new investment by companies that come here to obtain cheap power, said Ms. Davison, the lawyer for big electric customers. Intel has already announced a halt to its multibillion-dollar expansion in the Portland area until rates come down.
At the hearing Tuesday, no ordinary citizens, or Oregon journalists, observed the two hours of testimony, parts of which were also missed by Commissioner Lee Byers, who arrived late and repeatedly nodded off.
The hearing was filled with stories of the damage witnesses said Enron brought, of the lost retirement savings of utility linemen because of the collapse of Enron's stock, of the bonuses for executives and of the added burdens that customers said they would suffer. Any deal would be subject to a bankruptcy court's approval.
Edward A. Finklea, a lawyer representing big gas customers, said it was unfair for customers to wait years before sharing in the benefits of merging the local gas and electric utilities. He belittled the benefits that the utilities promise immediately and over the first eight years, saying they amount to $3 annually for each customer "or about enough to heat a house for one day."
Several witnesses warned that if business conditions worsen, or exceptionally mild weather prevails, the combined company would have trouble paying back the $1.4 billion in debt. Then the company would have to raise electric and gas rates further to avoid bankruptcy, they said.
Enron plans to sell Portland General for $1.4 billion in cash, $250 million in a special class of stock and the assumption of more than $1 billion of debt by Northwest Natural Gas. The debt burden would lower the combined company's credit rating to junk-bond status until the beginning of 2006, Mr. DeBolt said.
The deal would force customers to pay an additional $188 million in "phantom taxes" over six years, according to Energy Advocates, which represents major natural gas customers in Portland.
Phantom taxes occur when utility customers pay rates that assume the company pays higher taxes than it actually does. Because the merged utility here would pay reduced taxes, as it deducted its high debt payments, electricity and gas rates would include what amounts to a forced loan from customers to the utility at zero interest.
These loans would average $260 a customer and last for at least six years, according to calculations by Don Schoenbeck of Regulatory and Cogeneration Services, who said he relied on public documents from Northwest Natural Gas.
The average of more than $500 that each Portland General customer has already paid in phantom taxes almost certainly will never be repaid because of Enron's bankruptcy.