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The Oregonian - Business News

PGE backers question control

Provisions in acquisition documents give Texas Pacific wide veto powers over Oregon Electric Utility's board



Texas Pacific Group and three Northwest investors led by Neil Goldschmidt have been beating the drum for local control of Portland General Electric ever since the November unveiling of their plan to buy the utility from bankrupt Enron.

Most notably, they emphasize that former Oregon Gov. Goldschmidt, Portland developer Tom Walsh and Seattle venture capitalist Gerald Grinstein would have 95 percent voting control of Oregon Electric Utility, the holding company that would buy PGE for $2.35 billion. The three would anchor a newly appointed PGE board, with Goldschmidt as chairman, and each would invest personally in the venture.

Such homegrown commitment, they say, would give Oregon's largest utility a strategic and moral focus so sorely lacking under Houston-based Enron, the once-powerful energy trader that collapsed into scandal-ridden bankruptcy in December 2001.

No more "getting snookered by Enron," Walsh recently summed up.

Yet details contained in acquisition documents outline a structure that places significant control securely in the hands of Texas Pacific, the private equity investment firm that would provide the bulk of the cash for the deal. Texas Pacific has offices in Fort Worth, Texas, San Francisco and London.

Consider the following provisions, contained in the purchase application filed with state utility regulators on March 8:

Although Texas Pacific would hold just 5 percent voting control in Oregon Electric, it could veto virtually all significant decisions regarding PGE operations, including executive hirings and firings and large capital expenditures.

Any changes in rates charged PGE's 755,000 customers would be subject to Texas Pacific's approval. Rates also would be subject to the approval of the Oregon Public Utility Commission, as currently is the case.

Texas Pacific would immediately take voting control of Oregon Electric if a controversial federal law that places limits on utility purchases were repealed. The Public Utility Holding Company Act would face elimination under versions of an energy bill stalled in Congress.

In addition, Grinstein, a Northwest native with extensive business expertise, on Jan. 1 began a job as chief executive officer of Delta Air Lines in Atlanta, a move that critics say uproots his credentials as a standard bearer of Oregon interests.

The issue of local control is important because Texas Pacific hopes to convince state regulators that a new PGE board, anchored by Goldschmidt, Walsh and Grinstein, would serve as catalysts for a utility more responsive to its customers.

Oregon law requires the utility commission to approve the transaction if it concludes that the change of ownership serves utility customers "in the public interest" -- a clause interpreted to mean that customers receive a "net benefit."

Regulators began their review of Texas Pacific's proposal following the March 8 purchase application. They hope to reach a decision by the end of the year, although they anticipate intense, even acrimonious debate, given PGE's prominence and Enron's infamy.

In the past, state commissioners and consumer advocacy groups considering utility transactions have looked to rate cuts as a way to meet the law's intent. But Texas Pacific isn't promising rate reductions. Instead, it's offering a reformed utility.

"With united ownership, a locally focused, reinvigorated board, and restored operating independence, PGE will be well-positioned to be an effective partner of Oregon business and residents," Texas Pacific partner Kelvin Davis said in testimony included in the application.

Various consumer groups and politicians already have criticized the plan for what they say contains more bromide than benefit. They want rate cuts, and they want further assurances that representatives of Oregon's interests are more than window dressing.

"About the only public benefit they offer is local control -- and it isn't," said Portland City Commissioner Erik Sten, who earlier this month urged the PUC to reject the application outright.

Veto rights

Critics point to "Exhibit 7" of the bulky acquisition documents in the filing as proof of where the control actually lies. The exhibit lists the types of utility decisions that would require Texas Pacific's approval, regardless of what local board members might decide.

"These consent rights essentially give the (Texas Pacific) applicants veto power with respect to certain major corporate decisions," the investment firm's Davis stated in accompanying testimony.

Asset sales, operating budgets and rate requests are among the matters that would require Texas Pacific's nod.

"Voting control doesn't mean much if (local board members) can't do anything," said Bob Jenks, executive director of consumer watchdog group the Citizens' Utility Board.

Goldschmidt counters that he, Walsh and Grinstein have adequate authority to influence PGE's direction. Day-to-day operations would continue to be handled by management, currently headed by Chief Executive Officer Peggy Fowler.

"I am not uncomfortable at all about the capability of (Oregon Electric) to make decisions," Goldschmidt said.

Principals in Texas Pacific, he noted, must safeguard the interests of its investors, and the consent rights are a way to do that.

"They're a bridge to shareholders -- to the public pensions and those who provided the capital for the investment funds," he said, and they would be acting irresponsibly if they didn't lock in some controls of their own.

Some of those shareholders are local.

Oregon's pension fund -- which invests on behalf of the state's 300,000 public employees, working and retired -- is Texas Pacific's largest investor, with a total of $950 million in the firm's four funds.

It committed $300 million to TPG Partners III and another $300 million to TPG Partners IV, the funds that would be tapped to provide the $525 million cash piece of the PGE deal.

"Practically, boards always are in a partnership with capital," Goldschmidt said.

Texas Pacific's veto powers would prevent the board from "lurching off sideways," he said. "We couldn't do something stupid."

Bryan Conway, the PUC's case manager for the Texas Pacific proposal, said in scrutinizing the role of local representatives, agency analysts will be "looking very closely at how much local control they are actually bringing to the table."

The consent rights, Conway said, "make it a little harder to figure out."

"Does Goldschmidt have control or does everything get routed through Texas Pacific?" he aid. And when it's all netted out, "how much benefit does it bring to customers?"

More board seats to fill

Goldschmidt said his immediate job is to select additional board members to bring the count up from the currently identified six to 10, maybe 14. In addition to Goldschmidt, Walsh and Grinstein, Texas Pacific partner Davis and firm founder David Bonderman would serve on the board. So would PGE's Fowler.

The rest of the members haven't been named, but the acquisition plan says at least five Oregonians must be on the board at any given time.

"We will get back for ourselves the best board, the best talent, the best access to the thought process," Goldschmidt said.

Until recently, the PGE board has consisted exclusively of PGE and Enron executives, a makeup that Goldschmidt believes has harmed the utility, although its finances are sound.

Possibility of repeal

Another source of anxiety among critics is the possible repeal of the Public Utility Holding Company Act, a Depression-era law limiting utility mergers.

Texas Pacific created the holding company, Oregon Electric Utility, and the local board representation to meet PUHCA conditions. If the law were repealed, the holding company would remain intact, but the portions of board voting control shared between Texas Pacific and others would flip-flop.

Upon repeal, "Oregon Electric's economic ownership and voting control will be adjusted so that the (Texas Pacific) applicants will have voting control consistent with their equity interests," according to the acquisition proposal. That means the investment firm would hold at least 80 percent voting control.

Davis has said even if holding company act were repealed, Goldschmidt, Walsh and Grinstein would remain influential members of the board, which still would include at least five local members.

Nevertheless, Jenks and other critics consider the PUHCA provision further evidence that the claims of local control are a sham.

"They're setting up a facade organization to meet the PUHCA requirement," Jenks said. "They aren't even pretending it's any more than a shell game to get around federal law."

Walsh, a Portland builder and former general manager of TriMet, said he wouldn't have agreed to participate if he were mere decoration. His role, he said, is to be part of a team that would clear the way for a more accountable utility.

"If we're all doing what we ought to be doing as a creative partnership, then there will be no impediments whatsoever," he said.

Grinstein was not immediately available for comment. Walsh and Goldschmidt describe Grinstein as a titan of the corporate world who would prove an invaluable managing partner of Oregon Electric regardless of his address.

"Do the commitments in Atlanta detract from his responsibilities here? Not at all," Walsh said.

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