The Oregonian

Texas firm's bid for PGE generates talk of rate cuts

Consumer advocates and big users of electricity want a rollback of charges that partially reflect the recent energy crisis

11/21/03

GAIL KINSEY HILL

No sooner did news of Texas Pacific Group's proposed purchase of Portland General Electric from bankrupt Enron hit the street than a push for rate cuts began gathering momentum among consumer advocacy groups.

The deal appears certain to lead to a showdown before the Oregon Public Utility Commission, the agency that regulates the state's investor-owned utilities. The three-member panel must decide whether to approve the transfer of ownership, and it must determine the appropriate rate structure.

"We don't want platitudes," said Ken Canon, who represents the interests of many of Oregon's big electricity users, such as paper manufacturers and steel mills. "We want to know if they can get rates down to more competitive levels."

Texas Pacific, which has reached an agreement with Enron to buy PGE for $2.35 billion, isn't making any promises. In fact, it made no mention of rate cuts when it announced the purchase at a Tuesday news conference in downtown Portland.

But groups representing both residential and industrial ratepayers are demanding that any final purchase package submitted to state regulators for approval include rate cuts, likely in the form of credits to be applied to monthly bills. The desire for rate cuts stems, in part, from sharp increases that households and businesses have faced since the 2000-01 energy crisis.

Negotiations with Texas Pacific, based in Fort Worth, Texas, are expected to be contentious, perhaps even more so than those involving Enron's purchase of PGE in 1997.

The commission's inexperience adds to the tensions. Chairman Lee Beyer, with two years on the panel, is the longest-serving member. John Savage and Ray Baum began their terms two months ago.

"This is going to be one of the biggest cases the commission has ever had to face," said Bob Jenks, executive director of the Citizens' Utility Board, a ratepayer watchdog group.

The review might not take place at all. First the U.S. Bankruptcy Court in New York must approve the deal. So must a host of federal regulatory agencies. Also, the bankruptcy court must allow other potential buyers to bid for PGE, a 60- to 90-day process.

But a key creditors committee already has approved the deal, as has the Enron board. And the bankruptcy court faces pressure to find a resolution.

Hearings months away If the proposal reaches the Public Utility Commission, the review probably would begin in mid-2004.

Under state law, the commission can't approve the purchase unless it finds that customers would benefit from the change in ownership. Rate reductions are a common way to meet the "net benefit" standard, but improvements in customer service or electricity reliability also could apply.

Although none of the commissioners has dealt with an acquisition before, several PUC staff members are veterans. In less than a decade the commission's staff has faced Enron's overtures, two subsequent offers to buy PGE and ScottishPower's purchase of PacifiCorp.

When Enron bought PGE in 1997, it agreed to $141 million in rate reductions during 10 years.

When Sierra Pacific Resources, a Nevada utility, tried to buy PGE in 1999, it agreed to rate concessions of $97 million during seven years. That deal faltered, as did a proposal from Portland-based Northwest Natural Gas.

The PacifiCorp deal in late 1999 included rate relief of $51 million within four years.

Jenks said Texas Pacific might not fully realize that it is dealing with a highly regulated enterprise in a state anxious to protect a utility that serves almost half of the state's population and wields significant economic influence.

"If they don't understand that, then they're in for a rude awakening," Jenks said.

This proposal has at least one critical difference. All of the other deals involved acquiring companies already in the energy business. Texas Pacific is an investment firm.

As one of the nation's largest private equity firms, Texas Pacific has $13 billion under management. It is known for buying troubled companies, fixing them, and either selling them or taking them public for considerable profit.

The utility commission's pursuit of a "public benefit" and Texas Pacific's desire to increase PGE's value set up the potential for conflict.

Kelvin Davis, one of the partners in the firm, said the decision to buy PGE came after careful scrutiny of the energy industry and painstaking negotiations with Enron. Texas Pacific is betting, in part, that overall improvement in the electricity industry, which has been buffeted by an energy crisis and repeated scandals, will increase the value of PGE.

"We saw a situation that might present an interesting opportunity," he said.

Management plan Texas Pacific would provide most of the money to buy PGE, but it has formed a new company, Oregon Electric Utility, to carry out the purchase. Three prominent Northwest businessmen would serve on PGE's board: former Oregon Gov. Neil Goldschmidt; Tom Walsh, a Portland developer; and Gerald Grinstein, a Seattle venture capitalist.

The linkup with respected community leaders is designed to calm those leery of out-of-state corporate ownership and quell efforts by the city of Portland to buy PGE.

Although consumer advocacy groups say they're encouraged by the Northwest connection, they aren't ready to let down their guard. Neither are regulators, who are reluctant to give the regional ties too much significance.

"Just to say it's a return to Oregon ownership won't cut it" in terms of finding a net benefit to customers, said Phil Nyegaard of the utility commission staff.

Six years ago Nyegaard led the review of the Enron proposal. He now heads the PUC's telecommunications division.

The commission is credited with placing conditions on Enron that prevented the Houston company from mixing PGE's activities -- and cash -- with its own. This "ring fencing" required PGE to keep its common equity at certain levels and to maintain its own books and credit ratings.

"We never trusted Enron," Nyegaard said. "As it turned out, they were even sleazier than we thought they were. But we were skeptical from Day 1."

Lower price Another utility commission staffer said the lower price Texas Pacific plans to pay for PGE might ease the way for rate reductions, although the investment firm, eager for higher earnings, probably would disagree, said Marc Hellman, another commission staffer.

Enron paid $3.1 billion for PGE. Texas Pacific's offer is valued at $2.35 billion.

Beyer, the PUC commissioner, said his initial meetings with Texas Pacific partners, including Davis and the firm's founder, David Bonderman, were positive. He quickly added: "I don't want to convey the idea I'm sold on those guys. I'm skeptical, very skeptical."

As for any rate relief: "I would love that," Beyer said. "It would be wonderful if in establishing a benefit for customers the acquiring party came forward and said, 'We'll work toward rate reduction.'"

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