Texas Pacific, PGE, and Project Tahoe

Yesterday, Willamette Week unveiled secret documents from the Texas Pacific Group that outline their plans for massive layoffs, service cuts, rate hikes, and a rapid-fire sale of Portland General Electric to non-local ownership.

The Tahoe documents show that Texas Pacific plans wholesale layoffs and dramatic cuts in maintenance. The firm plans to sell the utility in five years for a huge profit. The records also show that Texas Pacific's exit strategy makes it highly unlikely PGE will continue as a locally headquartered, stand-alone utility.
All of that is at odds with the public pronouncements Texas Pacific and its Oregon representatives have made.

In the Oregonian, Governor Kulongoski had this to say: "I am concerned by media accounts alleging that Texas Pacific Group is delivering two different messages about its proposal to acquire PGE."

Mayor Potter went further: "If true, it's pretty disgusting. I intend to protect the ratepayers of Portland, and it sounds like they need protecting."

Portland City Commissioner Erik Sten, who has proposed public ownership, told the AP "This whole proposal is based on false promises and scare tactics. It's been an insult to the intelligence of Oregonians from day one and it shows how deep their lack of regard for Oregon's interests and common sense is."

Discuss.

Comments

  • Ruth (unverified)
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    Go Erik! Go Tom! Go Willy Week!

    So now Kulongoski, Neil's-best-friend, is shocked, shocked that TPG doesn't have the citizens' best interests at heart. Can we just get rid of this guy now?

    I can't wait to see how the O. justifies its ridiculous editorial stance that the TPG deal is in the ratepayers' best interest, esp. now that WW has once again trumped them by doing some actual journalism.

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    The Oregonian article states that the good Guv has provided the cover for members of the PUC to reject the acquistion. That's good governance.

  • Kathleen Gardipee (unverified)
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    Thanks Ruth!

    I thought it might make sense to run through was Erik is proposing as an alternative to TPG since I've worked on this for him over the last two years.

    Erik is proposing that the City of Portland purchase PGE by issuing revenue bonds as a conduit to set up an independent public electric utility. The reason it makes sense for the COP to do this is because we have a triple-A credit rating, Portland has the wherewithal to do it and issuing revenue bonds requires a simple vote of the City Council. Of course, the vote would come after sufficient public meetings.

    At the same time, an Advisory Council would be formed made up of regional stakeholders (mayors, county commissioners, ratepayer representatives, industrial and commercial customers, and low-income and renewable energy representatives. The Advisory Council would nominate a Board to oversee the utility.

    The Board would be regionally representative and be comprised of experienced, capable and dedicated leaders. The Boards fundamental obligation will be to advance the long-term economic and community health of the region.

    Specifically, the Board would: •Set rates •Set levels and type of service •Make resource decisions •Set utility policy •Decide where and if to expand the system. •Establish the process for public participation •Designate the uses of system revenue •Hire and fire utility management

    The Board would hire a private operator to run the day to day operations. It is not out of the question that if the current PGE employees wanted to form an operating company they could contract with the Board.

    Once a structure is developed, the Board could choose to transition the utility to an independent, stand-alone electric utility - not attached to the City of Portland.

    From day one, the public electric utility would have a 10% rate advantage. This is simply because a public utility does not pay federal taxes and borrows debt at a lower interest rate.

    It's not complicated. There is a long tradition of public ownership of electric utilities in the US, including many utilities right here in Oregon. In fact, more than 2,000 communities across the US benefit from public power including Austin, Nashville, Long Island, Sacramento, LA, Eugene, Seattle and Tacoma.

    If Oregonians ban together, we have a great opportunity to control one of the most important contributors to our regions economic and community health.

  • Ruth (unverified)
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    Pam, I have to admit I didn't take the time to read the Oregonian story, so thank you for pointing this out! If Kulongoski is helping defeat TPG, that is great. Really, I'm so angry at him about other matters that I shouldn't even post about him...

    Kathleen, thanks so much for the overview. I haven't been following this issue in detail, but especially after the latest revelations (no surprise really, was it?) my reaction is that public ownership and oversight wins, hands down. Neil's backroom deal sounds to me like a way for a few people to get rich and the ratepayers to get the shaft. I like Erik's plan.

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    I'm now fairly sure that TPG is not the answer for PGE, but the city's proposals continue to raise a lot of very troubling questions.

    The Board would hire a private operator to run the day to day operations. It is not out of the question that if the current PGE employees wanted to form an operating company they could contract with the Board.

    What if there are only a few companies that want to do this, and they all demand a guaranteed return of cost plus a large profit, over a very-long-term contract? How is that going to help the ratepayers?

    Will the lowest bidder automatically win? Will public bidding laws apply? Can Scottish Power bid? How about a group led by a Goldschmidt?

    Once a structure is developed, the Board could choose to transition the utility to an independent, stand-alone electric utility - not attached to the City of Portland.

    This kind of talk really turns me off. The City of Portland takes all the risk, spends millions to get the deal done, and then hands the company to some regional group dominated by the suburbs, or to another group of private swindlers. The "regionalization" option is just what Erik tried to do with the Bull Run reservoir system before smarter heads prevailed. It's stupid.

    Maybe he's thinking that by that time, his two terms as mayor will be up, and he can "transition" himself into a nice fat CEO job. 8c)

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    Jack (and others) -- would some of the objections be lessened if some or all members of the Board for this new nonprofit electric utility were to be elected or confirmed by public vote? Or is that worse?

  • Steve (unverified)
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    My biggest issue is that about 25% of PGE's customers live in Portland and yet CoP would have the say-so on who runs it. It would be the same kind of friends-and-family deal like PDC and their board.

    If there was some dis-interested party who would have oversight, but not too much power, I could go for a PUD. My pref is still for PGE to buy its own way out or maybe make the deal contingent on no ownership changes for 20 years.

    Giving CoP that much bigger of a tax base is only inviting abuse, especially of everyone outside of Portland. For reference they never mention the adder they charge communities outside of Portland for Bull Run water even though it costs just as much.

  • Kathleen Gardipee (unverified)
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    Jack:

    I don't want to get into a tit for tat, but let me offer a little bit information and you can do with it what you want.

    "What if there are only a few companies that want to do this, and they all demand a guaranteed return of cost plus a large profit, over a very-long-term contract? How is that going to help the ratepayers?"

    A year and a half ago the COP put out an RFQ to see if there were any companies that would be interested in operating PGE. Over 25 companies responded. These included all the big energy companies, other public utilities and a couple of guys in California. There is a long line of companies who would be willing to come in and operate the company.

    I guess that isn't the point however. The point is that the Board - upstanding, professional, knowledgeable, successful Oregonians would decide how to run the utility. The Board and their professional staff would negotiate the contract. The Board could even decide make all employees public if that is what they desired - but somehow I doubt it.

    You are right that a private operator would need to make a profit. No doubt about it, but PGE makes a profit of 10.5% right now. TPG is trying to make 20 -%0% profit (depending on how you calculate it.) A public utility has a cost advantage because they do not pay taxes and they can borrow money at a lower rate. Not to mention, that they don't make a profit. So there will be additional savings to ratepayers in the non-profit orientation of a public utility. Some of that savings could pay a private operator and still reward ratepayers with a cost advantage.

    I am sure that a contract would only be awarded if it was competitive in cost and had a good reputation, professional qualifications, and a good track record. Plus, people like you could impact how these decisions are made, which you can't now and you definitely won't be able to with TPG.

    "This kind of talk really turns me off. The City of Portland takes all the risk, spends millions to get the deal done, and then hands the company to some regional group dominated by the suburbs, or to another group of private swindlers. The "regionalization" option is just what Erik tried to do with the Bull Run reservoir system before smarter heads prevailed. It's stupid."

    Portland is one-third of the ratepayers of PGE. There are 51 other cities and 7 counties. Ideally, there would be a regional entity, other than the City of Portland, who could step in and purchase PGE. However, today there isn't. While Portland moving forward on behalf of the region is not ideal, it is pragmatic and can work. What I failed to mention previously is that in order for the utility to be transitioned to a stand-alone utility, Portland's debt would have to be repaid in full.

    The City of Portland and Erik are willing to help in what we see as a dire situation and do something good for the region and the state. Believe it or not, unlike others in this state, Erik (or I) will not get a payday out of this. He does it because he represents the public interest. Believe me, after working on this for the past 2 years, there are easier ways to get rich and be more popular with folks like you.

  • Erik Sten (unverified)
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    Jack,

    I think we need a public utility. It is the only rational answer to an era of speculators buying local infrastructure and ripping us off. Isn't Enron enough? I think reconfiguring the existing PGE to run it is a potentially elegant concept. Keeps private expertise and jobs, while gaining the advantage of public financing and long term stability. Immediate savings are $100 million dollars a year, or ten percent.

    I've been working on this concept for about three years. There is a consistent concern from various interest groups that they don't want Portland to run their utility. That is why I have tried be clear that I don't think Portland has to run it. I do believe Portland is the only public entity that has the legal authority and financial capacity to buy the whole system quickly. We would use revenue bonds to do it that do not have recourse to the Portland taxpayers.

    I've tried to come up with a strategy that is acceptable to the people who will be affected by the utility. Under the proposal, it would become a stand-alone utility if that makes sense down the road, but would be governed from the beginning by a Board drawn from the region.

    Why don't we have some real discussion of the pros and cons of how to set up a public utility rather than all the jibes. I remain interested in ways to improve what I'm proposing. Let's talk about what would work. I believe that a lot of our institutions need to be reconfigured to meet current needs, as the models were developed about 100 years ago or so. Let's talk about how to do that.

    So, bloggers. Is public ownership with its dramatic cost advantage a good option? Assuming that Portland is the only entity that can successfully buy the whole system quickly, should we do it? Once we do, should it be a municipal utility serving the region or should it become a regional utility?

    If I don't have it exactly right in your opinion, don't throw the baby out with the bath water, especially with my son's birthday being tomorrow.

    My best,

    Erik

  • Mike Miller (unverified)
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    Whatever your take on public ownership of PGE, it seems clear to me that the Texas Pacific deal is not in the public interest. I think there is a good chance the deal will not be approved.

    I'm all for public ownership. Buy it, keep the existing people, find a competent utility manager (not the current Enron lackey) and run with it!

    Mike

  • ron ledbury (unverified)
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    Kathleen/Erik,

    I want to at least hear discussion, and understanding, of the fundamentals of regulated monopolies.

    Can you describe the Open Access philosophy as applied to natural gas -- and then extended to electricity? Can you discuss the trade-off between the acceptance of regulation, by industry, as the price for being granted a government sanctioned monopoly?

    “The Board would hire a private operator to run the day to day operations.”

    That is the function served by a regulated monopoly today . . . to run the day to day operations. I see no functional difference, efficiency wise, between a hired private contractor versus an effectively regulated monopoly.

    The cost of borrowing is subject to happy numbers that are devoid of any personal-investment-backed risk to contain the exuberance of government (political) hacks. The recent case of happy population growth numbers justified building 5 nuclear power plants and then we said “Oh, Never Mind.” (or WPPSS)

    Who should bear the risk of loss? Shall the public, and its taxing authority, be constrained from borrowing for other things (an opportunity cost) to satisfy the urge to borrow money so as to buy some wires?

    The problem, as I see it, is the influence of national entities at the national level to simultaneously obtain the pricing benefits of monopoly while removing all constraints relative to regulation. This problem goes way back to the 1930's. The open access arguments functionally unwound all the controls that where pinned, originally, to the grant of the sanctioning of an otherwise unlawful monopoly.

    If you want to be a real rebel, in the public interest, you would set out to remove the grant of a monopoly, NOT become the new monopolist. (I had objected to PERS and the Oregon Investment Council becoming the new monopolist and my judgment would be the same for the City of Portland becoming the monopolist for the same reasons, based on my abhorrence of monopoly in general.) I don't trust politicians any more than I do the head's of private energy giants. People do not become good or bad just because they are labeled public or private. Start demanding a restoration of capitalism, the benefits of competition, by building a parallel set of wires. The mere notion of multiple sets of wires (and theoretical inefficiency) started the whole regulation thingy, and the vision of lawful monopoly, in the first place and it is a logical place to once again focus attention.

    The inefficiency, on the economic front, of having parallel sets of wires is presently less of a problem than the federal government's tolerance for monopoly power, the power to extract monopolistic rent, by a small number of energy giants. The ideological basis for the federal rules is supposedly based on the benefits of capitalism . . so use capitalism as the ideological club to bash the anti-capitalist national folks over their own puny little heads. Deny them the benefits of monopoly power. What can the feds do, prohibit the issuance of bonds to build a new set of wires or to send in the national guard to halt construction?

  • cab (unverified)
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    Just curious, why is that a little weekly breaks this story and not the well funded, large daily paper? This news to real for the O? Seems they are too busy running interest peices on the latest family who got some kind of fatal sickness or group limb ampute. God forbid they break a story that actually effects the region in a substantial way.

  • Steve (unverified)
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    For Mr Sten, I don't think there is a "need" for a public utility. There is a need for a well-run utility that can efficiently deliver product to the public at the best price.

    Mgmt in government do not get their jobs due to experience or tech knowledge, they get it because they are elected with the only qual being convincing voters they know what they are doing. Look at what happened when Gray Davis tried to buy power before he got booted, he almost bankrupted Cali.

    Based on CoP experience with utilities like water, I think in a couple of years the end price to consumers would be higher, just like we now have the highest water rates in the country.

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    So, bloggers. Is public ownership with its dramatic cost advantage a good option? Assuming that Portland is the only entity that can successfully buy the whole system quickly, should we do it? Once we do, should it be a municipal utility serving the region or should it become a regional utility?

    Yes, it's a good option. There are downsides to public ownership, all of which have been amplified and advertised by the (corrupt?) folks looking to profit on the TPG deal. But of course, life isn't perfect. There are downsides to every situation. What we haven't been treated to, as rate-paying citizens, is a complimentary exploration of all the downsides to the TPG deal (or the dangers of privatization generally).

    One of the most salient bits of information to emerge from that story was PGE's current value--according to the Texas Raiders, it's "once in a franchise" low. If ever there was a time for the city to buy PGE, this appears to be it.

    I appreciate your effort to keep the city's interest in PGE on the table, Commissioner. Though you've been occasionally demonized by the Brainstorm NW types, you've been consistent in keeping the interest of the people at the fore, and in trying to make the process transparent. Thanks.

  • Tom Civiletti (unverified)
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    I have not seen anything making a strong argument that electric power can be delivered efficiently under free market conditions. Even given the drawbacks of private regulated monopoly utilities, they can, under the right circumstances, deliver reliable, reasonalbly priced power. I cannot, however, see a way for PGE, coming from where it is, to do this under private ownership of any sort. The choice now is public ownership or disaster for ratepayers and our economy.

    Dan Meek has tried to warn folks about the risk of PGE's most profitable assets [wholesale transmission and hydroelectric facilities] beings sold off. This would allow the rump utility to demand much higher rates from OPUC. Another bankruptcy would not be unlikely under private ownership. If Congress repeals PUHCA [not unlikely, given Repubican dominance of the federal government] selling off plum assets may be possible even without a bankruptcy.

    This would cost Oregon dearly. The only way to effectively prevent it is public ownership. While I like the PUD format, and a service area wide PUD would make the most sense, CoP is able to move the quickest if the necessary political will develops. Sten and Leonard say they are ready to move. Will the recently leaked TPG document motivate Potter or Adams to back condemnation? It should. I fear that Saltzman's careful nature would preclude him ever supporting such a bold step.

    I do hope that board of directors representation of ratepayers outside the city limits will be strengthened. We don't need another wedge driven between urban Oregon and the rest of the state. What do you think, Eric, a little more say for us farmers of soil furrow and silicone chip?

  • Steve (unverified)
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    OK, Mr Civiletti, how about TPG and the public ownership plan fall thru. PGE goes and issues bonds to pay off the debt to Enron/its creditors. They then use their 10% profits to pay off these bonds.

    This is how utilities have financed themselves for a long time and successfully. Again, you assume a public owned utility will be better run. Mr Sten has no experience at all in this. You can keep ignoring the wonderful work they did at the Water Bureau, but the facts speak for themselves as to our high water rates. The people running PGE do have experience.

    If rates are an issue, then lets put some teeth (and good auditing) into the PUC. The CoP owning this will turn it into one big tax vehicle and not improve anyone's service. At least what I can tell from Mr Sten's short analysis.

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    Erik, I'm not "jibing." I'm concerned that the city's "operator" will turn a handsome profit, and I don't like Portland taking the lead (and the risk) and then handing the company off to some group run by developers from Lake Oswego and Tigard.

    But if the only two choices are Texas Pacific or public ownership, I came over to the public ownership side a while ago.

  • Tom Civiletti (unverified)
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    If TPG fails, Enron will likely distribute PGE stock to creditors, or so it has stated. PGE has little to say about this. PGE does not own PGE. The creditors are mostly the banks that backed Enron and took part in the scams. They want their money back, not what is best for PGE ratepayers or employees.

    There is no reason that the technical people who run PGE now would not continue to do so under city ownership. Now, the big wigs like Peggy would unlikely work at prevailing public sector wages. I say good riddance. If you look at industry wide stats, you see that publicly owned power is cheaper and more responsive to community needs than the privates.

    Both private and public entities suffer snafus. Why be transfixed by the CoP water bureau problems? Well, of course, the news media was all over it. How about PGE's billing computer system fiasco? Oh, you missed mention of that one? Maybe it was covered on the back page of the Big O business section, maybe not.

    Putting teeth into the OPUC would be about as likely as fully funding the Oregon Health Plan and cutting K-12 class size to 20 students, if you get my drift.

  • Scott Forrester (unverified)
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    There is no reason that the technical people who run PGE now would not continue to do so under city ownership. Now, the big wigs like Peggy would unlikely work at prevailing public sector wages. I say good riddance. If you look at industry wide stats, you see that publicly owned power is cheaper and more responsive to community needs than the privates.

    Good point here Mr. Civiletti.

    I would add that all of the union utility workers with the International Brotherhood of Electrical Workers will be glad to work for Portland's new municipal utility. Of IBEW's 1,000's of local worker's, I understand that over 50% of these union members already work for publically-owned utiliies (P.U.D.'s & Muni's) while making comparable wages and benefits! There is the talent to maintain reliability.

    We only need to now change to public ownership.

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    Ideally, COP would buy PGE and then transfer it (with at a markup to compensate for its cost and time) to a regionwide PUD, which could be created by voters or by the Legislature. Under the PUD, all voters within the PGE service territory would vote on a 5-person board of directors, which is how all other PUDs in Oregon are governed under ORS Chapter 261.

    But in other cases where city-owned utilities overflow the city boundaries, it is hard to find complaints from the disenfranchised. Nearly half of Tacoma City Light's customers are not located within the city limits, and they have no official say in the utility's policies or operation and no vote on the directors or on the choice of city officers. The TCL manager told me last year that they receive no complaints about this. In fact, surrounding communities often ask TCL to further expand to take them in (and away from Puget Sound P&L, the state's largest private utility).

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    Hey, it's Dan Meek! Cool.

    I say CoP all the way. To heck with the 'burbs. Let them keep voting for their Measure 37s, and paying the CoP for power.

  • the prof (unverified)
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    Erik,

    Two comments. First, you write I think we need a public utility. It is the only rational answer to an era of speculators buying local infrastructure and ripping us off. Isn't Enron enough?

    Isn't that a bit misleading? The "era" of speculation started with poorly conceived national electric market deregulation. With the collapse of Enron, and newly revived regulatory oversigh, that "era" is now dead. There weren't calls for public ownership pre-Enron, and am not clear why public ownership is superior to the sort of entity that PGE was before being bought by Enron.

    You also write: I've tried to come up with a strategy that is acceptable to the people who will be affected by the utility. ... Why don't we have some real discussion of the pros and cons of how to set up a public utility rather than all the jibes.

    That's a nice attempt to redirect the agenda on your terms -- "let's discuss how to set up a public utility." But the core issue is whether a public utility is the best solution at all, isn't it?

    You say you've tried to craft a strategy that best serves the ratepayers. Did that include a comparative consideration of non-publicly owned alternatives?

    I'm not sure how I feel about public ownership. I am very suspicious of TPG. But I am also suspicious of the PUD option when it doesn't seem like all the options have been fairly compared.

    As I suggested in a previous post, I would like to see a non-partisan, outside group of experts evaluating the various options for the citizens. Hello? Oregonian?

  • Ernest Delmazzo (unverified)
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    First off, thanks to Dan, Erik and Tom. You're especially well informed and have done much to educate the public on this issue.

    In addition to the known negatives, there are potentially other serious consequences if PGE is sold to Texas Pacific. Among these are:

    1) Oregon PERS has $300 million in the fund Texas Pacific will be using for the purchase. CalPERS is also heavily invested. If a problem arises, it will pit public employees against ratepayers. In a bailout, all Oregon taxpayers could conceivably suffer.

    2) In all likelihood, ratepayers will continue to pay state and federal taxes through their bills ($92.6 million annually) yet it’s likely no or little taxes will continue to be paid.

    3) The sale adds $707 million in new debt to the $1.1 billion of existing PGE debt. (Data from May 2004 which might have changed slightly) This is a highly-leveraged buyout.

    4) Repeal of Public Utility Holding Company Act (PUHCA) will weaken regulatory oversight by the PUC.

    5) Other legislation could conceivably cause much greater harm than PUHCA repeal such as allowing the piecemeal sale of PGE’s assets. (i.e. Montana Power) If its transmission and generation assets are sold out from under state rate regulation, PGE's value jumps to as much as $5.0 billion. It cost ratepayers of California’s PG&E $5.27 billion in what could be described as extortion money after the U.S. District Court for the Northern District of California held that PG&E could use the federal bankruptcy process to transfer its generation and transmission assets out from under state rate regulation. See http://www.cheappower.org/pg&e.htm and http://www.cheappower.org/montana_power.htm.

    6) Texas Pacific Group is a private company, exempt from SEC or any other regulatory scrutiny. This means even less oversight than Enron..

    There’s actually a lot more to be worried about. Visit http://www.cheappower.org.

    "Generally speaking, you like to dance with the girl that brung you, and if you can’t sometimes you have to shoot her." - David Bonderman, Texas Pacific chief, commenting about corporate buyouts.

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