February 6, 2005
The last thing Oregon needs is a speculator owning the state's largest electrical utility, ratepayer groups opposed to Texas Pacific Group's attempt to buy PGE say.
"We haven't heard of any proposals that are worse than TPG's, and it's hard to think of one," said Bob Jenks, executive director of the Citizens' Utility Board of Oregon, a consumer watchdog group.
Opponents of the buyout are troubled by Texas Pacific's strategy of buying companies that it considers undervalued and then selling them in five to seven years to reap a profit. Investor-owned utilities traditionally have kept assets for decades, made long-term investments and slowly accumulated profits.
This is a new type of utility deal for Oregon -- and one reason why it has been so polarizing.
Texas Pacific's business model clashes with the best interests of ratepayers
Buying PGE for the sole purpose of eventually selling it, or spinning it off in an initial public offering, is a major concern for the buyout's critics. They worry that Texas Pacific -- as an owner that isn't in it for the long haul -- would skimp on maintenance and other investments in PGE's infrastructure.
"It turns the investor-owned utility into a commodity to be bought and sold," said Ken Canon, executive director of Industrial Customers of Northwest Utilities. Industrial electricity users, who sometimes make investments based on 20- to 30-year timelines, dislike the uncertainty associated with the deal, he said.
"This kind of transitional stuff is very disruptive to the utility," Canon said.
The deal's opponents also warn that the highly leveraged buyout will put financial pressure on PGE. The utility's prospective buyers will need about $1.47 billion to fund the purchase price and fees. In addition, Oregon Electric would assume $1.1. billion in PGE debt.
Servicing the debt would give PGE an added incentive to keep its rates high, critics of the deal say. A downgrade of PGE's corporate- credit ratings is another possible outcome for taking on more debt, they say.
Don't bet on PGE remaining a local company for long
Texas Pacific's endgame for PGE likely would mean the end of PGE as a company with local headquarters, said CUB's Jenks. Although Texas Pacific officials have said that an initial public offering would be the preferred exit strategy for PGE, Jenks said he doubts that would be the case. A more likely scenario is selling PGE to a national or international company with headquarters elsewhere.
One Texas Pacific analysis suggested that it could earn $200 million to $400 million more by selling PGE rather than spinning it off as an initial public offering.
Local control is an illusion
The deal supporters tout the prominent businesspeople and community leaders who would be part of Oregon Electric Utility's board. But critics of the buyout say Texas Pacific can overrule the local board on major financial decisions, such as when and how to dispense with PGE.
"We believe local representation does not equal local control," Julie Brandis of Associated Oregon Industries said at a recent state Senate hearing. "This case will decide if net benefits and public interest really mean something."
The rate credit is inadequate
Staff members at the Oregon Public Utility Commission have recommended a $75 million rate credit. The Industrial Customers of Northwest Utilities wants a $97 million rate credit. The buyout backers, however, have stayed set on $43 million.
The alternatives are better
CUB's Jenks said Enron's plan to distribute PGE stock to creditors essentially would return PGE to its pre-Enron days.
Once again, PGE would become a Portland-based, independent company. Its stock would be listed on one of the major stock exchanges.
"We think that's an OK outcome," Jenks said.
The city of Portland's plan to buy PGE was worth investigating, Jenks said, if it could be structured more as a regional utility. The Industrial Customers of Northwest Utilities has studied various public purchase options for several years, but it never has endorsed the city of Portland's plan.
Ratepayers pay for a tax deduction
The result of breaking PGE's ties to Enron will be taxes for Oregon's general fund as well as the federal government.
The deal's opponents, however, say that the holding company Oregon Electric would be entitled to take an income-tax deduction on loans used to purchase PGE, reducing the corporation's tax liability. The deduction on interest expense would start at $15 million per year.
Charges for taxes are embedded in rates. It means that ratepayers, in effect, would be charged for taxes that Oregon Electric has no intention of paying.
Conflicts between the interests of retired public employees and ratepayers
Critics worry that the deal could someday put the Oregon Public Utility Commission in the difficult position of balancing the interests of the Oregon Public Employees Retirement System with those of ratepayers.
During the past decade, $900 million in PERS funds has been invested in Texas Pacific. In 2002, PERS invested $300 million in the acquisition fund that has backed the attempt to buy PGE.
What happens if Texas Pacific decides to sell PGE to an out-of-state corporation and makes the argument that the sale would provide a big return for the PERS fund? Ratepayer groups, who want to keep PGE an independent, Oregon-based company, would have to argue that what's good for PERS may not be good for ratepayers.
The PUCHA pretzel
A federal law passed in 1935 has encouraged long-term investments in regulated utilities and discouraged speculators. The law, the Public Utility Holding Company Act, or PUCHA, was created to curb abuses by huge utility-holding companies.
PUCHA was an issue for PGE's prospective buyers.
In response, Texas Pacific created a local holding company, Oregon Electric Utility. The approach, known as the "PUCHA pretzel" allows the deal to move forward without running afoul of PUCHA.
"You have a business model that should not be allowed, that has to go through contortions to pretend it's something that it's not," Jenks said of Oregon Electric. That alone should be enough for the PUC to reject the deal, he said.
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About Texas Pacific Group
Texas Pacific Group is one of the world' s largest private investment companies, with more than $13 billion of assets under management. Founded in 1993, Texas Pacific pursues investments mainly in the United States and Europe.
The company targets both publicly traded companies and privately held businesses for its investments. It has become known for investing in troubled companies that other investors shun.
Texas Pacific is not a holding company or a conglomerate. Instead, each of the companies it invests in is separately capitalized, overseen by a board of directors and managed by a separate team.
Texas Pacific has placed investments in more then 50 companies. The company's selection of investments runs the gamut, including technology and telecommunications, consumer products, health care, airlines, oil and gas, food and beverage, and luxury goods.
David Bonderman, Texas Pacific's founding partner, has described the proposed PGE buyout "as a low-return deal."
The company has offices in London, San Francisco, Fort Worth, Texas, and Washington, D.C. Among those investing in Texas Pacific Group are public and private pension funds, banks, large international financial institutions and insurance companies from North America, Europe and Asia.