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The Oregonian — Business News

Numerous PGE lawsuits raise fears



Tucked within Enron's bankruptcy reorganization plan is a list of the lawsuits facing Portland General Electric, Oregon's largest utility and an Enron subsidiary since 1997.

The entries go on for five pages.

Allegations of fraudulent electricity trades. Of unfair rate increases. Of ruined retirement plans.

Some don't include a specific cash demand. Some seek more than $100 million.

The lawsuits are so numerous that consumer advocacy groups and public officials have become increasingly worried about whether an onslaught of negative rulings could cripple the utility's finances and force rate increases.

Assumptions about the potential liabilities lie at the heart of increasingly heated arguments about PGE's future. Most dramatically, they pit the "stay-calm" urgings of utility officials against the "head-for-cover" warnings of Enron critics, who include three Portland city commissioners and Mayor Vera Katz, who support a public purchase of PGE.

Few are predicting a worst-case scenario capable of driving PGE into bankruptcy. But some, led by Commissioners Erik Sten and Randy Leonard, warn that ratepayers could bear the brunt of any adverse judgments, a dismal prospect to those still smarting from the 30-plus percent increases of 2001. They argue that city condemnation of PGE assets might be the best way to jettison the liabilities.

PGE officials say the city and other detractors are unnecessarily distressed by the lawsuits.

"We think our exposure is very, very small," said Jim Piro, PGE's chief financial officer.

In recent weeks, PGE's chief executive officer, Peggy Fowler; executive vice president, Fred Miller; and Piro met with Katz and city commissioners to calm concerns about the potential liabilities. But the efforts only stirred the controversy, with Portland officials demanding more information and utility executives arguing that disclosures have been ample.

Size of liability unclear The liability debate rages, in part, because the potential costs of the lawsuits are almost impossible to measure.

The legal outcomes are uncertain, and the monetary demands are often vague. Some of the suits capable of delivering the heaviest hit to PGE ask for treble damages, or three times the amount a court normally might award, but fail to specify any amounts.

"It's hard to gauge which ones are more likely to succeed, which ones less," said Jason Eisdorfer, an attorney with the Citizens' Utility Board, a group that represents the interests of utility residential ratepayers. "It's even harder to put a price tag on it."

PGE lists pending litigation in financial documents filed with the Securities and Exchange Commission but doesn't include estimates of potential costs. The company does put aside reserves when it thinks out-of-the-ordinary expenses are likely. The documents show PGE has put aside $113 million in reserves relating to the Enron bankruptcy and energy sales.

"Litigation is a fact of life," said Lon Peters, a Portland economist. But he said the past two years have proved extraordinarily contentious. "There's been an explosion of litigation and regulatory action associated with the market turmoil," he said.

Visible entanglements Enron, engulfed in bankruptcy and litigation of historic proportions, has made the legal entanglements of subsidiary PGE all the more visible to the public and possibly more onerous.

"Clearly, PGE's litigation situation is made worse because Enron owns it," said Jonathan Ater, a Portland attorney representing the city on PGE matters.

Miller suggests that commissioners critical of PGE are exaggerating the lawsuits' threat as a way to strengthen efforts to acquire the utility, through a recrafted bid to Enron or condemnation. PGE opposes condemnation.

Sten said discussions with attorneys and financial experts have only deepened his concerns about PGE's financial shape, pushing him closer toward the possibility of condemnation.

"These liabilities are real," he said. "I don't know of anyone outside PGE who isn't worried about them."

Ater suggests that PGE could weather judgments of about $50 million spread over several years. But "once it gets in the hundreds of millions, it's a serious problem for all of us," he said. "At the extreme, it's a nuclear bomb, and PGE will be in bankruptcy itself."

Piro, the chief financial officer, said even if judgments reached such worst-case scenarios, PGE's equity and borrowing accounts could take the hit.

"We have the ability to absorb at least that much, and more, without affecting operations or customers," he said.

Financial condition Businesses and agencies that analyze PGE's finances have given it mixed reviews.

The three major credit-rating agencies have rated PGE's debt investment grade. Fitch Ratings had lowered PGE's senior secured debt to junk-bond territory for 10 months, but recently raised it back to investment grade -- noting improvements in the company's legal situation.

Nevertheless, these rating agencies have expressed concerns about entanglements from the Enron bankruptcy and federal investigations into PGE's electricity trading practices during the energy crisis of 2000-01.

Financial and energy experts say PGE's liabilities probably are hindering Enron's ability to sell the utility, to the city or a private bidder.

"Any buyer should take these liabilities seriously," said economist Peters, who heads Northwest Economic Research, a firm that in February completed an analysis of a public purchase of PGE.

PGE's finances also currently exceed the standards set for the company by the Oregon Public Utility Commission when Enron bought the utility in 1997.

The PUC required the utility to maintain common equity of at least 48 percent of total capitalization. The provision is designed to prevent Enron from draining off the utility's cash through large dividend payments or other types of distributions.

The proportion stands at 53 percent, according to PGE's latest quarterly financial report.

PGE's rate schedule, approved by the utility commission, allows a return on equity of 10.5 percent, or $95 million. It made $66 million last year, falling short of expectations primarily because the state's lackluster economy dragged down energy use.

Short-term borrowings and cash in the bank give PGE a cushion of another $300 million, Piro said.

"We've intentionally strengthened our balance sheet to take care of the unexpected," Piro said.

Protecting ratepayers Sten says his biggest worry is that huge liability costs will force PGE to raise rates to its more than 740,000 customers.

Ultimately, the PUC is responsible for making sure customers receive "fair and reasonable" rates.

City commissioners and PUC staff analysts say most of the lawsuits and investigations hanging over PGE cannot be linked to prudent utility operations and therefore cannot affect future rate-making. Instead, shareholders would bear the costs, through reductions in dividend payments, for example, or in a draw-down of retained earnings.

"Generally customers aren't responsible for fines or penalties incurred by the utility," said Paul Graham, lawyer for the PUC. "If it has to do with Enron wrongdoing or vicarious PGE liabilities, the commission's going to say 'no.' "

Critics insist that any hit to shareholders also nicks consumers because electricity rates include allowances for profits -- in PGE's case, a 10.5 percent return on equity.

"It's inevitable that PGE's customers are going to be affected by all this," Ater said. "We just don't know by how much."

PGE officials note that the utility is a business enterprise allowed by regulatory law to earn a fair return.

Eisdorfer, attorney for the Citizens' Utility Board, said he doesn't begrudge PGE its profit motive. He does, however, look to the PUC to make sure "imprudent" costs fall to shareholders, not consumers.

"If the PUC is worth its existence, when push comes to shove, it will act appropriately," Eisdorfer said.

Here, Eisdorfer has another worry. The three-member PUC is quickly dwindling. Longtime Commissioner Joan Smith retired in May, and Chairman Roy Hemmingway has resigned, effective Sept. 1. If replacements aren't found soon, regulatory action could grind to a halt.

PUC appointments are made by the governor and confirmed by the Senate. Gov. Ted Kulongoski is expected to announce two new appointments this week.

The refilled commission immediately will face a number of challenging regulatory issues, Eisdorfer said, but PGE's extrication from Enron and the slew of lawsuits easily could prove the most formidable.

"The PUC will have to earn its colors on this one," he said.

Gail Kinsey Hill: 503-221-8590, gailhill[AT]

[Read Acquisition by Public v. Bankruptcy Path]


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