Oregonian — Business News
Power struggle for PGE's future
GAIL KINSEY HILL
A few weeks ago, Portland
City Commissioner Randy Leonard met privately with top executives of Portland
and uttered the word they didn't
want to hear: "condemnation."
His insistence that the city might
launch what amounts to a hostile takeover of PGE caught executives Peggy Fowler
and Fred Miller "completely off guard," Leonard
"But I'm dead serious," he said. "If
they think I'm bluffing, it's to their detriment."
Leonard has taken the lead in dropping not-so-subtle hints that the city might
exercise its powers of eminent domain as a way to wrest control of PGE from its
parent, bankrupt Enron, and protect ratepayers. Fellow commissioner Erik Sten,
long an advocate of government-owned utilities, also is leaning toward the option.
Mayor Vera Katz hasn't ruled out the possibility.
The ramped-up talk of condemnation came after July 11, when Enron filed a Chapter
11 restructuring plan with few details about the utility's future ownership.
It has touched off powerful political forces, sent proponents and opponents scrambling
for lawyers and strained relations between City Hall and PGE, Oregon's largest
utility and one of Portland's most influential businesses.
Recent comments by PGE that condemnation might force it to move its headquarters
out of downtown Portland only increased the tensions.
State statute and the city charter give Portland powers to condemn utility assets
both inside and outside city boundaries. Although several communities have exercised
their condemnation authority on utilities, the state statute has not been used
on this scale.
PGE executives are adamant that condemnation would prove disastrous for the
community. They contend the process would be long, expensive and contentious.
They say the results could split up a system covering eight counties, raise rates
for the utility's 743,000 customers and harm an economy struggling with a recession.
"With condemnation no one benefits," Miller
Commissioners Leonard and Sten say Enron's treatment of PGE could prove worse
than the disruption of condemnation. They contend that public ownership would
lower rates, guard against a piecemeal breakup of assets and create a governance
system more responsive to local concerns.
They haven't yet advocated condemnation, they cautioned. Instead, they support
looking further into the possibility, analyzing the pros and cons and gauging
"I'm certainly open to it, but I'm not there yet," said
Sten, who took the early lead in advocating a public purchase of PGE.
Options narrow The city has been trying to buy PGE for almost a year, but negotiations
broke off more than a month ago. Confidentiality agreements prevent city officials
and Enron from discussing details, but Enron's interim Chief Executive Stephen
Cooper confirmed negotiations had faltered.
Sten said the rejection pushed him
to consider "more extreme choices."
The reorganization plan laid out two options for PGE: Enron would either sell
PGE or it would distribute newly issued stock to creditors.
This wasn't news to city officials, who for at least two months had known of
Enron's two-pronged strategy. But they had hoped for more detail, even an indication
that Enron would consider the city as a potential buyer of PGE assets.
Sten has grown increasingly suspicious of the stock distribution plan, which
he claims could saddle the utility with liabilities from lawsuits and regulatory
penalties and force rate increases for PGE customers.
"I think they're up to no good," Sten said of Enron's intentions. "But
we need to prove it."
Condemnation would allow the city to gain control of the utility's assets, but
not its liabilities, Sten said.
"In this context, condemnation becomes more attractive," he said. "It
becomes a surprisingly clean way to get out from under liabilities."
Miller called the city's concerns "mystical."
All lawsuits and potential hits to the utility's bottom line are listed in financial
documents filed with the federal Securities and Exchange Commission, as required
by law, he said. If necessary, PGE would set aside reserves to cover unexpected
costs, such as those associated with uncollectible debts or unfavorable court
rulings. The money would come out of shareholder equity and not affect rates,
"The implication is there's something out there we aren't talking about,
and that's not true," he said. "You have to have little confidence
in existing people and institutions to get to that conclusion."
Mayor, execs meet
PGE executives Fowler and Miller met with Katz on Monday to explain Enron's
reorganization plan and try to calm anxieties about any subversive intentions.
Katz said Tuesday that she remained concerned about the potential liabilities.
In the meeting, she asked if PGE officials would answer a series of questions
submitted by the city.
Fowler, who described the meeting as cordial, agreed, although she thinks the
city's worries are overblown.
"It doesn't do any good to be fighting with each other," Fowler
Katz, too, is softening her language from past statements.
"They're not the enemy," she said of PGE. "Our
concerns should be theirs."
Fowler said Katz assured her that condemnation was not in anyone's best interest.
In a telephone interview with The Oregonian, Katz declined to discuss her position
"I don't want to go there," she said. "That
conversation right now creates far more attention, far more finger-pointing,
far more rhetoric than
Exploring the process Yet, the talk hasn't stopped. And it's prompted both city
and county officials to look more closely at precisely how Portland would initiate
a municipal condemnation and the issues certain to arise.
To get the process going, the City Council would pass an ordinance explaining
the need for a public takeover. The city would appraise the utility's assets,
set what it considers to be a fair market price and submit the offer to the owner,
Enron and PGE could then raise objections to details of the acquisition and
to the price. A circuit court would preside over any objections Enron might raise
regarding the details of the proposed acquisition. If the parties couldn't agree
on a price, a jury would make the final ruling.
The breadth of the city's authority to condemn remains far from clear, and litigation
is certain, say attorneys familiar with condemnation issues.
Condemnation of PGE's distribution
system -- the network of poles and wires that sends electricity to customers'
homes and businesses -- is a "no brainer," said
Tim Sercombe, an attorney with Portland's Preston Gates & Ellis.
From there, questions arise. The city might run into legal problems condemning
gas-fired power plants, for example, attorneys say. Legal challenges also could
erupt if the city tried to take over hydro plants, some of which are partially
owned by Native American tribes, or if the city tried to assume some of PGE's
long-term electric power contracts.
"No one questions it can condemn some of the pieces," said Greg Mowe,
an attorney with Portland's Stoel Rives who has provided legal advice to PacifiCorp
on condemnation issues. "But the whole system? There are some real issues
PGE recently retained Mowe to provide advice on condemnation issues, PGE officials
Determining value Sercombe, of Preston Gates, said the valuation process could
prove even more complex.
PGE's book value is close to $2 billion, according to the most recent estimate
by state regulators of the depreciated value of the utility's properties. Fair
market value could take the price to $3 billion, 11/2 times book, attorneys said,
but the appraisal process is far from clear-cut.
"It could be a long period of valuation," Sercombe
Sten acknowledged the process could take years, but he's not deterred by the
"We've got the charter, the statutory authority and the political makeup
to win this fight," he said. "We believe we have the authority to condemn
the whole system."
He said the city wouldn't go ahead with condemnation if such a takeover broke
up the system or if it increased rates for PGE customers.
The city recently hired Henry Lorenzen, a Pendleton attorney experienced in
condemnation litigation, to aid its analysis, Sten said.
Lorenzen's former clients include the city of Hermiston, which successfully
took over the portion of PacifiCorp's electric distribution system that lay within
city boundaries. Mowe represented PacifiCorp.
While PGE is worried about the city's plans, its immediate attention is focused
on a separate condemnation effort -- a request on the Nov. 4 election that asks
Multnomah County voters to form a peoples' utility district to operate PGE.
PGE already has begun an ad campaign condemning condemnation, and it is channeling
money into Citizens Against the Government Takeover, a committee expected to
launch attacks next month on the PUD measure.
Dan Meek, a key backer of public power, on Tuesday called on the city to immediately
approve a condemnation ordinance. Although he supports the public utility effort,
he said the city should move more quickly to protect ratepayers from what he
thinks are Enron's plans to sell off pieces of the system.
Gail Kinsey Hill: 503-221-8590, gailhill[AT]news.oregonian.com