The unasked question
The Oregonian ran a pretty big spread yesterday comparing the competing takeover plans for Portland General Electric. In particular, they held up side by side as potential purchasers the City of Portland and a possible new public entity to be created by the Oregon Legislature.
There's a lot of good food for thought there, but a key question didn't get asked very forcefully. That has to do with operations. Let's start with the basics: If PGE is publicly owned, who will actually operate the electric utility? Not the City of Portland or the new state-created public body. Under both plans, a private company will handle the day-to-day functions of the power business.
Proponents of the "public" power plans are slow to mention this truth: The shareholders of that private company are going to make a lot of profit.
Sure, there will be competitive bidding for that contract, but any electric utility operator putting in a bid will demand cost plus profit. It's likely to be a long-term deal. And the incumbent will have a major leg up on any bidding come renewal time. The slogan that private profit will be eliminated is simply misleading.
Of course, there will be additional private hands in the public pockets if either plan goes through. How much profit would Goldman Sachs earn from the sale of the bonds? How many millions would lawyers be paid to cut the myriad deals on the city's or state entity's behalf? The city has $2 million in its current budget for these transaction costs. At last report, the city had already spent around a million more, and so we're headed into $3 million territory, and so far, all we've done is make a hostile bid.
But most importantly, how many millions of dollars in private profit will the operator of the "public" utility earn, year after year? That's the $2.5 billion question that isn't being asked often enough.
To answer this question, it would be nice to see a comparable public-private hybrid operation to use as a model. But I don't know if one exists. Has this kind of arrangement ever been tried before?
One nice thing: No more "phantom" taxes, charged to ratepayers but not paid to the state. But will the private operator be able to pull a similar stunt in the "cost plus" contract?
The city tells us not to worry about these things. There will be plenty of bidders for the operations contract, and none of the bidders will want too much profit. In this, of course, the commissioners are just speculating, and repeating what Goldman Sachs has told them. High-priced consultants have grossly erred in predicting similar results for the city before.
Is PGE the next PGE Park -- an unmitigated financial disaster for Portland taxpayers? We've got Erik and Tram Adams back at the table, just as they were with the stadium, only now there are lliterally billions at stake.
I'm glad that the robber barons of Texas Pacific have been sent on their way. But at the thought of the city taking over, as a taxpayer I'm very afraid.
| Posted at 2:45 PM | Permalink |
|
Comments (10)
Good points Jack. We also need to be very aware of the City's unwillingness in the past to reduce or eliminate the "franchise fee" it charges existing municipal utilities like the water bureau. Multiple blue ribbon groups have called for eliminating it, but the requests fall on deaf ears at City Hall.
The article also failed to include the two other options in the comparison: (1) distribution of the stock to creditors; or (2) sale to a mutual benefit company. At least Oregon Mutual has said what it would do with profits: distribute them to the ratepayers who would be the shareholders under this model. Ratepayers need comparative analysis of all the options on all the key criteria.
Posted by gail achterman | April 18, 2005 7:11 PM
Gail, great to hear from you. Please keep helping us cut through the fog on this issue.
I think the distribution to creditors is a good idea, but in a year or two, there'll likely be another private suitor with a tender offer, and we'll be right back to where we were.
Of course, any time it wanted, the legislature could pass new rules to prevent the abuses highlighted under Enron ownership, and then the new private owner would have to play by those fairer rules. But no one seems interested in that at the moment.
Posted by Jack Bog | April 18, 2005 7:57 PM
Gail brought up the points I was going to make, but I still have a question:
What makes you think there will be competitive bidding for a private contractor to run the utility? Don't you think there is probably already an Anointed Contractor?
Posted by Mac | April 18, 2005 8:32 PM
Right on Mac. I'm sure they've already exSTENded the welcome hand.
Posted by rj | April 18, 2005 8:50 PM
Are Homer Williams and Gerdling/Edlin in the electric business now?
Posted by Jack Bog | April 18, 2005 9:25 PM
The answer is to turn this over to a small, private company focused ONLY on running power in Oregon. That is, don't send the money to Texas without paying taxes in Oregon.
Gail - "At least Oregon Mutual has said what it would do with profits: distribute them to the ratepayers who would be the shareholders under this model."
Where does the money for repairs/expansion/upgrades come from? Or is that money deemed 'surplus', and not 'profit' (or other sleight of hand)?
Jack - "The shareholders of that private company are going to make a lot of profit."
Better that, then the $30-million fiasco of the Water Bureau. If someone can pull it off, they should get paid. It's not like Oregon politics has any ploticians with the ability to do better.
Jack - "it would be nice to see a comparable public-private hybrid operation to use as a model."
That sounds like, "Have competent (private sector) people run the show for no profit, then hike taxes out of the blue when the bills come due." A nice idea, but not workable.
Posted by Scott | April 18, 2005 9:47 PM
The answer is to turn this over to a small, private company focused ONLY on running power in Oregon.
There's no way to make this happen. Any private company is subject to a takeover these days. You can try to keep PGE local, but as Fred Meyer, Pacific Power, etc., have shown, it doesn't usually turn out that way.
Posted by Jack Bog | April 18, 2005 10:06 PM
Jack - "There's no way to make this happen."
I agree with your sentiment - but you and I are smarter than than that - you yourself mentioned a public/private partnership.
How about getting a Board of Directors from private companies (screw elected officials) to step in and appoint some private-sector folks to manage the mess?
A small percentage of profits would go to the appointed management folks. And the vast remainder would pour back into the system for upgrades and repair - and yes, rebates to consumers if need be*. I have used this system at work, and it lights a fire under the tush of the folks involved.
* - Come rebate time, I'd prefer a winter-time fleet of Power-Restoration Repair Staff & Equipment than a rebate. Then again, I spent 10 days in The City's Worst Street™ during a winter storm in the '70s.
Posted by Scott | April 18, 2005 11:01 PM
"We also need to be very aware of the City's unwillingness in the past to reduce or eliminate the "franchise fee" it charges existing municipal utilities like the water bureau...the requests fall on deaf ears at City Hall."
In fact, last year the council passed, on a 3 to 2 vote, a reduction in the franchise fee on water and sewer from 7% to 5%.
Posted by Randy Leonard | April 18, 2005 11:13 PM
The city touts AAA bond rating and exemption from federal tax as the key ingredients to pulling off the PGE deal and assuring the ratepayers a break. Their assumption is that they can contain costs, pay off the bonds with operating profits and still reduce rates. A tall order, in my opinion.
Theoretically, these same financial advantages exist for BES and the water bureau. The combined water and sewer bill I received last week for a one bathroom home on a standard lot was just short of $180.00, and that's during the time of the year when there is no lawn watering. What's wrong with this picture?
The problem is, of course, the "big pipe". Since most heavy, industrial water users have fled, the rest of us are picking up the tab. Now, think about PGE. If the board of governance of this proposed public-private consortium determines that we need geothermal or wind generation, and embarks on infrastructure improvements to attain that goal, then we will have another "big pipe"; this time in the PGE system. That would throw promised rate relief right out the window.
Posted by Dave Lister | April 19, 2005 8:40 AM