(ACQUISITION BY PUBLIC)
v.
PLAN B (BANKRUPTCY PATH)
By: Attorney
Dan Meek
July 22, 2003
TABLE OF CONTENTS
PLAN B: THE BANKRUPTCY PATH
1. THE OREGON PUBLIC UTILITY COMMISSION CANNOT STOP THE SALE OF PGE'S
ASSETS TO COMPANIES THAT ARE NOT SUBJECT TO REGULATION BY THE STATE OF
OREGON.
2. PGE'S HYDRO AND
TRANSMISSION LINE ASSETS COMMAND A FAR HIGHER PRICE, IF SOLD OUT FROM
UNDER STATE REGULATION.
A. HYDROPOWER.
B. TRANSMISSION
LINES.
C. THERMAL POWER
PLANTS.
3. THE ENRON PLAN
OF REORGANIZATION INCLUDES AUTHORITY TO SELL PGE ASSETS INSTEAD OF
PGE STOCK.
A. THE "PGE TRUST" PROVISION.
B. THE "SALE TRANSACTION" PROVISION.
C. THE "TITLE TO ASSETS" PROVISION.
PLAN A: THE PUBLIC
ACQUISITION PATH
The
Enron Plan of Reorganization (July 11, 2003) ["EPOR" or "Plan"]
outlines several paths for the disposition of the stock or assets
of PGE. As Enron's major creditors include large Wall Street investment
banks (including J.P. Morgan Chase, CitiCorp, Goldman Sachs, Bank
of
New York, Barclays Bank, Credit Suisse First Boston, and many others),
it is safe to assume that the creditors will seek to maximize their
recovery of funds from the disposition of PGE stock or assets.
The EPOR would allow Enron and/or the creditors to break up and sell PGE's
assets in any fashion they may desire. To maximize the sale price, they
would have a strong incentive to sell PGE's most valuable assets (transmission
lines and hydropower facilities) out from under the regulation of any authority
of the State of Oregon, including the Oregon Public Utility Commission
(OPUC). This would likely increase the proceeds of the sale on the order
of $1-2 billion. This would also result in huge rate increases for PGE
ratepayers--approximately $300 million per year, if not more.
1. THE OREGON PUBLIC UTILITY COMMISSION CANNOT STOP THE SALE OF PGE'S
ASSETS TO COMPANIES THAT ARE NOT SUBJECT TO REGULATION BY THE STATE OF
OREGON.
The OPUC may wish
to prevent this from occurring, but the federal courts have consistently
ruled that,
since the U.S. Bankruptcy Code was amended
in 1978, no authority of state government can be invoked to stop a transaction
which is allowed in a plan approved by a U.S. Bankruptcy Court, even if
such a transaction would otherwise be prohibited by state law or subject
to veto or regulation by a state commission. The most recent case is In
re Pacific Gas & Electric Co., 283 BR 41 (ND Cal
2002)[1],
in which the U.S. District Court for the Northern District of California
overruled the
U.S. Bankruptcy Court and held that Pacific Gas & Electric Co. (PG&E)
could use the federal bankruptcy process to transfer its generation and
transmission assets out from under rate regulation by California. The U.S.
District Court held that "Congress intended expressly to preempt nonbankruptcy
laws that would otherwise apply to bar, among other things, transactions
necessary to implement the reorganization plan." 283 BR at 58. The
Court noted that Congress changed the Bankruptcy Code in 1978 to remove "the
ability of state regulators to veto reorganization of public utilities
in federal bankruptcy proceedings." 283 BR at
56.[2]
Various analysts estimated the
impact on PG&E's California ratepayers
of having the generation and transmission line assets sold out from under
state rate regulation. The Utility Reform Network (TURN), California's
largest ratepayer protection group, concluded that the selloff would increase
PG&E's charges to customers by $8.4 billion over a period of 12 years.
After the State of California and the California Public Utilities Commission
(CPUC) lost the case in U.S. District Court on August 30, 2002, they asked
the court to stay the order to allow them to appeal it. That motion was
denied on November 14, 2002. Faced with bad alternatives, the CPUC in June
2003 announced a settlement with PG&E, under which none of PG&E's
assets would be sold out from under state regulation. The catch: the settlement
calls for rate increases to PG&E's customers of $8.9 billion (according
to TURN) or $7.6 billion (according to the CPUC itself).
Thus, by threatening to use
federal bankruptcy authority to sell its valuable assets out from under
state rate regulation, PG&E is on the
road to gaining, through rates, essentially the same money it would have
realized by the proposed transfer of generation and transmission line assets.
2. PGE'S HYDRO AND TRANSMISSION LINE ASSETS COMMAND A FAR HIGHER PRICE,
IF SOLD OUT FROM UNDER STATE REGULATION.
A. HYDROPOWER.
PGE has over 500 MW of hydropower generating capacity on rivers in Oregon.
Under state rate regulation, PGE is required to sell the power these facilities
generate to PGE ratepayers at a low price, because the facilities have
a low depreciated book value (ratepayers having paid depreciation on these
plants for many decades), low fuel costs, and low operating costs. The
power produced by these plants (over 2,000 MWh per year) serves about 12%
of PGE's retail load (all PGE ratepayers). If these plants were sold to
companies that are not regulated utilities in Oregon (i.e., not PacifiCorp
or Idaho Power Co.), PGE ratepayers would lose the benefit of this low-cost
power and would have to replace it with power costing probably about 5
times more costly. The result would be a PGE rate increase on the order
of $100 million per year (based on the current price of natural gas, even
though long-term gas contracts are not available).
If sold as part of a regulated utility, the PGE hydropower facilities
are worth very little to a buyer. Conventional rate regulation allows PGE
to earn a profit on these facilities equal to only the authorized return
on investment times the depreciated book value of the plants. The depreciated
book value of PGE's hydro plants is only $130 million. With an authorized
return on investment of 9%, the allowed profit on those plants is less
than $12 million per year. If the buyer could sell the long-term hydropower
on the open market, however, it would expect to bring in revenue on the
order of $100 million per year or more. As the value of an asset can be
derived from its expected revenue, the value of the hydropower facilities,
if sold out from under regulation, would be the present value of a cash
flow of about $100 million per year.
Considering today's low interest rates (and consequently low discount
rate), that asset would likely command a price exceeding $1.5 billion.
On the other hand, as part of the regulated utility, the same asset would
be worth only about $180 million. It is not hard to imagine, then, that
Enron's creditors would prefer to have the hydropower assets sold out from
under state regulation.
B. TRANSMISSION LINES.
PGE owns two types of transmission lines. One set of lines is used to
bring power to the PGE service area from PGE power plants, although much
of that function is performed by the Bonneville Power Administration (BPA).
The other set of lines is PGE's 800 MW share of the Pacific Intertie transmission
system, which runs from The Dalles to the California-Oregon Border (COB)
near Malin. Let us examine only the Pacific Intertie transmission system.
If PGE's share of the Pacific
Intertie transmission system were sold to companies that are not regulated
utilities in Oregon (i.e., not PacifiCorp
or Idaho Power Co.), PGE ratepayers would lose the benefit of the net revenues
that result from PGE's use of these transmission lines to buy power where
is it cheap and to sell power where it is expensive. Although PGE generates
less than half of the power used by PGE's customers (about 19,000 MWh per
year), PGE typically sells to other utilities over 12,000 MWh per year.
It is able to do so, because it owns part of the "bottleneck facility" (the
Pacific Intertie transmission system) that connects the Pacific Northwest
and the Pacific Southwest. In the summer, power in the Pacific Northwest
(including Canada) is cheap (as that is when the rivers are running), while
power in the Pacific Southwest is expensive (due to increased load for
air conditioning). Conversely, in the winter power in the Pacific Southwest
is relatively cheap, because utilities can produce more power simply by
running their already-built thermal power plants. And winter power in the
Pacific Northwest is more expensive, because load increases for electric
space and water heating. Owning part of the constrained transmission system
between the regions enables PGE to make money both ways.
Most of the profits from these sales are credited to PGE ratepayers in
Oregon, as the Pacific Intertie transmission system has been in PGE's ratebase
for decades and is thereby considered an asset that constructively belongs
to ratepayers. In PGE's current rates, ratepayers are credited with about
$140 million per year.
Again, if sold as part of a regulated utility, the PGE share of the Pacific
Intertie transmission system would be very little value to a buyer. Conventional
rate regulation allocates the profits attributable to the Pacific Intertie
transmission system to PGE's retail ratepayers. The utility can earn only
its authorized return on investment times the depreciated book value of
the lines. The depreciated book value of all of PGE's transmission system
appears to be about $200 million. With an authorized return on investment
of 9%, the allowed profit on those lines is less than $18 million per year
(and that includes many more lines than just the Pacific Intertie transmission
system). If the buyer could use the lines to buy and sell power on the
open market, however, it would expect to bring in revenue on the order
of $140 million per year or more. As the value of an asset can be derived
from its expected revenue, the value of the Pacific Intertie transmission
system if sold out from under regulation, would be the present value of
a cash flow of about $120 million per year.
Considering today's low interest rates (and consequently low discount
rate), that asset would likely command a price exceeding $1.8 billion.
On the other hand, as part of the regulated utility, the same asset would
be worth only about $230 million. It is not hard to imagine, then, that
Enron's creditors would prefer to have the Pacific Intertie transmission
system assets sold out from under state regulation.
C. THERMAL POWER PLANTS.
On the whole, PGE's existing thermal power plants produce power at a cost
below that of long-term power purchases on the open market. The same analysis
applicable to PGE's hydropower facilities thus applies to PGE's thermal
power plants, although to a lesser degree (because the thermal plants have
higher depreciated book values and cost more to operate than the hydro
dams). Selling the thermal power plants out from under state regulation
may thus further benefit Enron's creditors and harm PGE ratepayers.
Although I have not yet quantified
the benefit or harm, the attached graph titled "Price of power from PG&E Generation Contract" illustrates
the difference between market price of power and the cost of power from
the existing power plants owned by Pacific Gas & Electric Company (PG&E).
The same analysis would be applicable to PGE.
3. THE ENRON PLAN OF REORGANIZATION INCLUDES AUTHORITY TO SELL PGE ASSETS
INSTEAD OF PGE STOCK.
While Enron and PGE executives have for 18 months insisted that Enron
would only sell PGE stock, and not PGE's assets, the EPOR provides otherwise.
It clearly authorizes Enron to sell off PGE's assets, in any of several
ways:
A. THE "PGE TRUST" PROVISION.
The Plan authorizes Enron to
create the PGE Trust and to transfer all of PGE's stock into the PGE
Trust. The PGE Trustee "shall manage,
administer, operate and liquidate the assets contained in the PGE Trust
and distribute the proceeds thereof or the Existing PGE Common Stock or
the PGE Common Stock, as the case may be." EPOR § 1.144 (emphasis
added). The "PGE Trustee" is Stephen Cooper, LLC, and the PGE
Trust Board is appointed by Enron, which can designate another entity as
the PGE Trustee, if it wishes. EPOR § 1.145.
The PGE Trust is one of the "Operating Trusts" established
by the EPOR, which sets forth the Purpose of the Operating Trusts as
follows:
20.2 Purpose of
the Operating Trusts: The Operating Trusts shall be established
for the sole purpose of holding and liquidating the respective assets in
the InternationalCo Trust, the CrossCountry Trust and the PGE Trust in
accordance with Treasury Regulation Section 301.7701 4(d) and the terms
and provisions of the Operating Trust Agreements. Without limiting the
foregoing, the Operating Trust Agreements shall each provide that the applicable
Operating Trust shall not distribute any of the InternationalCo Common
Stock, CrossCountry Common Stock or PGE Common Stock, as the case may be,
prior to the date referred to in Sections 28.1(c)(i), (ii) and (iii), respectively.
B. THE "SALE TRANSACTION" PROVISION.
EPOR § 1.175 defines "Sale Transaction" as:
One or more transactions jointly determined by the Debtors and the Creditors'
Committee, in their sole and absolute discretion, to sell all or a portion
of the issued and outstanding InternationalCo Common Stock, CrossCountry
Common Stock, Existing PGE Common Stock or PGE Common Stock or substantially
all of the assets of InternationalCo, CrossCountry or PGE, which transaction
or transactions, if determined to be made, shall be consummated on or prior
to the Effective Date. (emphasis added)
EPOR § 28.1 provides for the distribution of PGE stock to the creditors
(commencing sometime after December 31, 2004, and having no specified end
date), but § 28.1(c) then indicates that
in the event that a Sale Transaction has occurred prior to the Effective
Date [not earlier than December 31, 2004], the proceeds thereof shall be
distributed in accordance with the provisions of Section 28.1(a) of the
Plan in lieu of the Plan Securities that would have been distributed pursuant
to Section 28.1(c) . . . .
In other words, the EPOR allows Enron and the creditors to sell the assets
of PGE and distribute to the creditor groups the resulting cash instead
of PGE stock.
C. THE "TITLE TO ASSETS" PROVISION.
EPOR § 38.1 states:
38.1 Title to Assets: Except as otherwise provided by the Plan, including,
without limitation, Section 38.2 of the Plan, on the Effective Date, title
to all assets and properties encompassed by the Plan shall vest in the
Reorganized Debtors free and clear of all Liens and in accordance with
section 1141 of the Bankruptcy Code, and the Confirmation Order shall be
a judicial determination of discharge of the liabilities of the Debtors
and the Debtors in Possession except as provided in the Plan. Notwithstanding
the foregoing, the Debtors and the Reorganized Debtors, in their sole and
absolute discretion, may (a) encumber all of the Debtors's assets for the
benefit of Creditors or (b) transfer such assets to another Entity to secure
the payment and performance of all obligations provided for herein.
This appears to authorize Enron
("the Debtors") to sell the
assets of PGE at any time. An "Entity" is defined as any person,
organization, or corporation.
PLAN A: THE PUBLIC ACQUISITION PATH
This plan is outlined
in the presentation of Dan Meek and Linda Williams to the City of Portland's
October 29, 2002, public meeting on the subject
of acquiring PGE.[3]
The
ability of local governments to acquire PGE's assets by eminent domain,
without hinderance
by the federal bankruptcy proceeding, is indicated in
the Linda K. Williams memorandum of August
14, 2002.[4]
[1]. Pacific
Gas & Electric
Co., 283 BR 41 (ND Cal 2002) [link]
[2]. In
Public Service Co. of New Hampshire v. State of New Hampshire, 108
BR 854 (D NH 1989), the court addressed the
utility's plan to create new companies, unregulated by the State of
New Hampshire,
and to transfer to one of the new companies all of its generation
and transmission line assets. The plan also included contracts requiring
the company holding the distribution assets (the remaining regulated
utility) to buy power from the new generation/transmission company
at
rates regulated by FERC, not by New Hampshire. The reason was that
New Hampshire law did not allow a regulated utility to charge ratepayers
(in retail rates) for investment in power plants prior to their completion,
while federal law allows such charges in wholesale rates.
[3]. Public
Ownership of PGE - Issues Workshop, October 29, 2002 [Link]
[4]. Memorandum
by Linda K. Williams, attorney. [Link]
Additional information:
Enron Fiasco Threatens Oregon Ratepayers' Pocketbooks, November 30, 2001
[Link]
Federal Court Says Bankruptcy Allows Sale of Utility Assets Out From
Under State Regulation [Link]
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