City's proposed takeover of utility might not result in lower energy rates
If the city of Portland took over Portland General Electric, it would not necessarily mean lower rates or a smooth transition of its staff and energy resources, according to an internal city report outlining the pros and cons of a proposed acquisition.
However, there would be benefits of greater local control and 'tremendous payback potential,' the report states.
One of the biggest cons would be how to pay for a $2 billion company in a volatile power market. Because of federal law, the city would be required to use taxable revenue bonds, at roughly a 1.5 to 2 percent higher interest rate and lower bond ratings, to buy a new municipal public power entity, the report says.
The city also would have to pay higher rates to the Bonneville Power Administration, which has a limited amount of power and already is overloaded with energy demand.
'Given probable high initial costs and long timelines, is there sufficient support?' asks the report by Regional Financial Advisors Inc. submitted in June, a month before the City Council's vote to negotiate with parent company Enron Corp. to acquire PGE. The Tribune obtained the report Friday.
The bankrupt energy trader has set a deadline of Oct. 12 to accept bids for PGE Ñ the city's third largest taxpayer Ñ and its other remaining assets. One of the potential bidders, Willamette Valley Power, withdrew from its pursuit of PGE this week. The city recently agreed to a confidentiality agreement with Enron.
'This has to happen quickly, and the counties acknowledged we were in the best position to do that,' said Bureau of Financial Management director Kenneth Rust, one of several city staff members investigating the proposed acquisition.
A decision on a new PGE owner is expected by the end of the year.
Rust said the issuance of taxable bonds could affect any initial rate reduction for electricity customers. Any future capital costs could be done by tax-exempt bonds, he said.
'The rate savings, to the extent they'd be savings, would be contingent on the sale price,' he said. 'If you buy cheaper, that can be savings.'
As yet, the city does not have an estimated purchase price, although the book value of PGE is estimated at $1.9 billion. The city has hired consulting engineers R.W. Beck to conduct a valuation.
The report, Rust said, 'did a pretty good job of laying out the options. But there's still a lot more work to do, like at what price the assets might become available and what it takes to operate it.'
Municipal power benefits
Supporters argue that a public utility district would provide stable and lower rates, access to lower-price capital and greater local control. That's been true of Hermiston Energy Services, which after its first year of operation this month, will charge rates 7.9 percent lower than what the city would have paid to PacifiCorp.
The timing worked well for Hermiston in terms of pricing of the power market and acquiring supply from BPA, said John Heberling, a consulting engineer who worked on the Hermiston and Columbia River public utility districts.
'It's not certain right now you could go to BPA with a load like Portland and say, 'Can we have power?' If Portland were to come in as a whole load, BPA wouldn't have the power available.'
The BPA system has 8,000 megawatts, but is currently purchasing power outside the system to meet an 11,000 megawatt load, said BPA spokesman Ed Mosey.
New public utility entities would have to qualify for BPA power. Once they do, Mosey said, they would pay a priority firm rate and a targeted adjustment charge. The TAC represents the difference between BPA's current rate and the cost to buy the power out of market.
'Right now there would be a substantial additional charge on top of our priority firm rate for a new customer like Portland, simply because buying long-term power on top of that load is going to be expensive,' Mosey said. 'It's going to cost over $30' per megawatt hour.
BPA's preference customers have made a proposal for 2006 that would make it difficult for new customers to get into the system Ñ by allowing only 75 megawatts for new entities, Mosey said.
Portland has an electricity load between 600 and 800 megawatts, he said.
Rust said they are still studying the governance structure. Because Multnomah, Marion and other counties are supporting the PGE acquisition, the board would likely be of regional composition, he said.
Not just PGE
The report also recommends that the city purchase not one electric company, PGE, but two. It suggests there are 'potential savings in operating and maintenance costs' if it were to acquire the Portland assets of PacfiCorp. Acquiring only PGE 'leaves about half the city in private control.'
PacifiCorp spokeswoman Jan Mitchell said the utility's Portland assets are 'certainly not for sale.'
'No one at the city or counties involved have given us any indication that they are interested in PacifiCorp,' she said. 'Their focus is on PGE because it is for sale through the Enron bankruptcy process.'
Rust said that, despite the report, 'there's no serious thought given to that (Pacificorp).'
The report reveals that city officials considered taking over PGE as early as 1999.