Energizing City Hall's Hunt For Schools Money

[March 22nd, 2006] As City Hall struggles to find bailout money for Portland schools, its failure to update Portland General Electric's franchise-fee agreement may have cost the city dearly.

A WW analysis of franchise-fee payments over the past seven years appears to show the city charged PGE nearly $50 million less than it might have for the right to sell electricity here.

The franchise fee issue has nothing to do with PGE's practice of collecting nearly $900 million from customers for local, state and federal income taxes over the same time period but never paying those monies to tax collectors (see "Pants on Fire," WW, Nov. 30, 2005).

Nobody is saying PGE has done anything wrong in this case; both the utility and city say PGE has fully complied with its franchise-fee obligations. Instead, the issue is an outdated definition of "revenue" in city code language concerning franchise fees, which utilities pay to operate in Portland.

And with City Hall seeking money for schools, full franchise fees are part of the discussion.

"I think we definitely need to look at this as a source of additional revenue," says city Commissioner Randy Leonard, the council's most aggressive PGE critic.

Currently, PGE and other utilities pay 5 percent of gross revenues they earn in the city as a franchise fee.

Last year, PGE paid the city $16.3 million in franchise fees, about 40 percent of the city's total collection from utilities. (After property taxes, the total $41 million collected in franchise fees was the city's second-largest source of general-fund revenues last year.)

But the city could have collected much more, had it kept up with changes in the utility industry.

In 1946, when the current definition of "revenue" entered the city code, utilities rarely engaged in wholesale operations such as selling surplus juice to California buyers. But after 1997, when Enron acquired PGE, the utility's wholesale revenues exploded. PGE's filings with the federal Securities and Exchange Commission show such revenues quintupled from $234 million in 1998 to nearly $1.2 billion in 2000.

In contrast, city figures show PGE franchise fees increased only about 8 percent over the same period.

"Franchise fees, per City of Portland codes, do not include wholesale,'' says PGE spokesman Scott Simms.

But for the past year, the city and PGE have been renegotiating PGE's franchise agreement. Currently, the utility does business here under agreements dating from the late 1800s between predecessor utilities and municipalities. (PacifiCorp's agreement, which expires this year, is also under negotiation.)

The city's lead staffer on the issue says a more modern method of viewing PGE's operations is on the table.

"The definition of revenues is part of our discussion," says Mary Beth Henry, deputy director of the city's Office of Cable Communications and Franchise Management. The city's franchise agreements with telecommunications utilities already includes wholesale activities as part of revenue, Henry adds.

A recent court battle over PGE's collection of the Multnomah County business income tax that turned on PGE's wholesale revenues showed the "heads PGE wins, tails PGE still wins" system the utility has enjoyed.

When wholesale revenues and profits rose following PGE's acquisition by Enron, PGE sharply increased its collections of the Multnomah County business income tax from its customers. But instead of paying the taxes it collected, PGE and Enron pocketed the money.

Yet when it came to calculating city franchise fees where wholesale revenues would have increased the utility's payment to the city, PGE got a free ride. (In January, PGE agreed to pay $10 million to settle the Multnomah County tax lawsuit, which was filed by the Utility Reform Project, a watchdog group.)

Had the city's definition of revenue included wholesale activities in 2000, for instance, the city could have collected up to an additional $10 million. Over the past seven years, a modern definition of revenue could have brought the city an average of $6.5 million annually.

It is unclear whether such a windfall is in the cards should the city and PGE agree on a new revenue definition. In late 2003, a change in accounting rules let the utility sharply reduce the amount of its wholesale activity counted as revenue. Last year, for instance, that change allowed PGE to reduce reported wholesale revenues from $652 million to $116 million.

Even at that smaller figure, however, if the revenue definition expanded to include wholesale activity, it would have collected an additional $1.74 million a year. City Commissioner Erik Sten says PGE's role in the Enron tax grab has "really opened our eyes to all sorts of problems about regulatory structures around the utilities."

"If the franchise agreement is out of date,'' Sten says, also eyeing the money for schools, "we need to make changes."