Six months ago, the Oregon Public Utility Commission rejected the Texas Pacific Group's bid for Portland General Electric, saying, "The potential harms or risks to PGE customers from the deal outweigh the potential benefits."

Two weeks ago, Enron presented the PUC with a new plan to distribute PGE's stock to Enron's creditors. Utility watchers say the commission will almost certainly approve that plan.

Yet by almost any measure, the spinoff of PGE to the bankrupt energy giant's creditors is worse for the utility's 767,000 customers than the Texas Pacific deal.

Politicians and consumer advocates involved in the PGE saga, which began in 1997 when Enron bought the state's largest utility, are puzzled.

"I don't know why we'd give PGE's customers over to Enron yet another time-yet that's what this deal does," says state Sen. Ryan Deckert (D-Beaverton).

Dan Meek, a lawyer with the watchdog group Utility Reform Project, agrees. "This deal is worse in almost every respect than the Texas Pacific proposal," he says.

Most notably, the proposed deal contains not a penny in electricity rate cuts for ratepayers-something even Texas Pacific offered.

The absence of rate cuts violates guidelines that Gov. Ted Kulongoski established earlier this year for a new deal. In March, after the PUC rejected Texas Pacific, the governor-who appoints the commission's three members-said any future owner of PGE must "provide rate relief for PGE customers who have endured unpredictable and increasing energy costs. Any proposal under consideration should include a plan to lower rates."

Enron's proposal does not do that. Nonetheless, the plan enjoys Kulongoski's blessing. Confidential PGE documents obtained by WW last week make the situation even more inexplicable. Those documents show that the utility can easily afford rate cuts: PGE is financially stronger now than it has been for a long time and expects a 62 percent profit increase over the next two years.

"It's the height of hypocrisy for PGE to generate a forecast this good and say they can't afford a rate cut," says Portland financial advisor Bill Parish, who reviewed the confidential documents at WW's request.

Rate cuts are not just an idle wish. Oregon law requires that when a regulated utility such as PGE changes ownership, the transaction must provide ratepayers a "net benefit." Usually, that means rate cuts.

When Enron bought PGE in 1997, it promised to cut rates $105 million over eight years. When Scottish Power bought Oregon's second-largest utility, PacifiCorp, in 1999, it cut $51 million over four years. Sierra Pacific, a Nevada utility that tried to buy PGE in 2001-the same year Enron declared bankruptcy-offered a $97 million cut over seven years. Even Texas Pacific offered $43 million in cuts over five years. The City of Portland, whose bid for PGE was rejected by Enron on July 21, promised cuts of more than $100 million annually.

The stock-distribution plan does offer a few new items, such as the opportunity for consumer advocates to meet periodically with PGE's board and management and greater access to the open market for industrial users. It also continues service-quality and financial protections that are already in place for customers. But such gestures are of questionable value to the average ratepayer. "This agreement is meaningless," Meek says. "The provisions almost entirely restate the commission's existing authority."

What the plan most certainly does not offer is a rate cut. The average PGE residential customer-who PUC stats show paid the utility $875 in 2004-has gotten abused for years.

Because of the lingering effects of Enron's market manipulations and because it has fewer and more costly generating facilities than other utilities, PGE's rates today are 31 percent higher than those charged by PacifiCorp. PGE's rates are higher than any investor-owned utility operating in Oregon or Washington (see chart at left).

Steep rates hurt homeowners and Oregon businesses. "Competitive electricity prices are important to any manufacturer that competes in a global marketplace," says CEO Mike Siebers of Blue Heron Paper in Oregon City. "There have been several rate comparisons done showing how PGE industrial rates stack up. Theirs are always on the high end."

No one understands PGE's importance better than the governor, who has made strengthening Oregon's economy his top priority. After keeping a low profile during state regulators' consideration of Texas Pacific's bid, Kulongoski moved aggressively this summer to shape PGE's future.

On July 20, he vetoed Senate Bill 671, which would have established a customer-owned entity to buy PGE. Two days later, he vetoed Senate Bill 1008, which Deckert sponsored and which would have allowed the state to buy the utility.

As he eliminated potential competitors to Enron's stock distribution, Kulongoski reiterated his earlier insistence on rate cuts. "I cannot support SB 671 because it violates the basic principles I set forth in March 2005," Kulongoski wrote in a letter to the Senate explaining his veto. "As I said at that time, any plan should provide rate relief."

Yet the governor supports the current stock-distribution plan even though it, too, offers no rate relief. His spokeswoman, Holly Armstrong, says Kulongoski now feels that "a desire to lower rates was just one of [his] guiding principles."

Kulongoski's about-face infuriates former PGE suitors. "It's unbelievable," says Jim Hansen, a Lake Oswego investor who was behind SB 671. "When the governor vetoed our deal, he promised a rate cut. Where is it?"

PGE can certainly afford reduced rates. According to documents filed with the SEC on June 30, for instance, the utility recently paid Enron a $150 million dividend and is still sitting on more than $500 million in retained earnings.

PGE expects its financial picture to grow even sunnier. Confidential PGE records obtained by WW show that the utility expects its profit to rise from $77 million in 2005 to $125 million in 2007.

(PGE gave its projections to the PUC on the condition that they be kept confidential. The utility claimed that making financial projections public "could be detrimental to PGE and its customers." The PUC agreed.)

Nonetheless, PGE Chief Financial Officer Jim Piro says customers are not entitled to relief. He argues that Enron's plan to distribute stock to creditors is not a takeover and should be judged differently. "Trying to compare this with other transactions is not fair," Piro says.

Piro is right that this deal is different. But the "net benefit" law makes no distinction between a takeover and a stock distribution. "It's impossible to find a benefit here," Meek says. "And that's what the law calls for."

Enron's stock distribution is less attractive than the Texas Pacific bid in other ways.

The Texans got Enron to agree to shield PGE from the costs of lawsuits stemming from Enron's misdeeds. But the current stock-distribution plan does not protect the Portland utility from many of those potential liabilities. That should concern ratepayers, who are the ultimate source of PGE's cash. They could suffer if the utility pays for damages relating to Enron's market manipulations, abuse of employee benefit plans and other offenses.

PGE's Piro argues the company faces fewer liabilities today and those that exist won't affect customers.

But Phillip Gildan, a Florida utility lawyer who has done work for the City of Portland, disagrees. "The stock-distribution plan offers little protection against Enron-related liabilities and doesn't fund them in any way," Gildan says.

No matter how loudly critics complain, however, PUC commissioners appear ready to accept Enron's terms. The PUC staff, which makes an independent recommendation, has already endorsed the plan.

"It's highly likely the commission will grant approval," says Ann Fisher, a lawyer who represents the Portland Building Owners and Managers Association in front of the PUC. (On BOMA's behalf, Fisher declined to sign on to the stock agreement).

Perhaps more importantly, the state's two biggest customer groups-Industrial Customers of Northwest Utilities, which represents big players such as Intel, and the Citizens' Utility Board of Oregon, which advocates for residential ratepayers-have also endorsed the stock-distribution plan.

The dynamics are very different from the Texas Pacific case, when ICNU and CUB badgered the Texans for 16 months. Their rabid insistence that Texas Pacific meet the "net benefit" standard helped kill that deal.

There are several reasons the customer groups have mellowed. First, the stock distribution offers ICNU's members increased opportunity to buy power from producers other than PGE, and it gives both groups the opportunity to lobby PGE brass personally. Second, both groups are busy battling investor Warren Buffett's proposal to acquire PacifiCorp, which is currently before the PUC.

But the overwhelming reason both groups signed on to Enron's plan is that they see no other choice. Enron's bankruptcy plan calls for the company to either sell PGE or give it to creditors. After the PUC nixed Texas Pacific, Kulongoski vetoed the two legislative possibilities and Enron rejected the City of Portland's bid, only stock distribution remained as an option. "We had no leverage at all," says Jason Eisdorfer, a lawyer for the CUB. "In a normal utility transaction, you look at the alternative for comparison. In this case, there isn't one."

Eisdorfer might be right that the odyssey that began when Enron put PGE up for sale in 1999 will soon be over.

But one wild card remains. Buried in Oregon law is an obscure statute that allows cities to cut the rates of utilities operating within their jurisdictions.

Specifically, ORS 221.420(2)(c) permits cities to "prescribe by ordinance, or in any other lawful manner, the rates, charges or tolls to be paid to, or that may be collected by, any public utility."

Normally, the PUC sets utility rates, but this law seems to provide an exception. "It means that the City of Portland has statutory authority to set utility rates for PGE customers within the city," Meek claims.

No Oregon municipality has ever tried to lower a utility's rates unilaterally. And even if the Portland City Council were to do so, the statute allows the affected utility to appeal such a rate cut to the PUC.

The PUC then has 90 days to consider the matter. If the PUC agrees with the utility that rates should not be cut, the question is automatically referred to a vote of residents in the affected city. Such a move could complicate the stock distribution. Creditors might have qualms subjecting their investment to the whims of Portland or the other 50 cities PGE serves-and of course, a successful effort to lower rates would lessen the value of PGE stock.

Portland Mayor Tom Potter says the city is aware of the law. On Friday, a city attorney will give the PUC Portland's view of the Enron stock plan, which is unlikely to be favorable. But what comes afterward could be even more interesting. "When Enron broke off negotiations with us, we said we'd do whatever it takes to protect ratepayers in Portland and the region," Potter says. "We're looking at various options, including how to utilize Oregon law."

Out of the frying pan...

The only thing certain if the Public Utility Commission approves Enron's stock distribution plan is more uncertainty.

The plan would transfer ownership of 30 percent of Oregon's largest utility to Enron's creditors next April, with the rest to follow later. The stock is expected to trade on the New York Stock Exchange.

One problem: It is unclear exactly who Enron's creditors are. Neither the PUC nor PGE can identify them. "We do not know who they are," says PGE Chief Financial Officer Jim Piro.

The reason for the mystery is that Enron's IOUs trade freely in the secondary market. Anyone from investor Warren Buffett (who is already in the process of buying PacifiCorp) to the National Bank of Iraq can buy them, thus potentially becoming a part-owner of PGE.

Critics say Texas Pacific, whose identity, track record and goals were known, looks good by comparison with a nameless, faceless ownership.

The balance of the stock not distributed next April-70 percent of the company-will remain in Enron's hands. Enron CEO Stephen Cooper will retain control over this stock for a couple of years, until all bankruptcy claims are resolved. "Cooper will control [the company], and we have absolutely nothing to say about what he does with it," says Ann Fisher, a lawyer for the Portland Building Owners and Managers Association.

Before all the stock even gets distributed, experts say, a new investor is likely to grab a controlling stake in PGE, creating further uncertainty.

That likelihood increased last month, with congressional repeal of the Public Utility Holding Company Act, which strictly limited utility ownership. The PUC will still have authority over utility deals, but now anyone with a checkbook can own an electric company. "With no restrictions on ownership, it seems to me the chances of PGE staying an independent Oregon company are very slim," says Lynn Hargis, a utility lawyer with Public Citizen in Washington, D.C. -NJ

PGE's desire to keep its financial projections out of the public view is similar to the Texas Pacific Group's effort to keep its due-diligence findings confidential (see "The PGE Papers," WW, Jan. 5, 2005).

Utility lawyer Dan Meek has shown that since 1997 PGE has collected more than $700 million in state and federal income taxes from ratepayers but that Enron, rather than the government, kept the money.

In theory, PGE's return on investment is capped by the PUC, but the utility has regularly earned far more than its maximum allowed rate (see "PGE's Windfall," WW, Feb. 9, 2005).

PUHCA was created in 1935 to prevent speculators from using the steady profits of utilities to finance more risky investments. Among the guiltiest parties of the day was a protégé of J.P. Morgan named Sam Insull, who then controlled PGE.

PUC approval is necessary any time a buyer acquires more than 5 percent of an investor-owned utility's stock.