As 2005 comes to a close, the year's biggest local business story—the fate of Portland General Electric—still lacks a conclusion.
In March, the Oregon Public Utility Commission rejected the Texas Pacific Group's bid to buy the state's largest utility. Not long afterward, Stephen Cooper, CEO of PGE's parent company, Enron, rebuffed a City of Portland proposal for public ownership—for the third time. Four years after Enron declared bankruptcy, the Houston energy giant's corrupt culture still lingers over Portland like a toxic cloud.
Heading into 2006, Enron's plan is to hand over ownership of PGE to its creditors. If the PUC approves, that process could take many years and will leave current management in place.
Many civic leaders welcome the return of the "old PGE," as an independent, locally run utility. The Portland Business Alliance, the Westside Economic Alliance and a group of eminent businessmen calling themselves "The Committee to Save PGE" have joined with The Oregonian's editorial page to celebrate this prospect. They argue that PGE is a well-managed pillar of the Oregon business community that, like the rest of us, was simply snookered by a bunch of Texas crooks.
That's certainly the story PGE management would like Oregonians to believe—that they, too, were abused by Enron.
An April 2003 Oregon Business op-ed by PGE's then-executive vice president Fred Miller captured the PR campaign theme that has run almost continuously for the past four years. "Part of the reason Enron failed so dramatically was that core values were never instilled throughout the company," Miller wrote. "PGE, on the other hand, has 113 years of history and a well-established corporate culture that emphasizes customer satisfaction, honesty, strong communications...and giving back to our community."
In the past week, however, Willamette Week has obtained two separate batches of documents that reveal a different side of PGE. The documents show for the first time that PGE's local management—not just Enron executives in Houston—was intimately involved in the well-publicized tax dodges and financial machinations that cost Oregonians nearly $1 billion over the past eight years (see chart, page 21).
"I've always thought PGE was much closer and more involved with Enron than they'd care to have people know," says Portland City Commissioner Randy Leonard, who with Commissioner Erik Sten has spearheaded the city's pursuit of PGE.
By now, many Oregonians have at least vague knowledge that under Enron's ownership, PGE collected hundreds of millions of dollars from ratepayers that were supposed to go to state and federal taxing authorities but never did.
The first revelation of the Texas-sized tax dodge surfaced in February 2003 on Capitol Hill. The Senate Finance Committee—which was investigating Enron's spectacular collapse—revealed in a 2,700-page report that the energy giant had paid no federal income taxes from 1996 to 1999, despite reporting $2.3 billion in profits during that period.
The Senate investigation found that Enron "had deliberately and aggressively engaged in transactions that had little or no business purpose in order to obtain favorable tax and accounting treatment." Translation: While Enron bragged it was wildly profitable, it convinced the IRS it was losing a fortune.
Under federal tax law, large corporations such as Enron can file a "consolidated" tax return, which combines the results of the parent company with all its subsidiaries. If the net result is a loss—as Enron claimed—then it could be legal for the parent to pocket money collected for taxes by a subsidiary.
After the Senate report, PGE didn't express surprise and responded that it had simply collected the money from ratepayers and passed it on to Enron, as the law allowed.
At that time, it was unclear what had happened to the money PGE sent to Houston, but the implication of the Senate report—that customer tax dollars went into Enron's pockets—started a long, slow process of disclosure that continues to this day.
Utilities handle income taxes differently from most corporations. Unlike most companies, they are allowed by state regulators to collect money from their customers specifically to pay corporate income taxes. For instance, the Oregon Public Utility Commission sets PGE's rates at a level that will allow it to cover costs and earn a reasonable profit. It also allows the utility to tack on to its 767,000 customers' electricity rates an amount to cover federal, state and local income taxes.
Although Senate investigators found that Enron paid no federal tax, their report was silent on the issue of state income taxes.
In March 2003, Dan Meek, a lawyer for the Utility Reform Project, a local watchdog group, asked the PUC to investigate whether Enron had also pocketed the money PGE collected to pay Oregon income taxes. Although Meek got an answer—Enron kept state taxes—PGE and the PUC have stymied his efforts to claim refunds for Oregonians.
While battling Meek, the utility and its executives have carefully distanced themselves from Enron's tax strategies. PGE officials stressed their utility was a separate company.
"Simply put, Portland General Electric is not Enron," the utility's CEO, Peggy Fowler, testified in a City Hall hearing in August 2002.
"[PGE employees] don't want this Enron taint to slop over on PGE," she told the Portland Tribune in July 2003.
"In terms of our day-to-day operations, Enron has let us operate on a stand-alone basis," Fowler explained in July 2004 as part of the PUC review of the Texas Pacific bid.
Over and over, PGE execs explained that they simply did what other utilities have been doing for decades—increasing rates to customers by an amount equal to the expected tax burden. Those funds were legally passed on to the corporate parent—Enron. What Houston did with those funds was out of PGE's hands, execs say.
Jim Piro, the utility's chief financial officer, made the point explicitly in a March 2003 interview with the Portland Tribune. "Piro said the utility followed the standard practice required by the tax code and paid its federal and state income taxes to Enron, but he doesn't know what happened later," Trib reporter Kristina Brenneman wrote.
The two sets of documents WW obtained last week, however, contradict the utility's claims.
The first set consists primarily of financial and tax records PGE produced in response to a recent series of queries from the City of Portland. WW obtained them through a public records request.
The second batch, which includes internal PGE emails, was turned over to Meek in a lawsuit he filed against the utility in Multnomah County Circuit Court. WW obtained the documents late this month, after Meek filed them in court. (Meek declined to comment for this story, citing pending litigation.)
The documents PGE turned over to the City reveal that from 1997 through 2005, the utility collected more than $671 million from ratepayers for state and federal taxes.
That number is a little larger than previously reported, but the real stunner is this: Of that $671 million, PGE passed along only $575 million to Enron, keeping $96 million for itself. In other words, PGE collected money from customers above and beyond its allowable profit for the purpose of paying taxes but kept almost $100 million in its own coffers.
Such a revelation contradicts the story told repeatedly by PGE and invoked most recently in an Oct. 12 letter from PGE Associate General Counsel J. Jeffrey Dudley to City Attorney Linda Meng. "For several years, we paid our income taxes to our parent company, which consolidate PGE's taxable income with those of its other subsidiaries...," Dudley wrote.
WW shared this disclosure with state Sen. Rick Metsger (D-Welches), who, along with Sen. Vicki Walker (D-Eugene), passed legislation this year that would force utilities to collect only those taxes they pay.
Metsger expressed outrage. "If they knowingly retained taxes, they were basically using taxes as a revenue source," he says. "That would make one seriously question their position that they had no role in this accounting scheme." (Metsger has not seen PGE's responses to the city.)
PGE's failure to disclose earlier that it retained $96 million of customers' money is no small oversight. To put that sum in context, PGE earned only $58 million in profits in 2003 and expects to earn less than $100 million in 2005.
PGE spokesman Scott Simms acknowledges the utility kept the money but says it did nothing improper. "These deferred taxes will come due in a future tax year," Simms says. "Deferred taxes benefit customers because they represent a reduction in our rate base and are essentially an interest-free loan from the government."
Phillip Gildan, a Florida utility lawyer who has analyzed PGE's responses for the City of Portland, disagrees. "The source of the 'loan' is customers, not the government," Gildan says. "PGE may or may not pay those taxes in the future, but in the meantime they, not the customers, benefit."
The documents also reveal something else:PGE—not just Enron—kept tax dollars earmarked for Multnomah County.
Unlike any other county in Oregon, Multnomah County levies a business income tax on all companies that generate revenue within its borders. To capture that tax from its ratepayers, PGE inserted a separate line item on its Multnomah County customers' bills. Between 1997 and 2005, the company collected about $7 million from county residents, according to company figures, but Enron and PGE collectively paid the county a little less than $4,000 of that sum.
And while PGE passed on some of the $7 million in county money on to Enron, PGE admits it kept about $2.5 million itself.
Not only did PGE pocket tax money from Multnomah County ratepayers, but the PGE emails Meek obtained show that the local company's executives rejiggered its calculations to collect more money from Multnomah County residents.
The emails document a remarkable series of exchanges in October 2001 between a number of PGE personnel, including Marcia Romito, an accountant, Jim Barnes, the firm's risk manager, and Piro, the company's No. 2 executive and top numbers man.
The employees discuss doubling the amount of the utility's wholesale profits allocated to Multnomah County. In the past, Romito explained, that allocation had been 26 percent of the utility's profits for that year, a percentage that mirrors the percentage of the utility's total customer base living in the county.
The group agreed to claim that 55 percent—rather than 26 percent—of the utility's wholesale profits could be allocated to Multnomah County. The result: a retroactive increase in the amount charged to ratepayers for the county tax.
"We are increasing the tax rate to pick up the under collection of taxes for 1999, 2000 based on actual tax returns filed and the revised estimate for the remaining 2001," Romito wrote Barnes in an Oct. 26, 2001, email.
By boosting the allocation of profits to Multnomah County, the utility increased its taxable income in the county and thus the amount of tax it could collect from county ratepayers. That would provide a windfall for PGE, since its records show it did increase collections after the email exchange but did not pay the county a dime in 1999, 2000, 2001 or 2002. Therefore, the additional money fell right to the utility's bottom line. Another Oct. 26, 2001, exchange between Barnes and Romito appears to acknowledge that point:
"What is the affect [sic] on tax expense and revenue for 2001 and 2002?" Barnes asks.
"No effect on tax expense," Romito responds. "I calculate additional revenue of $551,000 for taxes collected in 2001. I will have to get a forecast for 2002."
In other words, the two PGE officials are acknowledging that a tax collected through a line item on customer bills is being used to increase revenues, which increases profits.
Jason Eisdorfer, a lawyer for the Citizens' Utility Board, a consumer group, calls the increased allocation of profits to county residents "disturbing."
Ann Fisher, a utility lawyer and former PGE employee who reviewed the emails at WW's request, agrees. "They would have to have known that they hadn't paid the taxes and they could put the money right in their pockets," Fisher says.
What motivation might PGE have to increase collections for a tax it did not pay? Like most top corporate executives, PGE execs, as is spelled out clearly in the company's filings with the federal Securities and Exchange Commission, get bonuses that are pegged to the company's net income.
In March, PGE announced that Fowler's bonus for 2004 was $377,000 (on top of her $350,000 salary), an increase of 57 percent from 2003. For 2004, the company earned $92 million, its best year since 2000 and a 59 percent increase over the prior year.
Bill Parish, a Portland investment adviser and former CPA who reviewed the emails, says PGE's handling of the county tax should make Oregonians skeptical about the utility's claims that it was an unwitting Enron victim. "It's startling to see a respected utility pilfering county taxes from ratepayers and treating the money as a source of revenue," he says. "Taxes are the big cash flow item for utilities and can be a huge source of profits."
PGE's Simms says the critics are wrong and that the utility has complied with all federal, state and local tax laws. "The OPUC concluded [in October] that PGE did not violate state regulations regarding collection of local income taxes," he adds. At the same time, Simms concedes, "Since the ruling made clear that utilities have discretion in how they collect local taxes, PGE has chosen to stop collecting the [local taxes] and to voluntarily issue a refund to customers using shareholder funds."
Intern Max Muller contributed to this story.
The Billion-Dollar (actually $909 million) "Charge"
Thanks to Enron and Portland General Electric, Oregonians are nearly $1 billion worse off than they were before the Texans came to town. That figure does not include the sharp rate increases that have catapulted PGE's rates from among the lowest in the Northwest less than a decade ago to some of the highest now.
Here are the details:
Enron debt forgiven, December 2004: $243 million
State and federal taxes pocketed by Enron: $563 million
State and federal taxes pocketed by PGE: $96 million
Multnomah County Business Tax pocketed by Enron/PGE: $7 million
TOTAL: $909 million
To forgive is divine, and maybe expensive.
While new documents show for the first time that Portland General Electric pocketed Oregonians' taxes in a big way, the utility was far more forgiving when it came to money owed by its parent, Enron—a policy that could prove costly to PGE's future owners.
Utility economics are confusing, but they boil down to a simple concept: Investors are allowed what regulators deem a fair return on their money. Broadly speaking, PGE's investors are supposed to receive up to 10.5 percent on the roughly $1 billion of equity they have put into the company—although, historically, the utility has often earned far in excess of the PUC-imposed ceiling (see "PGE's Windfall," WW, Feb. 9, 2005).
Therefore, if a utility's equity base is reduced, the amount it would be allowed to charge ratepayers should be reduced proportionately.
Normally, the Public Utility Commission sets utility rates in Oregon. But under the terms of a little-used state law, ORS 221.420(2)(c), cities have the authority to set utility rates within their borders. In September, Portland's City Council, frustrated by its failure to buy PGE and lower rates, invoked that law to compel PGE to turn over information about its finances.
In responses to queries by the City of Portland, PGE has turned over documents showing that since Enron declared bankruptcy in 2001, PGE has forgiven a total of $243 million in debts owed the utility by Enron and its affiliates. Once Enron declared bankruptcy, PGE had little chance of collecting from its parent, but writing off Enron's IOUs is different from taking a hit on bad debts, says Phillip Gildan, a Florida utility lawyer who represents the City of Portland.
The difference, Gildan argues, is that since Enron owned 100 percent of PGE's equity, the debt writeoff is essentially a return of equity. In other words, after the forgiven debt Enron would be allowed to earn a return only on about $750 million, instead of $1 billion.
The city will also argue that the money PGE paid to Enron for taxes also constitutes a return of equity. Exactly what PGE's equity base will be in the future will probably be a major source of contention in discussions between the city and the utility in 2006. If the city is right, PGE's next owner could be looking at significantly lower income.
City Commissioner Randy Leonard says he's keeping an open mind, but he wants more information from PGE. "I can't imagine how they can explain charging ratepayers so much more than they should," he says. —NJ
Enron buys PGE for $3 billion. PGE shareholders receive $1.8 billion in Enron stock.
Sierra Pacific Resources agrees to buy PGE from Enron for $3.1 billion.
Sierra Pacific backs out due to financial problems.
NW Natural announces a plan to buy PGE for $2.9 billion.
Enron declares bankruptcy.
NW Natural backs out, citing bankruptcy-related complications.
Enron rejects the City of Portland's $2.33 billion bid for PGE.
Enron rejects the City's follow-up offer.
Multnomah County voters reject a ballot measure seeking to form a People's Utility District to buy PGE. Soon afterward, Texas Pacific announces its proposed purchase of PGE and forms Oregon Electric Utility Company, led by former Gov. Neil Goldschmidt.
Goldschmidt resigns from his roles as chairman of Oregon Electric and investor in Texas Pacific purchase of PGE, as WW reports that he sexually abused a 14-year-old girl in the 1970s.
WW obtains documents revealing Texas Pacific's confidential analysis of PGE. The documents show a lucrative potential investment strategy that's at odds with the company's public pronouncements.
Oregon Public Utility Commission unanimously denies Texas Pacific's $2.35 billion offer to buy PGE.
Enron CEO Stephen Cooper rejects another City of Portland offer for PGE, then announces Enron will distribute PGE stock to its creditors. The PUC is currently reviewing that plan.
—Pete Hunt and Nigel Jaquiss
From 1997 through 2005, neither Portland General Electric nor Enron paid any state income taxes in Oregon, and in fact PGE received a net refund of about $34,000 during that period.
The "Committee to Save PGE" includes Columbia Sportswear CEO Tim Boyle, former PGE president Dick Reiten, homebuilder Tom Walsh, real-estate broker Clayton Hering and property mogul Harold Schnitzer.
Enron CFO Andrew Fastow, generally considered to be the evil genius behind the company's fiscal sleight-of-hand, pleaded guilty to securities fraud in January 2004 and was sentenced to 10 years in federal prison.
Former Enron CEOs Ken Lay and Jeff Skilling face trial on conspiracy charges in January.
Two excellent books about Enron's rise and fall are The Smartest Guys in the Room by Bethany McLean and Peter Elkind (which was turned into a documentary) and Conspiracy of Fools by Kurt Eichenwald.
To read the internal PGE emails cited in this story, go to www.wweek.com/photos/3204/emails.pdf