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PacifiCorp deal reaches critical stage
By Wendy Culverwell, The Business Journal of Portland, Dec. 4, 2005
The coming weeks promise a flurry of legal briefs, filing deadlines and electronic activity as the $9.4 billion sale of PacifiCorp swirls toward a January climax.
Iowa-based MidAmerican Energy Holdings Co. is seeking regulatory approval to purchase the Portland-based utility. In Oregon, a series of deadlines this month will set the stage for a January showdown before the three-member Oregon Public Utility Commission, which has the authority to determine if the sale will proceed.
PacifiCorp serves 1.6 million customers in six Western states. Most of its customers are in Oregon and Utah, but regulators in Washington, California, Idaho and Wyoming must weigh in on the purchase as well.
MidAmerican is a holding of Berkshire Hathaway and it has pitched itself as a logical buyer ready -- and this is key, willing -- to shoulder the enormous cost needed to keep the system running properly. ScottishPower, which bought PacifiCorp in 1999, has indicated its enthusiasm for investing in transmission lines and generators is waning.
But MidAmerican's willingness-to-invest argument isn't cutting it with critics.
In written testimony to the PUC, critics were nearly unanimous in saying MidAmerican's proposal falls short. Nearly a dozen groups testified in the case, with most strongly counseling the PUC to reject the deal. PUC staff too advised a no vote without further concessions by MidAmerican.
Under Oregon law, MidAmerican must demonstrate the deal will provide a net benefit to customers. Critics say that in its present form, MidAmerican's proposal doesn't do that.
The company can modify its application and the back-and-forth will continue through the holiday season. In January, the matter goes before the utility commission for a hearing and eventually, a decision.
If it all sounds a bit familiar, that's because it is. Just 10 months ago, the PUC was up to its proverbial eyeballs in the contentious attempt by Texas Pacific Group to buy Portland General Electric. The commission ultimately rejected the deal.
Many of the players in MidAmerican/PacifiCorp are the same, but the issues are not.
One eyebrow-raising objection stems from the way MidAmerican is framing its pursuit. MidAmerican says it is more willing than ScottishPower to meet the utility's appetite for capital investment -- it estimates it will require a $1 billion annual investment over the first five years.
Critics say that's ironic since ScottishPower advanced its own willingness to invest in PacifiCorp when it sought approval to buy the utility just six years ago.
The Citizens Utility Board, which provided some of the liveliest testimony regarding Texas Pacific, argues that there's no reason to believe ScottishPower won't keep up its obligation to invest in the utility.
"[W]e have no hard evidence that ScottishPower will cause PacifiCorp to underinvest," CUB's Bob Jenks wrote.
CUB and its fellow critics worry more that MidAmerican's willingness to invest in PacifiCorp could be better for MidAmerican than for PacifiCorp and its customers.
"The holding company has an even higher incentive to invest capital in the utility, because there is an added bonus; the ratepayer pays the shareholders more for the use of the investment equity than it costs the shareholder to borrow that same money," CUB asserted.
Similarly, Community Action Directors of Oregon, which is concerned with assisting low-income households with power bills, worries that a spending spree will cause higher rates, which would harm its constituency.
Keith Hartje, senior vice president for communications for MidAmerican, said the company would answer the concern in a response due to the PUC by Dec. 7.
"It is not unusual for parties to have different views on issues at this point in the proceedings. We will continue to work with all parties to the proceedings to seek agreement," he said.
Not everyone is concerned that MidAmerican will saddle PacifiCorp with debt and raise rates.
The Pacific Coast Federation of Fishermen's Associations, which is chiefly concerned with the impact of dams in the Klamath system on salmon fisheries, faulted MidAmerican for not including the Klamath Basin in its $1.3 billion list of infrastructure projects.
For its part, MidAmerican said its plan would benefit customers. Greg Abel, president, chief operating officer and a minority owner of MidAmerican, said his company would lower operating costs by $36 million in five years and by far more over a longer period. He also committed the company to a series of capital projects that would strengthen the transmission system and reduce emissions from PacifiCorp's four coal-fired power plants.
Abel said MidAmerican is committed to long-term ownership of PacifiCorp and has no plans to sell it.
He said MidAmerican understands what it is getting by entering the regulated Oregon market -- critics have said outsiders such as ScottishPower and PGE owner Enron Corp. didn't know what they were getting into here and attempted to leave because they were disappointed by the returns allowed under Oregon law.
"[MidAmerican] does not expect great returns from the regulated business, but we do expect the opportunity to earn reasonable returns ... ," he told the PUC.
And lastly, he defended the purchase price -- $1 billion-plus more than PacifiCorp's book value -- as a prudent investment.
"[S]hareholders believe the price negotiated for the transaction is fair for the value received, if PacifiCorp is able to earn its authorized return."
Dec. 7 -- Deadline for
MidAmerican Energy Holdings Co. to answer
criticism of its proposed purchase of
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