SOURCE: The Oregonian. Reprints may be purchased at www.oregonlive.com
Portland, Oregon, June 22, 2004 --Digging deeper into the Texas Pacific deal by Steve Duin.
Given that PGE bills itself as family, our neighbors, our friendly little homegrown utility, PGE's insistence that its ratepayers continue to pay income taxes that end up in the hands of Texas corporations may seem, well, just a trifle unneighborly.
But the fraud Portland General Electric is hoisting on its hometown is easily explained when you get past the media blitz. "PGE is Enron, for chrissake," said Dan Meek, the Portland lawyer who has gone to court to stop this travesty. "PGE's board is appointed by Enron. And the money is going to Enron."
Bill Parish -- a Portland investment manager who is tracking the Oregon utility better than Oregon's governor, Oregon's state treasurer or Oregon's public utility watchdog -- is just as blunt: "PGE is Enron. For some reason, we don't want to accept that. Are we that stupid? Please. Have some honesty and integrity. PGE is Enron. End of story."
Actually, that's the beginning of this story. The new company desperate to get its hands on those state and federal taxes --which total $93 million each year -- is the Texas Pacific Group.
Texas Pacific is not Enron. Or, as City Commissioner Erik Sten puts it, "Texas Pacific is an honest version of Enron. They've told me what they do. They come in, buy distressed property and roll it. The only question about Texas Pacific is why anyone would support it who cares about the long-term interest of the Oregon economy."
That's a great question, of course, for several Oregonians, including Neil Goldschmidt, Tom Walsh, Jim Francesconi, Ted Kulongoski and Randall Edwards, all of whom are either on board with this deal or unable to muster an opinion.
"The neutral stance has become almost absurd," Sten said.
As some well-meaning folks may still be mired in the absurdity, let me explain why. Texas Pacific doesn't care about your electric rates or your income tax payments. Texas Pacific is a business, with no obligation -- unlike, say, the Oregon Public Utility Commission -- to defend the ratepayers' interests.
In making its play for PGE in the Enron bankruptcy proceedings, Texas Pacific is trying to claim those tax receipts and take advantage of a marvelous loophole in the tax code.
For reasons only the accountants understand, private equity groups such as Texas Pacific can use the losses from one company to offset the profits of another company and not pay a dime in taxes.
Back in the 1980s, the Senate Finance Committee realized profitable companies were buying companies with such operating losses -- for pennies on the dollar -- and deducting those losses against net income to escape any federal tax obligation.
Then-Sen. Bob Packwood, R-Ore., led the effort to shrink that loophole. "We changed the law when a profit-making company buys a losing company," Packwood said Friday. Instead of writing off the entire loss, the profitable company could write off only a small percentage of those losses each year.
"That effectively stopped the practice," Packwood said, "because profitable companies weren't interested in buying losses if they had to spend five to 10 years spreading those losses out."
Packwood and the tax gurus never anticipated, however, that the companies with the huge operating losses would turn around and purchase corporations with the profits. They did not set similar restrictions on tax write-offs for the money-losing operations.
That, Parish argues, gave America-Online the incentive to buy Time-Warner and, after combining losses and profits, pocket $4 billion in saved tax receipts. Closer to home, it is a key element in Texas Pacific's proposed purchase of PGE.
Earlier this month, Meek -- the attorney with the Utility Reform Project -- won a court order requiring another utility commission review as to whether PGE fraudulently collected $665 million from area ratepayers to cover corporate taxes that PGE and Enron never paid. Because PGE has been consolidated with Enron in seven of the past eight years, not a dime of that money went to Oregon or the federal government in those years.
"I get a PGE bill every month," Edwards said. "When I see the line item that says taxes I assume it's going for taxes."
But PGE -- excuse me, Enron -- continues to insist state law entitles it to collect tax money even if its abusive parent company doesn't pay any taxes. Meek is not optimistic the PUC will change its cluttered mind and order an end to a rip-off in which the ratepayers are sending Enron $254,000 each day.
That's precisely what Texas Pacific is counting on in its bid to buy PGE and take over that tax collection. In its application before the PUC, Texas Pacific has created what Meek calls a "double leveraged capital structure." For the purposes of setting higher rates, PGE and its new corporate firm, Oregon Electric, will be separate companies.
But for tax purposes, the two companies will be combined into a single entity, a company that carries an additional $707 million in debt. Because there is no limit on the allowable deduction, consolidation will generate a $56 million tax savings, Meek estimates, which will reduce PGE's net income -- and net tax liability -- to close to zero. The income taxes PGE charges its ratepayers will be calculated without factoring in this huge corporate tax deduction.
"By consolidating Oregon Electric and PGE for tax purposes," Meek said, "the additional debt and interest deduction will reduce the tax bill to Oregon Electric . . . but not to PGE ratepayers."
"The name of the game," Parish added, "is to get the tax payments PGE owns so they can pocket the cash flow."
Texas Pacific isn't Enron. While the equity firm originally hired Goldschmidt and Walsh to put a pair of friendly, local faces on this deal, the company is making no attempt to conceal its economic strategy, a strategy that is perfectly legal. While Texas Pacific makes clear it won't be obligated to repay tax receipts that don't end up with the government, no one is chortling about ripping off grandmothers. No one is keeping five sets of accounting records.
"It's all business to Texas Pacific," Sten said. "They'll walk away in a minute if Oregon won't go for this deal. And they'll soak us for every dollar they can if we will."
The real shame is this deal isn't all business for the state of Oregon. As Meek and Parish both point out, there are two business proposals for PGE on the table. In one, PGE ratepayers will continue to stuff $93 million in "taxes" each year into the pockets of Texas-based speculators.
In the other, the city of Portland buys the utility at much the same price Texas Pacific is offering and those same ratepayers save more than $100 million each year.
As I heard someone say much earlier in this column, "For some reason, we don't want to accept that. Are we that stupid? Please. Have some honesty and integrity."
End of story.
Steve Duin: 503-221-8597; Steveduin@aol.com; 1320 S.W. Broadway, Portland,
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR 97223
Tel: 503-643-6999 Fax: 503-221-3161
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