The Power Of Two

[December 7th, 2005] An exchange between two lawyers in the pending purchase of PacifiCorp raises an intriguing possibility: that the buyer also may want Oregon's other large utility—Portland General Electric.

If PacifiCorp's interested buyer—legendary investor Warren Buffett—added PGE to his portfolio, the world's second-wealthiest man would get even more of a reliable cash cow for his coffers. That's because PacifiCorp and PGE combine to represent three-quarters of Oregon utility ratepayers. Here's the back story:

In May, Iowa-based MidAmerican Energy Holdings, owned by Buffett's Berkshire Hathaway, offered $9.4 billion to PacifiCorp's owner, Scottish Power. PacifiCorp operates in six states and is Oregon's second-largest utility, serving 517,000 customers.

MidAmerican then applied to the Oregon Public Utility Commission for approval of the deal. Customer groups are part of the state-required approval process to ensure customers' interests are protected. One group, Industrial Customers of Northwest Utilities, asked a very pointed question that generated a very intriguing answer.

On Oct. 18, Melinda Davison, ICNU's attorney, asked MidAmerican to "provide all documents and/or analyses" that would involve acquisition of PGE's stock or assets by MidAmerican or Berkshire Hathaway.

The request was logical. PGE's owner, Enron, put the utility up for sale in 1999. Several buyers, including NW Natural, the Texas Pacific Group and the City of Portland, have tried unsuccessfully to buy PGE, which with 767,000 customers is Oregon's largest utility. And Buffett, whose Forbes magazine-estimated $44 billion fortune trails only Bill Gates' wealth, has repeatedly expressed interest in adding to his utility holdings.

MidAmerican's attorney acknowledged that documents relating to MidAmerican's interest in PGE exist—but she said they are "irrelevant."

MidAmerican attorney Katherine McDowell argued whatever interest MidAmerican might have or had in PGE is "highly confidential" and "outside the scope of [the law regarding utility transactions]."

Davison disagrees, saying the public has a right to know if one company is going to end up with a stranglehold on nearly 1.3 million Oregon utility customers.

"If Buffett has the intention of buying both utilities, he should be forced to put his cards on the table," Davison says.

Although the PUC exists to protect customers from predatory behavior by utilities, the industry is rapidly deregulating, attracting non-utility players such as Enron and Buffett.

Even without deregulation, utility owners are assured consistent returns with little risk—and pocket considerably more by "managing" the utility's ability to keep customer tax payments (see "Pants on Fire," WW, Nov. 30, 2005).

MidAmerican spokesman Keith Hartje says the company has no current intention to acquire other utilities with Oregon customers.

Oregonians won't know it Buffett's previous interest in PGE was anything more than legwork—at least for now. On Nov. 18, Christina Smith, the administrative law judge overseeing the PacifiCorp acquisition, denied ICNU's request for information.

"The Commission may be very interested if [MidAmerican] applied to own two utilities in Oregon," Smith wrote in her decision. "But at this time [it] has only applied to own one."

The PUC is expected to rule on MidAmerican's acquisition in the first quarter of 2006.