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April 18, 2005

Mutual Utility Proposal

A "hybrid" organization purchase proposal has been under construction by a group calling itself Oregon Mutual Development Company (Mutual Utility). The Mutual Utility would be a privately-run but customer-owned company, similar to a cooperative. Like the two public ownership models, the Mutual Utility would potentially have the advantages that no shareholders would exist to draw profit payments from the utility; and the utility would remain locally owned and managed, potentially with existing employees and executives.

There are, however, some key differences between the hybrid proposal and the two true public ownership models. The Mutual Utility is a group spearheaded by former PacifiCorp employees and includes other business people in the realm of tax policies and finance. It would rely on the securitization of bonds, borrowing against additional future revenue customers would pay on their bills, to finance the deal. Eventually, customers would wind up owning the utility. In addition to having some very high-powered current and former utility execs behind this deal, the Mutual Utility has also hired some very high-powered lobbyists to move their case forward in Salem.

Unfortunately, the public ownership in this deal has fewer advantages than that of the two true public ownership proposals on the table. According to CUB Executive Director Bob Jenks, this deal "does not seem to offer the advantages" such as lower tax-exempt borrowing rates, and avoidance of federal income taxes, that the other two sales would. The Mutual Utility deal would be a purchase of PGE's stock, which includes liabilities, financed by bonds secured by the future payments of PGE customers. The bonds would presumably be held by an investment bank or equity firm, potentially even a firm very much like Texas Pacific Group.

Mutual Utility supporters say that the PUC would continue to regulate the utility. This sounds better than it is, because, without shareholders, customers in this hybrid model would be on the hook to pay all the costs, debts and liabilities. Thus, the PUC could never disallow any costs and would have to pass through all costs, whether prudent or not, to the customer. This leaves us wondering what would be the point of paying for PUC regulation at all.

One of the big questions that arises is who exactly runs the utility. Mutual Utility proponents claim that customers would vote for the Board of Directors, but a first Board has already been chosen, and current Board members will nominate candidates for the future. CUB's position is that within this system the Board could conceivably remain an "inside game" among select business people.

Other questions include: How would new investments in the power production system be financed? How would we ensure that new investments are the best and most prudent ones possible? How would rates be set? Finally, there have been contradictory statements from Mutual Utility proponents about the potential tax liability of the company, and this issue is a matter of millions of dollars for customers.

Obviously, from CUB's perspective, the Mutual Utility model raises more questions than it answers. CUB is looking into these issues and more as they arise in discussions with the parties involved in all aspects of the various proposals.

Posted by Oregon CUB at April 18, 2005 10:48 AM

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