The Seattle Times editorial board today urges the state Utilities and Transportation Commission to “Block PSE sale,” arguing that the highly leveraged proposed buyout of Puget Sound Energy would be “hazardous to ratepayers.” And, well, I don’t disagree.
Why do this transaction? For shareholders, the answer is easy: They get $30 a share, in cash, immediately, for a stock that traded recently in the lower $20s, with the profit taxable at the 15 percent capital-gains rate.
For Puget’s CEO, Stephen Reynolds, who has options on 300,000 shares priced at $22.51, the attraction is obvious. He also gets a payment of $4.4 million from the acquirers, with the tax paid by them.
[…] And then there are the people who rely on Puget for their electricity and gas. As a result of this deal, they get a utility burdened with $1.4 billion in extra parent-company debt, a mortgage that buys the ratepayers nothing of value to them. And it is not a mortgage really, but a medium-term debt that will have to be refinanced a few years hence at an interest rate no one can now determine.
Last week I kinda-sorta debated uber-conservative Grover Norquist on the limits of governments, and it’s issues like this that really test the ideological purity of self-proclaimed free marketeers like Norquist and his ilk. No doubt, this is a deal that is good for shareholders. And no doubt the unchallenged doctrine of the invisible hand would argue that the market always makes the most efficient allocation of resources. But it’s hard to see what if any benefit would accrue to ratepayers by having foreign investors mortgage PSE’s assets to facilitate a leveraged buyout?
PSE is after all a monopoly throughout most of its coverage area, leaving consumers no alternative supplier of electricity or natural gas. Given a deregulated market (the conservative ideal), it would be equally foolish to expect investors to build competing power lines in response to rising rates as it would to believe that competing power grids could somehow constitute an efficient allocation of resources.
One can reasonably argue with specific regulations and the specific decisions of government regulators, but there are simply some products and services for which a regulated monopoly—or God forbid, a government agency—provides the most efficient and beneficial economy of scale. To inflexibly argue otherwise—that regulation is always harmful and that the public sector is always less efficient than the private—is to argue that PSE should not only be free to sell out to whomever it pleases under whatever conditions most benefit shareholders, but that it should also be free to raise utility rates as high as consumer demand will bear… which in a natural monopoly for a crucial commodity can be pretty damn high.
Imagine electricity rates quadrupling the way gasoline has done, with no end in sight, and imagine what havoc that would wreck on our local economy. That would be an unregulated free market at work.
I expect there are arguments to be made against recommendations that the UTC block PSE’s sale, but I’m wondering if anybody can cogently argue against giving UTC the power to do so?
Puget Sound Energy proposed merger request:
Puget Sound Energy’s expensive campaign to increase its own power-generating capacity is helping lead PSE, to run Washington’s largest utility, in order to sell itself to a group of Australian and Canadian investors for $7.4 billion. The company expects state and federal agencies to approve the deal in the fourth quarter.
PSE has requested permission from the Washington Utilities and Transportation Commission to raise rates for electric-residential customers and for residential gas users in November to compensate for capital investments and higher operating costs.
The Washington Utilities and Transportation Commission should not approve the selling or merger of PSE to a group of Australian and Canadian investors for $7.4 billion. PSE adopted its name and current structure in 1997 when two of its largest ancestral companies–Puget Sound Power & Light Company and Washington Energy Company–merged. Since 1997 the company PSE has been requesting rate increases once or twice a year with which most have been approved in one form or another. Was this all in their plan? No to any foreign sale or merger or any form of rate increases.
Note that the reason why this proposed sale is such a good deal to the “new owners” is the relatively cheap rate of the dollar to other foreign currencies.
Foreign buyers are on a buying spree across the country. The sale of the Wall Street Journal to Murdoch is just one such example.
It used to be said that one of the advantages of a relatively weak dollar is that it gave our manufacturers an advantage overseas. But we manufacture so little in the U.S. now, we aren’t seeing that benefit. Instead, foreign buyers are looking at buying up the remaining U.S. industry, perhaps for no other reason than to close it down and remove all competition. Certainly our auto makers aren’t benefiting much from the current expansion. They won the battle against realistic CAFE and emissions standards, with the Bush administration proposing long-range standards which are laughable. Instead, their cars are quickly becoming obsolete on the world market, if not here at home, also.
But we can protect ourselves against further loss of control in the utilities market by rejecting the PSE sale. If you want an example of why the government should be very active in ownership and rate issues of utility companies, you need look no further than Enron.
By the way, with Friday’s tanking of the DJIA well below 12,000, you might wonder why the “economic stimulus plan” of giving cash to taxpayers doesn’t seem to be working very well.
Well, there are lots of reasons. One is that the problem is with the credibility of the credit markets, and it’s long reach into every sector of our economy.
But another reason is the lack of our manufacturing capacity. The old saw that if you could put hands into consumer’s pockets, then they would start to spend it, resulting in retailers orders to factories who would start hiring again to fullfill orders, creating more jobs and more income into local merchant’s pockets, etc.
But if the cash is mostly going overseas for foreign-made products, like wide-screen TVs, etc., then you don’t get much of a bump. You only see a little bump at the retail level, which doesn’t produce much in the way of jobs.
Of course, if you have consumers who simply use the money to make debt payments, as most of them do, then you have another reason why it doesn’t provide much immediate relief to the economy. With real wages stagnant since the early 1970’s, the American consumer has been living off debt to make up the difference.
Of course, if you have consumers who simply use the money to make debt payments, as most of them do, then you have another reason why it doesn’t provide much immediate relief to the economy.
I told PuddySilly that’s what most people would do at this stage of the business cycle and he called me names.
What a loser.
Did the Times mention that Reynolds will also get a buyout bonus of $20 million if the deal goes through, and that McQuarie will pay his taxes on the 20 mil?
Is the Times aware that PSE’s natural gas customers will get hit with a sneaky back-door rate increase as a result of the buyout? It’s no accident that McQuarie’s 49-percent partners in the buyout are Canadian pension funds. Those pension funds already own the Canadian companies that supply PSE with half of its natural gas.
PSE’s natural gas costs are passed straight through to customers. If this deal goes through, those pension funds will own both the seller and buyer of the gas. They will, in effect, be selling the gas to themselves at a price they dictate instead of a price set by the market. The gas prices passed through to PSE customers will then be determined in a cloud of cigar smoke wafting in a boardroom behind closed doors instead of in the open market, without any regulatory review or intervention.
The more you learn about this buyout, the smellier it gets. That’s why there’s organized opposition and hundreds of citizens have appeared at WUTC’s public hearings.
Apart from the buyout, PSE is also seeking hefty increases in electricity and natural gas rates. A substantial part of its rate requests are to raise capital for building more infrastructure to serve a growing population. Such requests are inappropriate. Investors, not customers, are responsible for providing the company’s capital. Making the customers pony up capital is pure windfall for the owners. It’s price-gouging, pure and simple. This, by the way, is a common ploy by utilities. The phone companies tried this, too. Hopefully, WUTC is too smart to let them get away with it, but keep your fingers crossed anyway.
A regulated utility such as PSE makes its profit from “return on equity” (ROE), sometimes called “return on investment” (ROI). ROE is a percentage of the company’s invested capital. For example, if a utility has $4 billion of invested capital, and state regulators approve a 10% ROE, then the utility is allowed to collect $400 million a year from its customers to compensate its owners or shareholders. The customers in effect pay interest on the money put up by investors.
PSE wants an increase in its ROE rate from 10.8% to 11.3%. We are currently in a low interest rate environment where the Federal Reserve is lending money to banks at 2% and most consumer savings account return less than 1% a year. The Federal Reserve has been cutting interest rates recently. Why PSE needs a higher ROE to attract investment in its capital needs, when it’s already collecting a double-digit ROE from its customers, is a fucking mystery.
I don’t need to tell you what will happen to PSE’s customer service, its employees, or their pensions if this buyout goes through. Your imagination is up to that task. McQuarie isn’t a utility company. It’s a hedge fund, a financial company run by financial sharps who use leverage and accounting gimmicks to squeeze every last drop of profit from any public utility or infrastructure they can sink their claws into. They’re best known as operators of privatized toll highways.
Like I said, the more you find out about this, the worse its odor gets.
This doesn’t look good no matter how you slice it. Kinda reminds me of when I read about PG&E in Portland was being sold to a Scottish company several years ago, and how the locals were complaining like all get-out about it (I was playing in Bend at the time).
Can’t think of a good Scottish epithet to close. Any suggestions, Piper?
I am afraid that the “FIX” is in. Christine Gregoire has received $13,725.00 from Puget Sound Energy executives in campaign contributions for her 2008 campaign. Dino Rossi has received only $6,400.00 in 2008 campaign contributions from Puget Sound Energy executives. Guess who appoints the Utilities and Transportation Commission?
In addition, Puget Sound Energy has given another $4,700.00 to Gregoire’s 2008 campaign in its own name: $2,700.00 through the corporation itself, and $2,000.00 through the PSE “Good Government Committee”.
By contrast, Puget Sound Energy has given precisely ZERO dollars in its own name to Rossi’s 2008 campaign.
In 2004, Puget Sound Energy gave Rossi $2,600.00 in its own name, and ZERO to Gregoire.
Also, in 2004, Puget Sound Energy executives gave $8,441.67 to Rossi and only $875.00 to Gregoire.
This is quite a major change in PSE’s loyalties from 2004 to 2008, especially considering that PSE’s executives tend to be basically Republicans in their own personal political views.
I am truly afraid that the “FIX” is in for this PSE sell-out to be approved by the Utilities and Transportation Commission.
That’s some good digging, Richard.
@8 Looks like PSE’s bookies aren’t giving Dinosour much chance this time around. I wouldn’t either, if I were them.
@8 @9 CG comes cheap??
Christine Gregoire has received $13,725.00 from Puget Sound Energy executives in campaign contributions for her 2008 campaign. Dino Rossi has received only $6,400.00 in 2008 campaign contributions from Puget Sound Energy executives. Guess who appoints the Utilities and Transportation Commission?
In addition, Puget Sound Energy has given another $4,700.00 to Gregoire’s 2008 campaign in its own name: $2,700.00 through the corporation itself, and $2,000.00 through the PSE “Good Government Committee”.
By contrast, Puget Sound Energy has given precisely ZERO dollars in its own name to Rossi’s 2008 campaign.
In 2004, Puget Sound Energy gave Rossi $2,600.00 in its own name, and ZERO to Gregoire.
Also, in 2004, Puget Sound Energy executives gave $8,441.67 to Rossi and only $875.00 to Gregoire.
Hell at this rate I ought to be able to buy CG too? Anyone else wanna chip in and get her to do what we want?
What BS. Look I am not a fan of CG, but is she can be bought so cheap, lets all chip- and get her to
a. buy KIRO for Goldy
b. tax the effin athletes and give the tax to political groups meeting on Tuesday nights.
c. subsidize my research
Actually, I do have a grant pending with her Life Sciences Defense Fund. Do you think for … oh say 20k, I get her to intervene on my side? Anyone here wanna chip in?
Two things:
1. The seattle times got it right – PSE should not be sold off and the resultant debt should not be the responsibility of rate payers.
2. Just because PSE gave a piddly amount to Gregoire doesn’t mean there is any fix – especially since how many vacancies have come up since the campaign contibution?
For there to be even the appearance of impropriety, an elected offical needs to take money and then ACT – and even then it was tough to pin down the Abramoff associated deals without insider info or computer records.
Roger Rabbit @ 8
That could be, but Rossi had even less of a shot back in 2004. He was behind by 10 points or more in all the polls (except for the one poll which counted, where he was only 0.0045 points behind). This year, Rossi seems more competitive in the polls, with some being within just a few points.
PSE and its executives have gone from supporting Rossi with over 90% of their contributions, to supporting Gregoire with nearly 75% of their contributions. And PSE has taken a 100% about-face at the corporate level.
On the other hand, PSE and its executives have also given money to Rob McKenna in both his 2004 and 2008 campaigns. And the Public Counsel section of his office is strongly opposing the PSE sell-out. To be fair, Public Counsel is composed of professional attorneys, and it is rare for the staff in our state AG’s office to make decisions based on political considerations dictated by the elected AG. So it would be hard for McKenna to influence the decision of Public Counsel, even if he wanted to.
Another beneficiary of generous PSE assistance in 2004 was Mark Sidran in his quest for the Democratic nomination for Attorney General. Sidran happens to be one of the three Utilities & Transportation commissioners.
Somehow I think that the BIAW might be coming out against the PSE sell-out, and presumably not because they have any opposition to the sell-out in principle … Stay tuned to your radio …
@13 Actually, Sidran chairs the WUTC.
13 – The odds usually favor the incumbent. The execs are just playing the numbers
Well, is anybody going to the hearing in Bellevue concerning the PSE buy-out? Sounds like a lot of the usual suspects have done some good homework on why this sale shouldn’t go through. Now the thing to do is to present the data in the public forum.
re 8: Can such a paltry sum of money put the “FIX” in, Richard?
I doubt it.
Headless Lucy @ 17
Let’s hope not. Because I am sure we will be hearing BIAW radio ads about it if the UTC approves this fiasco.
@4
I paid down my car loan with mine. My CONSERVATIVE Grandfather taught me to never pay a dime in interest than you had to.
12 Got it bang on.