Fortnightly: Could you tell me a little bit of the history that led Portland General Electric (PGE) to be acquired by Enron a few years ago, and what you hoped to accomplish back then?
Fowler: Well, certainly, I would say I was not in charge of the company then, but I was president of the company, so I was closely involved in working with the board. I’ll give you the perspective of PGE and I’ll also give you Enron’s thought at the time. The environment at the time was the assumption that deregulation was going to happen and that there would be transmission companies, distribution companies, and generation companies. Particularly at the time, I think people were looking at the California market. And probably from PGE’s perspective, it was an opportunity for the shareholders. Enron was willing to purchase PGE to prove their model of deregulation. Their assumption was that the Oregon Public Utility Commission would allow them to sell the generating plants to the market and they would no longer be regulated. Then they could prove that model down into California. I think that was the concept at the time. Obviously, the world changed from that. To begin with, Oregon regulators had no interest in letting Enron sell PGE’s generating plants. So, essentially, Enron lost interest in us. They bought us in 1997 and in 1999 put us up for sale. Sierra Pacific was going to buy us, and that transaction might have been completed had it not been for the California energy crisis and the financial situation they got into. Then Northwest Natural was going to buy us. But it was a stretch for them anyway because of their size as compared to PGE’s size. With Enron’s bankruptcy, [Northwest Natural] became concerned about some of the potential liabilities. Although Enron was willing to hold them harmless for most of those, I still think they were cautious, and rightfully so, given the change in the economy. The downturn impacted all of us.
Fortnightly: Certainly things in 1997 were very different in the way the world viewed Enron and how things were going on in the economy. However, do you see any similarities between now and then in terms of the reason utilities are pursuing mergers?
Fowler: Even back then the belief was that a company our size couldn’t survive, because there was no opportunity for growth—we’d only be a distribution company essentially. You wouldn’t have the opportunity to invest in generating plants or anything else. You couldn’t have return or growth for your shareholders because that was all going to be done in the market.
Fortnightly: What is your view of today’s arguments that say you need economies of scale to meet investor expectations as interest rates rise?
Fowler: They keep saying that. The problem is—and everybody knows this—the cost to customers right now is really the cost of generation. It used to be that maybe three-quarters of the customer’s bill was actually the distribution and transmission and all those economies-of-scale things, And a quarter of their bill was power generation. Well now it is probably 50 percent on power and 50 percent T&D.
We are a net-benefit state—if anybody is going to buy us, they have to show a net benefit to customers ultimately. The only way you get that is if somebody has excess generation capacity and comes in and lowers customers’ prices. You don’t get it from economies of scale of billing systems or distribution information systems.
In fact, the commission probably keeps all that. They don’t let that flow through to shareholders. And there probably isn’t much there to begin with, just because of the nature of the business. So, even when you look to the East where places are more closely located, there may be some places where [mergers for scale economy] make sense, but they are struggling with that issue. Time will tell. Then you move to the Northwest, or places in the West. If you look at Puget Sound, they are slightly larger than we are. Avista is smaller. Idaho [Power] is smaller. Certainly, Idaho is doing very well, they have investors who are interested in them. You look at Northwest Natural, they are doing great. Lots of investors are still interested in stable, predictable earnings and dividend growth that is reasonable.
Fortnightly: How would you describe your company today?
Fowler: We are mid-sized, somewhere in the neighborhood of $1.5 billion to $1.8 billion market-cap, which puts us about in the middle of the regulated utilities. We have a good service territory that is growing. We have opportunities to invest in generating plant and in transmission and distribution plant. We have very good, strong cash flows.
It is very clear we are a vertically-integrated regulated utility. During all of this, we managed to keep our investment-grade rating, through hard work on our part as well as the PUC putting the ring fence in place keeping Enron from sweeping cash or causing us to lower our credit rating. We think we do have an opportunity for earnings growth and to pay a competitive dividend to our customers.
Fortnightly: They say more financial players are going to be coming in and purchasing utilities. Given your experience, what is your view on the use of leverage, and why do you believe Texas Pacific Group failed in its acquisition?
Fowler: A leveraged transaction from a commission standpoint puts too much risk on the customers. It doesn’t appeal to them. They don’t see the benefit unless a company is truly in financial trouble. It’s kind of interesting, looking at down at Tucson [UniSource Energy] with KKR, I thought that one might get approved just because of their financial situation. Our financial situation was always stronger, so as we looked at the Texas Pacific Group, I wondered if that could ever happen. Even in Tucson, they just didn’t see enough benefit in a leveraged situation like that.
Fortnightly: But to play devil’s advocate, at a recent conference on mergers, the private equity investors assured the crowd they would properly ring-fence the utility, so the leverage should not matter in making the decision. What is your view on the likelihood of their success to try again to purchase utility assets?
Fowler: I think if they put enough money on the table and show that there is truly a benefit for customers, and a ring-fence to protect them from the leverage, they might able to get it done. I’m not sure most of those guys are willing to do that, because really what they have in mind is to buy it at a low price and sell it at a high price. Some of them, like MidAmerican, say they are in it for the long run. That will be interesting to see if they continue to be in it for the long run. Even in Oregon, Wyoming, Washington and other places, it was easier for [MidAmerican] because they were comparing themselves to Scottish Power. So a commission that ultimately has the final say on these things looks [and asks], “Is MidAmerican a better choice than Scottish Power, and what can we extract for the customer out of this?”
They were able to do that. But if there isn’t a problem or another company they’re trying to make go away, I think commissions are going to have a hard time approving these.
Fortnightly: There have been several attempts over the years by local government to “take over” or municipalize Portland General Electric’s existing utility’s poles, wires, substations and other distribution assets, despite your company’s objections. Can you tell us what you learned from these experiences?
Fowler: If you look at the public power side of things, that is something we have dealt with and all Northwest utilities deal with, as well as California from time to time. I think East Coast areas are going to see more of that too as prices go up, particularly those companies that have moved to deregulation. Look at what is happening in Baltimore right now with increased prices and no generation attached to those customers.
I think there will be a greater push for municipalization. The fundamental question is [whether] a government can more effectively or efficiently run a business than an investor-owned company.
Here in Oregon, because we are an old company, that’s one that we have been able to win and defeat. But it is something we will continue to face in the future depending on how the population changes and the interest for things like that. It’s definitely one we need to keep an eye on.
Fortnightly: Do you believe there will be stronger efforts to municipalize investor-owned utilities as a result of rate increases that have to be pushed through as a result of skyrocketing commodity prices?
Fowler: I think so. You look at the munis. Those guys thought they were in trouble back in 1997 and 1999 and they were going to go away. Well, they are all excited now. They think there are all kinds of prospects out there. They have a chance once again, particularly in those areas that are deregulated. How do you grow, and how do you improve for an investor? It’s difficult to do unless you have generation or some other things attached that allow you to do that. Maybe they will get back to investing in generation again. I suspect that will have to happen for some of those customers if the markets don’t work effectively or if costs get to the point where they don’t make sense.
Fortnightly: What type of performance metrics might we expect from the new Portland General Electric? What type of growth and total return to shareholders? What type of dividend?
Fowler: The earnings guidance that we have given is public. We’re focused on 2007 because we have a rate case in place. We hope in the long term that we can have earnings expected to grow between 4 percent to 5 percent per year. We are going to start with paying a target dividend ratio in the range of about 60 percent.
That’s probably a little bit low compared with some other utilities. But we have more opportunities to invest capital in our system. We are building a gas-fired plant now. We have an additional wind resource we’re looking at. We’re looking at some automated meter reading and some transmission within our system. So, we do have some good opportunities to invest, and you do need to invest in this business to keep it going.
Fortnightly: What is your definition of leadership and how has it been applied in what we see today?
Fowler: You learn from the situations that you have been through. To begin with, building on core strengths, just the basic business itself, and paying attention to the details. Make sure that you are serving the customers well, that you know what the customers want, which is reliable, reasonably priced energy, and you have ways to measure that, and know how you are doing on it. [Know] that within the company you have the right people and the right jobs, particularly ethical and honest people, who are focused on the basic business. You have to pay attention to that, [make] strategic decisions into the future in a very uncertain environment.
There are a couple of things people don’t realize about PGE. One is throughout all of this bankruptcy with Enron, we kept investment-grade ratings, which was huge. And we continued to invest in the business. We came out very strong and very stable. Certainly, I’m grateful to the people who worked on the plan of reorganization and all of that, too, because they could have had us pay more dividend or whatever. But they wanted us to be strong. The PUC ring-fenced us so it could only go to a certain point. But that allowed us to move forward and not to slip backward, not do damage to our system during that time frame.
I think in our business, meeting higher customer expectations and staying focused on that all of the time will ultimately serve your shareholders.