26 March 2007 at 12:54:19 PM
I saw an article about Texas Pacific looking to buy Spanish airline Iberia (which of course is not a utility) and wanted to know more about it. Tough to know because Texas Pacific, like Carlyle Group and Blackstone, is a *private* equity group. The same link, above, has a very instructive video about what private equity companies are and what they do. Their concern is NOT the public not necessarily making a profit from operations, but making a company profitable in order to then resell it in the future and make THEIR profit. Meanwhile, what accountability is there for the public?
Like any private equity firm, Texas Pacific, which is based in Fort Worth and San Francisco, gathers cash from pension funds and wealthy investors and uses it to buy control of companies. What sets it apart from its peers is its reputation for taking on risky, unfixable companies--and then devoting serious resources to fixing them. A dozen of Texas Pacific's 57 professionals are devoted to the nitty-gritty of operating the companies the firm buys. The game here is Extreme Makeover: Corporate Edition. Bonderman buys a company, brings in a Texas Pacific SWAT team to renovate and spruce it up, and then sells it for huge profits. His team's buyouts have included Continental and America West airlines, Oxford Health, Del Monte Foods, PETCO, and J. Crew, to name a few.
At one point a couple of years ago, Texas Pacific attempted to buy out Portland (Oregon) General Electric. This whole article is worth reading, because it reminds me very much of what is going on with TXU, and also because of the laws governing public utilities in Oregon.
It was the quintessential Texas Pacific deal. Two power companies had tried to buy PGE in the bankruptcy process. Both had failed, in part because of the massive Enron liabilities that could potentially attach themselves to PGE. But Texas Pacific thought it could pull it off. The firm negotiated an agreement in which Enron agreed to cover up to $1.4 billion in liabilities. And the price was right: Texas Pacific persuaded Enron to unload the utility for $1.25 billion (plus the assumption of $1.1 billion in debt), a third less than the company had paid six years earlier.
Once you stripped out the Enron liabilities, it was actually a low-risk deal. Like all power companies, PGE isn't glitzy, but it delivers steady earnings. The purchase price, says one analyst, was $500 million less than PGE is worth. So if Texas Pacific, which would put down $420 million in cash (along with $100 million from passive investors) and $700 million in debt, did nothing other than erase the taint of Enron, it could generate a 100% return.
But there was a catch: PGE is a regulated utility. A half-dozen different state and federal agencies would have to sign off. No problem, the Texas Pacific team thought. We've dealt with airline regulators, bank regulators, insurance regulators. Why should this be any different? Well, maybe it was the second catch: an Oregon law requiring that any utility sale result in a "net benefit" to customers. Texas Pacific was legally obligated to make the deal worthwhile for the utility's ratepayers.
The regulatory process in Oregon allows great latitude for a huge range of participants to become, in legalese, "intervenors." Ultimately the state's utility commission decides on the deal, but the intervenors are roughly equivalent to parties in a lawsuit: They get to examine Texas Pacific's documents and take depositions. Then they can negotiate a settlement, oppose the deal, or propose conditions for approval. In this case, 47 intervenors would weigh in. All this would be set against the backdrop of a region with a populist tradition and a long history of consumer-owned utilities.
But even as the regulators pondered the case, there was one more explosion: In January, sealed documents that Texas Pacific had provided during the regulatory process were leaked to the press. A new wave of bad publicity erupted, this time over "secret documents," which turned out to be Texas Pacific's due diligence. The documents mentioned the possibility of job cuts at PGE and spun out scenarios in which Texas Pacific earned $1 billion on the transaction that Bonderman had proclaimed a "low-return deal." The papers also referred to the structure creating a local holding company as a "PUHCA pretzel"--making it clear that the structure was designed to outwit the federal Public Utility Holding Company Act (PUHCA) and not to benefit customers, as Texas Pacific had repeatedly implied.
Reporters in Oregon wanted to know WHY Texas Pacific wanted this utility. We have to ask hard and fast questions in the same vein. And is all this turning over of government functions, including public utilities, to private entities is in our best interest.Sure, it makes money for the companies that invest and undoubtedly for those who help broker the deals, including government officials who may be getting lobby money. But for the average Joe, we might have gas pipelines criss-crossing our property without our consent, because of eminent domain laws, and therefore companies that are selling us energy and controlling our utitlies ought to BE public and controlled.. by us...because what they do has a direct connection on what WE do and how we live.
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