4/23/2000

KUFM / KGPR

T. M. Power

Making Off with the Cash: Montana Power Sells Out

Montana Power has been arguing forcefully that any profit it might make when it sells off its regulated electric and natural gas systems and transforms itself into a national telecommunications company should go to its stockholders, including Montana Power executives, and that not a cent of that profit should go to its current customers.

This represents a 180-degree turn from the position it took when it sold its hydroelectric and Colstrip generating facilities. Very quickly after it announced its intention to sell off those generating facilities, it went public with the assurance that any profits from the sale of the generating equipment would go to customers, fully 100 percent of it.

When asked why, in this final sale before it went out of the utility business, it now thought that customers should not share even part of the profit from the sale, Montana Power explained that once it went out of business it would have no utility customers and therefore could not turn the profits over to them. This strange and twisted logic left observers wondering if it was just an April Fools joke rather than a logical or legal argument. Montana Power executives, in their briefing of the Montana Public Service Commission made clear that it was no joke. They have no intention of sharing the gain from the sale with anyone but themselves and their fellow stockholders.

Montana Power is no long attempting to logically defend their “take the money and run” position. Montana Power now simply asserts that they have found a way of structuring the sale so that state regulators will simply be cut out of having any say in how the profits are distributed. The key idea in MPC’s efforts to create this profit shelter is to structure the sale of the utility business as if it were just the resale of stock, something that takes place daily on a largely unregulated willing buyer / willing seller basis. MPC will first strip off the unregulated parts of the business like Touch America, buy up the outstanding shares of Montana Power stock, and then simply resell that stock to the new owner of the utility. Montana regulators have never had any claim on the profits made by people who sold their MPC stock when the price was high. Why should they have a say now when MPC resells all of its utility stock?

I will leave the question of the Montana Public Service Commission’s authority over these sorts of financial shenanigans to the legislature, lawyers, and the courts. What interests me are the economic and regulatory principles that led Montana Power just one year ago to believe that it had no choice but to turn over the profits from the sale of its generating equipment to its customers. The general principle is that once a utility investment is accepted by regulators as the financial responsibility of customers who will be forced to pay rates that allow the utility to both recover its investment and make a profit, those customers become the equivalent of part owners. Since the regulatory power of the government will be used to make all customers pay whatever is necessary to cover the investment and profit, regulation has effectively shifted the risk associated with the investment to the customers and away from the stockholders. Just as customers’ rates will be raised if sales fall off and the current rates don’t assure a return to stockholders, so too should rates be lowered if that equipment that customers have been required to support over the years can be sold off at a profit.

Both the Oregon and Washington utility commissions have recently issued orders applying this regulatory principle to an electric utility. PacifiCorp recently sold its interest in the Centralia power plant in western Washington. The electric utility wanted to keep the profit for its stockholders. Both the Oregon and Washington Commissions ruled that profit should follow risk and that the profit should be divided between ratepayers and stockholders in proportion to how the risk associated with the investment had been shared. The Oregon commission found that customers had shouldered almost all of the risk and allocated 95 percent of the profits to customers. The Washington commission carried out a more complex analysis of risk and also concluded that customers should get the bulk of the profits, 90 percent of them.

It no doubt was the likelihood that the Montana Public Service Commission would have come down close to the Oregon commission’s position that led MPC to not even bother to fight over the profits from the sale of its hydroelectric and Colstrip generating facilities. But if customers were owed the profits from those sales, they certainly have a right to the profits from the sale of MPC’s pipes and wires. Montana Power was at risk over its Colstrip investments. Investors lost tens of millions of dollars before those facilities were made the responsibility of Montana customers or long term contracts that covered the facilities’ investment costs were signed with California customers. But Montana Power was never at risk for its investments in the wires and pipes that distribute electricity and natural gas. Customers have always been fully responsible for those.

Montana Power got it right when it sold its generating facilities and turned the profits over to customers. Now, as it seeks to leave the state permanently, it has simply gotten greedy. It also knows that it doesn’t have to maintain any long-term relationships with Montana citizens or politicians any more. With nothing to lose, it simply has decided to take the money and run. It is up to us to stop them.