May 29, 2007

KUFM / KGPR

T. M. Power

 

Montana’s Utility Financial Shell Games Continue

 

            Financial confusion is likely to continue to surround Montana’s largest energy utility, the old Montana Power Company.  Over the past ten years, the citizens of the state have had to watch the disintegration of that unusually low cost electric and natural gas company:

  • The sale of the cheap hydroelectric resources to an unregulated out-of-state utility that now sells that power back to us at what ever the market will bear.
  • The sale of the pipes and wires part of the old Montana Power Company to NorthWestern Energy, a haphazardly assembled South Dakota-based conglomerate that quickly slipped into bankruptcy.
  • And the transfer of the capital raised from those sales into Touch America that then almost instantaneously evaporated in bankruptcy.

Now, NorthWestern Energy, newly emerged from bankruptcy, is being bought by an Australian company, Babcock and Brown Infrastructure, a subsidiary of one of Australia’s largest investment banks.

            This might be seen as an improvement. New capital could be injected into the Montana operations, allowing NorthWestern to build some of its own generating capacity so that we are not entirely at the mercy of unregulated markets when we pay our electric bills. But that positive aspect of the purchase is overshadowed by the unusual financial structure of Babcock and Brown that may make it difficult for the Montana Public Service Commission to protect utility customers.

            Babcock and Brown Infrastructure is built on a relatively new financial model pioneered by another Australian investment bank. The general idea is for the bank to look for businesses that face little competition or market risk and, therefore, have a relatively assured cash flow. Local monopolies are ideal. Hence the focus on local infrastructure: toll roads, airports, energy utilities, seaports, etc.  The investment bank buys up such companies, largely using borrowed money, and puts the assets in a business trust.  That trust is then listed on one of the world’s stock exchanges and shares of ownership in that trust are sold.  The investment bank gets its money back so that it can go looking for other business plums to pick.

            The trust that NorthWestern will become a part of will have many different types of businesses rolled into it. That diversification helps reduce the risk and makes it attractive to investors. Since the diversified companies absorbed into the trust are all businesses with relatively captive markets and steady cash flows, investors are likely to see these investments are unusually low risk for a stock market investment, offering reliable dividends as well as the potential for capital gains if the stock market is expanding.

            The investment bank that makes these purchases and sets up these trusts earns its money through a variety of fees it charges these independent trusts. The investment bank charges what it calls a management fee based on the value of the assets of the individual companies. Since each company continues to be managed by its own board, few management services are actually provided and when they are, they are billed separately. The “management fee” is really a continuing and perpetual commission on the purchase and sale of the various companies. Then the investment bank also receives a share of the growth in the trust’s stock value if it exceeds the performance of the overall market. In effect, money that otherwise would have flowed to investors who bought into the infrastructure trust, flows instead back to the investment bank that created the various trusts.

            Since it is investors who voluntarily put themselves at risk to this financial shell game and perpetual skimming process, maybe we should just mumble “let the buyer beware.” But after the Montana Power, Touch America, and Enron financial fiascos, maybe we do not want to be so cavalier about other people’s financial losses.

            But the bigger concern for Montanans is what this does to the Public Service Commission’s ability to both regulate electric and natural gas rates and protect the financial health of the energy utility on which the state heavily depends. NorthWestern Energy will become a privately held company embedded in a large publicly traded infrastructure trust. Gaining access to accurate financial information on the Montana operations may be difficult. Weeding out the costs associated with Babcock and Brown’s purchase of NorthWestern and the investment bank’s various profit-skimming management fees will also be a challenge.

            Then there is the question of how the Montana Public Service Commission can protect the financial health of the utility and implement the Commission’s policy of local management and control.  There will be multiple corporate veils that will have to be pierced and complex financial trails to be followed. It will not be easy.

            That is not to say that it cannot be done. This deal cannot proceed without Public Service Commission approval. The Commission should make its objectives of local management, financial transparency, and isolation of ratepayers’ money crystal clear to Babcock and Brown and simply say “no deal” if that cannot be contractually assured.

            Montanans have been through enough shady financial manipulations with Montana Power, PPL Montana, Touch America, and NorthWestern Energy. Montana’s economy and its citizens’ financial well being have been damaged by the results.  Citizens should demand that the Montana Public Service Commission keep that from happening again.