SEATTLE – The Public Counsel Section of the Washington State Attorney General’s Office today recommended that the state Utilities and Transportation Commission (UTC) not approve the acquisition of Puget Sound Energy, Inc., (PSE) by a consortium of private equity investors because the transaction, as proposed, is not in the public interest.
Bellevue-based PSE, Washington’s oldest and largest energy utility, serves more than 1 million electric customers and 725,000 gas customers in Western Washington. In December 2007, PSE asked the UTC to approve the sale of PSE and its parent company, Puget Energy, to a consortium of private equity investors led by the Macquarie Group, an international banking and investment firm.
Public Counsel, which represents residential and small business customers in utility rate cases, today filed expert witness testimony with the UTC based on extensive review and analysis of numerous documents associated with the acquisition request. These documents, many of them confidential, included testimony provided by executives from PSE and the investor consortium, Puget Energy board minutes, presentations made by Macquarie to equity and debt investors, long-term financial projections by PSE and Macquarie, opinions of bond-rating agencies, and other related information.
“Based upon our review, this sale, as proposed, simply exposes PSE’s customers to an undue level of financial risk by undertaking too much debt,” Public Counsel Chief Simon ffitch said. “At the same time, customers have no assurance that capital for infrastructure will be any more available or affordable than without the merger. Consumers appear to get little or nothing in return for the increased financial risk.”
Public Counsel expert testimony concludes that the proposed transaction should not be approved because:
- The transaction is dependent on substantial amounts of debt financing, for example, adding $1.6 billion of new bank debt to PSE’s $2.6 billion of existing debt as part of the initial transaction. Bond-rating agencies have recognized that the proposed debt represents a significant departure from Puget’s current financial strategy. The bond rating has been negatively impacted, an indicator of potential harm from the proposed transaction.
- The transaction reverses a carefully crafted and successful effort that started in 2002 under UTC oversight to rebuild PSE’s financial strength. At that time PSE had excessive levels of debt financing which have since been reduced under the rebuilding effort.
- The transaction does not balance the interests of shareholders and ratepayers. Puget’s ratepayers will receive no direct benefit and must shoulder the additional financial risk associated with the transaction debt.
- As part of the transaction, Macquarie and PSE commit to provide customer benefits related to service quality, environmental impacts, local presence and other areas. However, these commitments don’t provide new benefits, but simply restate existing PSE obligations. Furthermore, the commitments, as proposed, don’t offset the additional risks caused by the transaction.
- The projected cash flows appear not to be sufficient to provide an adequate margin of financial safety when compared to changes in actual historical operational costs and revenues.
- PSE has successfully funded all its capital needs to date in the publicly traded capital markets (either by borrowing funds or by sales of stock). The company has not made the case it could not do so in the future. Moreover, Macquarie and PSE do not claim in their application that Macquarie could provide capital more cost-effectively than the public markets. The applicants appear not to have analyzed whether PSE’s cost to obtain capital for investment in infrastructure would be lower as a result of the sale.
- The transaction will make Puget a privately-held company, for which detailed quarterly and annual financial information will no longer be publicly available through Securities and Exchange Commission filings
Additional testimony and recommendations addressing service quality, energy efficiency and rate assistance programs for limited income customers were co-sponsored by Public Counsel and the Energy Project, an advocacy group representing programs for limited-income customers. The testimony raises the concern that the transaction creates risks for maintaining service-quality standards and offers no specific commitments over and above what PSE is already required to provide under existing regulation.
The UTC will examine the testimony and evidence presented by Public Counsel and other parties. Hearings to cross-examine expert witnesses will begin on July 28, 2008. The UTC is expected to issue a decision by September 2008.
PSE has also filed a request with the UTC for rate increases for electric and natural gas customers. The UTC is considering the rate increase request separately from the sale and will issue a decision in that case by November of this year. Hearings to cross-examine expert witnesses will take place beginning Aug. 25, 2008.
Customers can submit comments about the acquisition to the UTC via e-mail at email@example.com, online at www.wutc.wa.gov/comment or call toll-free 1-800-562-6150. Details about the company’s proposed rate changes are online at www.wutc.wa.gov. Enter 072375 in the docket field.
The Public Counsel Section advocates for the interests of consumers on major rate cases, mergers and other rulemakings before the UTC. Public Counsel also advocates for consumers in court appeals, through technical study groups and before the Legislature and other policy makers. The office maintains contact with the public through a citizen advisory committee, community organizations, public hearings and personal contact with consumers in major cases. More information about Public Counsel’s work is available online at /Utilities.aspx.
Media Contacts: Kristin Alexander, Media Relations Manager - Seattle, (206) 464-6432
Simon ffitch, Public Counsel Section Chief, (206) 389-2055
Editor’s Note: The spelling of Simon ffitch is correct – the surname begins with two lowercase f’s.