How to buy PGE without breaking the law (third in a series)

Article XI, Section 9 of the Oregon Constitution says: 

No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.

The City of Portland is a city, and Portland General Electric is a corporation.  This provision prohibits Portland from buying and owning stock in Portland General Electric.  A fair amount of the talk about public ownership of PGE has been directed to finding a way for the government to own PGE without running afoul of this provision.

The Willamette Regional Electric Company (WREC) would be a corporation, formed either as a mutual benefit nonprofit corporation under Chapter 65, Oregon Revised Statutes (ORS), or as a cooperative corporation formed under ORS Chapter 62.  Each of these types of corporation can have shareholders, but is not required to have shareholders.  In place of shareholders they can have members, who might pay either a single-premium membership fee or annual or other periodic membership dues.

WREC would have members, but not shareholders.  Membership would be open to any city or county government within WREC's service area.  The membership fees and participation in distributions would be roughly proportional to electrical consumption.

Cities and counties can be members of corporations and other associations.  They're members of all sorts of organizations now (the League of Oregon Cities is one example).  They could be members of WREC as well.  They are not raising money for WREC; that is, they are not looking for capital contributions from their citizens or other third parties to pay to WREC, and if they do not guarantee the debt of WREC then they will not be lending their credit to WREC. 

WREC should be exempt from income taxes (the closest analogue is the Eugene Water & Electric Board, which I think is exempt), but it should as a matter of policy pay property taxes to local governments even though it might be exempt.  The loss of income taxes from PGE costs the state only $10 per year, based on the taxes paid for the last few years.  PGE pays property taxes (it's centrally assessed), and WREC should pay property taxes or make equivalent payments in lieu of taxes so that its formation doesn't affect local budgets.

The legal twist that allows WREC to own PGE without owning its stock, and with the local governments having control, is in how the purchase is set up.   WREC would not buy the stock of PGE and become its sole shareholder; instead, WREC would merge with PGE in what is called a "cash merger," in which the PGE shareholder (Enron) would receive cash in liquidation of its shares, leaving WREC as the surviving corporation owning the combined assets of WREC and PGE.  WREC never becomes a shareholder of PGE as PGE disappears at the moment of merger. 

The structure works, and it has the advantages of using existing legal technology and not needing any legislative approvals.  Let's encourage our local governments to take one more try at getting PGE into the WREC room.

Comments

[Richard Bennett]

This is all very nice, but the more important question is how to *run* PGE. A takeover by the Portland City Commissioners would probably mean switching to bio-diesel for generation, with a few used Birkenstocks on occasion to appease the electricity goddess. The homeless would be signed up to read meters and given full union benefits, and rates would go on a sliding scale depending on length of tenure in Portland and number of tattoos. Power to businesses would be cut off at 5:00, earlier on Fridays, to prevent overwork, and the people would end up generating their own power after the system was bankrupted by a multi-billion-dollar experiment with solar coffee-makers failed.

I just don't see it.

[ron ledbury]

I would not isolate on the document that evidences ownership, as in a share of stock. I would instead look to the exclusivity of any beneficial interest in the control. The right to exclude others in the gain is just one of the elementary bundles of rights associated with ownership.

I had hoped you might get to the nugget that if capitalism, as a theory that holds an owner solely at risk of loss for their own stupidity or misfortune, is an accountability regime all by itself. The elections for folks who participate in the pubic venture provide the alternative accountability, in lieu of capitalism.

There should be no vacuum on accountability, whichever approach is taken. Legal and economic reality considers it a truism that someone is always accountable, no matter the creativity of form to hide the risks and gains.

One person's advanced legal technology is just another person's artful deception, pick your audience and call it what you will.

[Jack Bog]

"No city... shall become a stockholder in any joint company, corporation or association,... or raise money for, or loan its credit to, or in aid of, any such company, corporation or association."

"The Willamette Regional Electric Company (WREC) would be a corporation..."

"They are not raising money for WREC; that is, they are not looking for capital contributions from their citizens or other third parties to pay to WREC..."

It's the "that is" in the last quotation that's the weak link. Who says the city would not be "raising money" if it floated revenue bonds and contributed (or loaned) the proceeds to the new company?

[Isaac Laquedem]

I palmed a card here. The hidden card is that the Oregon Supreme Court laid out the ground rules for cities investing in power companies 21 years ago, when it ruled on the anti-WPPSS lawsuit brought by Peter DeFazio (DeFazio v. WPPSS, 296 Or. 550 (1984))

Mr. DeFazio had argued that the cities had effectively become stockholders in WPPSS, had "raised money" for WPPSS within the meaning of the constitutional provision, and had lent their credit to WPPSS, also within the provision's meaning. The defense was that WPPSS had no stock and that the constitutional clause prohibited only investments in, and raising money for, private enterprises.

The court held that the city participants were not "stockholders" of WPPSS, and that they did not "raise money" for WPPSS in violation of the constitution. I also read the court's holding to be that cities can pledge the revenues from specific projects to benefit private enterprise, but cannot issue general obligation bonds (bonds supported by the cities' general powers of taxation and assessment) to benefit private enterprise. I also think that the Oregon Supreme Court would rule that WREC is not a private enterprise.

[Jack Bog]

It doesn't say "any private enterprise." It says "any corporation, whatsoever."

[Isaac Laquedem]

It does, but the Oregon Supreme Court has put a gloss on that phrase by effectively limiting it to private enterprises, and the court also said that a city can be something-that-is-not-a-stockholder in an entity such as WPPSS. That's part of why it seemed to me (perhaps naively) that the legal work to show how the city could buy PGE should be straightforward, because the supreme court laid out the ground rules 20 years ago, and most of the legal research -- maybe all of it -- is in the court's opinion.

[Richard Bennett]

Thanks for clarifying, Isaac - apparently many of us don't fully appreciate the role of courts in interpreting law.