Seven Days; Tobacco Cash; Power Deregulation

Hi, I'm Christy George, sitting in for Stephanie Fowler, and this is Seven Days. Our topics this week, the plan to sell bonds backed by Oregon's share of the tobacco settlement and a bill that would deregulate the electricity industry in the state. On Wednesday, State Treasurer Jim Hill outlined a plan to sell $400 million in bonds. They'd be backed by Oregon's share of the national tobacco settlement. The state is supposed to get $2.4 billion over 25 years. The state treasurer says, with his plan, the money would be available right away to invest in education, health care, and a rainy day fund. On the surface, it looks like a win-win solution to some of the tough budget problems being

debated in the legislature. The Republican leadership at the Capitol and Governor Kitsaber are cool to this idea. Steve, tell us why. I think they actually agree on this more than they disagree. Most of them, the leadership does not like the idea of having this one-time source of money that supposedly solves the problem now. Then you have to pay for it in the long run, and you don't get the money in subsequent years. So it's a short-term fix. The Radio Adam's Ascended President, who's the budget guru, is worried about adding $200 million into the budget to get to the magical school figure that the governor has requested. And then he wonders, where are you going to get the $200 million in the next budget cycle? The Kitsaber said today that he didn't want to pay for something that's going to pay for school operations with a bond that you have to pay off in 20 years in the future. Didn't think that made much sense. It's a philosophical, in large measure. Well, you can break this down in several ways.

I find both Hill's announcement and sort of the resulting backlash, if you will. One of the more interesting developments in Salem in the past couple of weeks, although I'm certainly not down there as often as you two are, but the concerns are on the one hand, does it make more sense to take $400 million today or get $900 million over 20 years? It's sort of similar to, and Jim Hill has used this example, winning the lottery, if you win the $1 million lottery, you're allowed to get 20 payments over 20 years or you can get a half a million dollars today. The issue is that if you take that half a million dollars and you invest it over 20 years, it would approximate a million dollars. That's part of the issue. The $400 million that you would get is worth somewhat less than $900 million over 20 years, because this is a little bit of a riskier investment, if you will. This $400 million would be raised by selling bonds that would be secured by the proceeds from this tobacco settlement. Well, who knows what's going to be, as we were talking earlier before the show, what's

going to be with the tobacco industry in 18 years? They could be bankrupt. You know, there was the $81 million verdict in Portland that may affect tobacco companies. So part of it is whether or not you should take the money now. The other political part of it is whether what Hill is proposing to do with the $400 million is correct. He wants to take half of it and give it to schools. He wants to take half of it and put it towards some health care trust fund, and then with the balance of the settlement, put it into a rainy day fund. And then lastly, if you'll just indulge me for a second, there is sort of, in some circles, this is being viewed as sort of the opening salvo of the Jim Hill for governor race. He did not do an extraordinary amount of conversing with other individuals prior to his unleashing this. I could have imagined a press conference in which he had John Kitsa Burr and his right, Brady Adams on his left, or maybe it would have been the other way in which they could have all shared credit for what's being considered to be sort of a bright idea. I think the fact that he didn't do enough of that is part of the reason. I hope I'm not being too cynical why the governor and the Republican leadership is being

a little bit cautious. I think this approach is going to look increasingly appealing as the session goes on, and as it becomes apparent, and it will become apparent very quickly, that John Kitsa Burr doesn't have a chance to get that tax increase or keep the kicker from the Republicans, and it will become apparent, and I say this with some regret that the Republicans, particularly Republicans in the Senate, are not up to the task of cutting the state budgets in the way they would need to in order to get to a higher education figure. When that happens, $400 million dropped on them by Jim Hill is going to look very appealing. It's an exit strategy to get out of there, and while it does present some of the problems that Steve mentioned, those problems will be there if you have an uptick in the economy and you have more revenues.

We're going to face budget challenges and gaps in two years anyway, and you could argue as Brady Adams has to me that the best thing you can do from the standpoint of fiscal conservatism is to get that legislature out of there as quickly as possible. Well, I think the key thing here, and I think you hit on it a little bit, is that really nobody down there wants to be seen supporting a lower school funding figure. A lot of it was sort of an interesting sort of almost a bidding game in an auction. The governor comes out with a figure, and then the Republicans come out, Brady Adams first, and his budget came out with a little higher figure, and then the school funding coalition came out with a figure nobody's top at this point, and then the governor came out with one higher than the Republicans, and so I think there's a lot of pressure now to get to the figure that the governor proposes, so they're going to be looking everywhere for that. We've talked for years about having stable funding for schools, and I think we've achieved it, is that we have the legislature come in every two years, and then just look under

every seat cushion and everywhere for money, and it's a huge scramble, and I think that's sort of what's going to be the time to come here. It does sound like you're both saying there's a real consensus to fund the schools up to that pretty high level, but where? I think they'd like to get as close, like I said, nobody in the end wants to be in the position of going into the next campaign with their opposition saying we did more for schools than the other side. I disagree that there's a consensus on the number. I don't think either the Speaker of the House or the Senate President are really behind the $4.95 billion that Kitsabra and others in Lankwis, for instance, have endorsed. But they also understand the political heat. For example, they kind of been batting around a figure about $200 million less, and they understand the heat of that, and I'm not sure they have the votes among their own members for a number that low. So, but they do have the votes to kill the kicker and kill the people. But would they use the tobacco money to get to a lower figure?

In other words, Hills proposed this as a bridge between some of these competing bids, is it going to come to a situation where they grabbed that dough and come in even lower for it? And unless the revenue forecast is a whole lot worse next time or not, I don't think I don't want to see that. The issue for a number of people is not, shouldn't this money be spent on education? Aren't you postponing the inevitable? This would be a $200 million shot in the arm. It would be spent all, as I understand it, during the next biennium. So two years hence, the legislature is back exactly where it is today, which is why you have the governor saying, no, we need to do something more structural. And I think that's where at least some of the talk will be headed. Well, you can still have that structural debate and have it in the next two years. This just allows you to get out from that always troublesome debate about whether you keep the kick or... Right. Well, I think that's always going to be... Well, I guess, you know, if the governor succeeds in finding another tax source that funds schools, I think that's always going to be a debate, though.

I think we're in sort of the postmodern era, if you will, where there is always going to be a huge fight every two years. And they're going to be looking in places they never used to look for money before. I mean, I've had obscure funds people have mentioned that nobody has ever really talked about before, you know, that they can... They're talking, once again, I've heard some people talk about, well, let's once again look at the state accident insurance fund, you know, so... But is this operating or capital? I thought Jill was... Hill was saying, let's use it for capital as a whole... It's sort of a shell game. Because you can't really bond. I mean, two years ago, the voters passed $150 million bond. That's how they got to the school figure last time. And really, schools just sort of re-adjusted their budget. I mean, the effect was the same. That was a different depending upon the school district. Portland took all of its money and just said, oh, this is extra money for our operations. The second largest district in the state, Salem Kaiser did just the opposite. They said, no, we're using this to equip our new schools. So it was a varying, in fact, they did...

They are planning using a brand capital. How different did they do things than they would have done if they hadn't gotten that money? I'm not sure how they would have paid for the new schools, but that money was a flexible use money that you can't do with regular school bonds anymore. And that's interesting. The bond that Jim Hill is talking about is identical, really, in scope to the lottery bonds that are paid for $150 million. You're getting this revenue source, the lottery, that you're saying, okay, let's get one big bond. And instead of using some of that money each year, you're getting a lot up front and paying for it over 20 years, whatever the term is. Computers and textbooks are generally considered operating schools. It seems like operating, rather than measure 50, rewrite some of computers and operating costs. But because it's hard, we can drive this capital and get away with that. But it is a little bit of a show game because, you know, and I don't think any school district would take this $200 million divided up appropriately and use it for a one-time expense and we're not going to...

We will have the same problem two years hence, you know, in a funny way, I think part of the adverse reaction in the part of the governor's office is after getting beat around the head for not having done anything in this issue of school funding, the governor says, okay, I'm going to do it. And he has this tax plan and then he basically says, and I'm going to basically use the last year of my time as governor to campaign for a more structural tax reform. Well, Hill has sort of let a certain amount of air out of that balloon and in so far as the governor is interested in creating some sort of a legacy, it has made it, I think, even that much more difficult because you have postponed for two years the crisis if you believe there to be one. Well, if the kicker and the corporate income tax were dead before Hill came out with this plan, they are doubly dead after Hill's proposal. But now, wait a sec, because the speaking of shell game, this money, there's an argument that this tobacco settlement money should not be used for schools, but that should be used for health education, tobacco, anti-tobacco, I mean, there's a very powerful strong argument that this is not school money, you can't use it for this. This is an argument that is made very passionately by health care individuals and the Clinton

administration which wants to latch on to some of this money itself. I actually don't think it's that compelling. This is taxpayer funds that if we hadn't been, by the logic of the settlement, if we hadn't been using it to take care of the people's medical needs, it might have been going to be that's my personal logic, but I think people voted for tobacco education. Finally a moderator who agrees with me, I probably shouldn't agree with anybody. I mean, it does sort of, I hate to overuse the word shell game, but that's what always gets complicated about public budgets. Voters always love to have money dedicated to something because they feel like it's a good source of that. So they vote to dedicate money to something and then what often happens is the politicians figure out a way to take that money and use it to pay for services they're already doing or that they would fund it another part of the budget and then that frees up money

somewhere else. So you always sort of get into that, no matter technically what you use that money for. But is there a compelling argument to fund a tobacco education program to the Hilt and more because of the money that would generate, because of income. That's a little bit overkill, so to speak, because you can always spend so much trying to keep people from smoking and this is really an obscene amount of money to do that. You remember that, I don't think they're talking about spending the whole amount, I think they want to 18 million. It would be more for healthcare. Oh, sorry. Remember, the tobacco settlement says that we'll pay out this amount of money unless tobacco sales go down appreciably. In theory, if not enough people smoke cigarettes, less money is going to come to individual state. And it's already gone down, correct, almost by half. I mean, before we've got the first track. Because of the price hikes, and you started out, Mark, by saying that this was a little risky, isn't it also risky to count on getting this money for the next 25 years? That's exactly Jim Hill's argument.

I mean, his point is that you have no idea what the fiscal, you know, this is not being backed by the full faith and credit of the state of Oregon. You know, it's not, you know, it's not backed by the full faith and credit of it. It's a lot more. Right. And the industry, by the way, that people want to kill. Right. There are a lot of people. I mean, to a certain extent, Wall Street is coming in here and saying, we'll convert your uncertain money to certain money. There's a price to be done for that, but, you know, but I mean, that maybe that's worth it to have a steady flow of money we can depend on. That's worth something rather than gambling against Wall Street. Don't you find it odd that in the midst of this budget stalemate and people crying out for some leadership and fresh ideas, Jim Hill. Sally's forth with this proposal. And it was met with a rather chilly response on the part of Republicans, and I think, frigid on the part of the Kitsauber, which if you surveyed this state, maybe less than 10% of the state would know who Jim Hill is.

And he has not exactly been in the forefront of coming up with bold new ideas for the state. But here we are. I think the Republican leaders probably like the means of Hills of proposal more than the ends. I think they like the burden, the hands worth more than two in the bush. They don't necessarily want him telling them how to budget their money. Well, and they certainly don't like the fact that he's made it, as you say, more difficult for them to say, no, we're going to cut the budget first before we talk about raising education. We're going to take a hard look at where those dollars are spent. He's cut everybody off. Yeah, yeah. I'm not sure he's cut the Republicans off, especially the House Republicans who I think are more interested in cutting those budgets to get to their figures. Yeah. But once again, you can take that money, use it for healthcare, tobacco prevention, whatever that's called, and things like that. And I might free up some parts in the budget where you could then put more money into the education budget. So in essence, the Republicans might get to the same place Hill is talking about just not by the director out.

He said something a minute ago that I think is interesting. It should states like Oregon worry that Wall Street is going around to off the states that are getting a piece of tobacco settlement money saying, hey, we got a deal for you. We got to wait, wait, wait. It's like getting along on your paycheck. Pretty easy to do the math. I mean, the state says that the bonds that would be issued to raise the money for this would be rated A. State Oregon State bonds are rated AA, so an A is a higher risk than AA. So clearly, you're paying, you know, how many percentage points, or it's not a percentage point. It's a thousandth of a percentage point for the risk that the underwriters are paying that the tobacco industry may file for bankruptcy or get bought by a foreign company and says, no, we're not paying. There's a, there's a, it's pretty easy to calculate. And this is something that states and private markets do all the time. They bundle mortgages, for example, and then sell mortgage-backed bonds. So what they pay for those mortgages depends on the credit worthiness of the homeowner. Well, I want to, I'm going to move to another place where the private sector is interested

in Oregon. And that's a deregulation. The Senate Committee on Public Affairs approved a bill Monday that would move the state toward deregulating the electricity industry. Senate Bill 1149 would require the state's two largest utilities to offer their residential customers a portfolio of choices by January 1st, 2001. Among those choices, people could buy green power, stick with regulated prices, or take their chances on the open market. Business customers are behind the national push to deregulate the utilities. And under this bill, they would buy power in a fully competitive market. Jeff Oregon has some of the cheapest power costs in the country, but it hasn't been the first state to line up to deregulate the power industry. Is that related? Absolutely. I think the feeling is, you know, if it ain't broke, why fix it? And you find that from a lot of legislators still. I mean, there's, as I've been writing this week, there's a rather extraordinary coalition behind this bill. I walked into a meeting of all the electricity lobbyists who are supporting this bill, and it looked like the bar scene out of Star Wars.

You know, I mean, it was just a... Sure they'll appreciate it. That's right. It was a sort of amazing collection of creatures. And... They speak kindly of you. Yeah. You're really fine to the business pages. So that's pretty interesting, but I think the difference in this approach, if we were simply going to open up all of our utilities to competition, that bill would not pass at all. There's some significant differences in this than what they've done in some states. For starters, residential customers, as you pointed out, aren't going to face full competition. They can really essentially kind of just stay as they are, still get a rate-regulated plan, and their bill may be a little more detailed, but perhaps the bottom line won't be very different. Another big difference is about 25 percent of the state gets public power, and essentially they've been allowed to decide for themselves whether they want to deregulate or not. So all the, you know, the rural co-ops, places like the Eugene, which has a city-owned utility,

they can decide their own future. So you think that the push for this has really, which gets back into this issue of cost, has really less been on the side of those people who arguably speak for residences and consumers, but it has really been the big industrial users. Absolutely. And in fact, when you talk to the consumer and environmental groups, they essentially say, look, deregulation is kind of happening. It's starting some of the big industrial people are starting to cut their own side deals. It's a little bit like before Mob Bell was broken up when, you know, you could start to find alternatives for long-distance calls and big, you know, businesses were starting to find ways to get out of the monopolized phone network, and it's sort of that same way now. And their attitude is, hey, let's get on board and try to guide this and control what's going to happen instead of letting it just happen, helter, scalter, and kind of the consumers left out in the cold.

And they've gotten a lot of concessions in this bill that they might not get as a deregulation from imposed by Congress or another legislature down the road. This 3% surcharge, whatever you want to call it, on bills will actually increase revenues for energy conservation that the Bonneville Power Authority administration has really cut in recent years. And on the utilities themselves have cut. Exactly. Can you tell me why the public utilities have been exempted from this 3% of the purposes? Well, it's a purpose. They've been exempted from everything. Well, I mean, I think maybe we ought to define for our— Municipal City-owned power companies, and rural power companies. Well, there's actually a high-committance look. We're owned by the consumers. We've always guided ourselves, and we don't have the PUC regulating the Public Utility Commission like everybody else. We ought to be able to determine our own future. We do things like energy conservation already, and let us—one size doesn't fit all. Some of us are very small. We don't have the ability to do a lot of the innovative things, maybe some of the— Well, it seems like it's protecting some of the folks who have the cheapest rates, too.

And also, people who might get left behind in a super competitive market, folks out hard to serve, hard to get a power line way out to Eastern Oregon to one house. It is protecting some public utilities with the cheapest rates, but they are then going into competition in other areas with utilities that need to—are required to have this 3-percent public purpose. Well, they do. Yeah. I mean, for the publics, really, I mean, I don't think there's so much going to be competing for industrial customers outside their districts. I mean, there's—some already are. To some degree, I mean, if they open up their own territory to competition, then they're subject to the 3-percent public purpose charge or tax, really. What are the reasons that these small publicly-owned utilities need to be worried is a lot of them where created to serve a few large customers, and if they start losing one or two, or more, in some cases, even one, and some of them, then they lose a whole market share, maybe

a huge chunk, and then the cost have to be absorbed by everybody's laugh, so they can really get really creamed by this, all their residential customers. If they're not careful, and they don't have the ways to raise vast capital on Wall Street that a company like Enron can to respond to the competition, really are. And frankly, it was a compromise that a lot of the supporters of the bill, both the business groups supporting it and the consumer and environmental groups are not wild about. They would have liked to bring the publics in more. It's worth noting that despite this Star Wars coalition, as you've coined, that there is some opposition, principally, Pacific power, which is the second largest utility operating in the state of Oregon, and is not an insubstantial presence in Salem. And maybe about to be a multinational. And is the target of a buyout by Scottish power? It's not, and Jeff, you may be able to enlighten me a little bit.

It's not exactly clear to me exactly why they're opposed. I believe and have been told that one of the reasons why they're opposed is one of the big issues in deregulation is who pays for stranded costs. Who pays for these enormous and perhaps unproductive investments in nuclear power plants and dams or whatever. This bill conveniently punts on the issue of stranded costs and says, we'll leave it to the PUC. And it's my understanding that Pacific power is very uncomfortable with the idea that the Public Utility Commission, which has been very consumer-oriented, might be responsible for determining this huge piece of deregulation. Yeah, and this is a complicated subject, and here I think to an extent, I'm not sure anybody knows for sure, but in the Pacific course case, it may be stranded benefits. They may have some low-cost sources actually where the regulators could argue if we go to full competition that the benefits of those low-cost power developed during rate should go to consumers, and that makes them very nervous. They are in a different situation than PGE, the other big private utility that they operate

in, I think, a six-state area, and they argue that it's kind of hard to separate out Oregon from the rest. They're also very different. They're a power generator. I mean, they have plants, whereas PGE Enron has divested and is already almost the model of the company that buys power on the market and doesn't really run plants anymore, which is the new model. It still does, but Enron's history is not to function that kind of environment. And they shut down their Trojan nuke already and have been paying off without any stranded cost bailout by taxpayers or ratepayers. Some of those costs of decommissioning, though maybe not all. Well, that's yet another issue. There's a bill on the legislature to- Not unrelated. Yeah, actually, maybe we should mention that real quickly. There is a bill that's, who's actually supposed to reach the House floor this week, but all the other politicking that has been going on, the school charter bill slotted up, it probably will be next week. There's a bill that would overturn a court decision that said that the PUC was wrong to allow PGE to recover a profit and essence on the remaining part of their investment in Trojan

because the plant closed early. They weren't able to depreciate it all before it closed, and so there's a bill that would overturn that decision that would allow PGE to continue collecting from ratepayers on that. In fact, that's an issue, frankly, that PGE cares about at this point as much as or perhaps more than the deregulation bill. We don't have much time, but I want to go to the overarching question and put the northwest into the picture of what I think of as the free lunch theory of electricity deregulation, which is you introduce competition to the market and prices go down for everyone. Of course, California and New York and places with super high power costs have led the way in places like Oregon are a little slow to get on board because they think, well, maybe our prices will go up. There was just a report by the U.S. Department of Agriculture, which said, indeed, yes, the prices are going to go up in places like Oregon.

What do you think? Has this bill plugged some of those gaps for residential customers, rural customers, or is it begged the question? Is deregulation makes sense for the market? I think prices are going to go up deregulation or not. I think one of the interesting things is that in the few areas of this country where you presented to people the opportunity to deregulate on a residential basis, most of us have said, we're not interested, you know, and it may just be because we're confused, or it may be that the potential savings is not that great, or it's just your comfortable swearing at your current utility. You don't need another one to swear at. Prices could go down significantly for big industrial energy users. The benefits to the residential customer, if they come at all, I think, will come in 10, 15, maybe 20 years. If I was a union representing utility workers, I would be most fearful of this, because if you look at the airlines, the deregulation prompted competition and busting of unions or the formation of non-union workforces that depressed wages, you know, that may be

one area where residential customers may see some lower cost, irrespective of what happens at BPA and Hydro, if you have a lower cost workforces, the competition will help them ultimately. We've got to stop there. Thank you. All this is a great subject. Jeff Mape, Steve Law, David Reinhart and Mark Sussman, thanks for joining us this week on Seven Days. And we want to say goodbye to our associate producer, Elise Eden. This is her last show and we'll miss her. And thank you for watching. Have a good night.