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Ochenski: Montana’s Enron?

How “aggressive accounting” may jeopardize our energy

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Last week’s Public Service Commission (PSC) hearings to determine the fate of nearly 300,000 former Montana Power Company (MPC) residential and small business customers revealed deeply disturbing events surrounding our state’s energy future. First, there were claims of political chicanery in the decision to award the entire wind power contract to a single, highly controversial entity. Then came accusations that the entire bidding process was faulty and should be reopened. Such warnings from power experts caught Montanans’ attention, but in the end, it was a news report about Enron-style bookkeeping by MPC’s successor that finally took the week’s prize as Montana’s deregulation debacle deepens.

Giving credit where credit is due, it was Jan Falstad of the Billings Gazette who did the investigative reporting that lays out the story. In her article, Falstad talked not to energy experts, but financial analysts, about NorthWestern Corp., the company that bought MPC’s transmission lines and distribution facilities. What she heard back was, to say the least, alarming.

To start with, NorthWestern spent $44 million last year to have Arthur Andersen do their financial accounting. And yep, that’s the very same Arthur Andersen that did the fiscal hocus-pocus to make Enron look like the nation’s seventh largest company when it was actually slated to become the nation’s largest bankruptcy. And yep again, it looks like some of the same financial sleight-of-hand could be at work.

For instance, after a utility analyst for the giant investment firm A.G. Edwards went through NorthWestern’s last annual report, he had this to say: “We’ve never seen anything like this before. We do not believe this accounting methodology paints a good picture of reality.” The analyst pointed out a $119 million loss that was shifted to its subsidiaries, thus allowing NorthWestern’s financial statement to claim millions in earnings. Maybe that sounds like no big deal to those of us who don’t happen to be utility analysts, but for A.G. Edwards, it was one reason they listed the company’s stocks as “sell.”

When Falstad contacted a California accountant who specializes in analyzing accounting policies, the reviews got even worse. Calling the financial presentation, “both unusual and aggressive,” the analyst said he “didn’t believe NorthWestern’s financial presentation would survive the scrutiny of formal review by others.” His opinion is that NorthWestern is somewhere between $70 million and $142 million high on its income statements.

Closer to home, D.A. Davidson’s senior analyst, Jim Bellessa, is also wary of the company. For those with short memories, Bellessa is well-known for his die-hard endorsement of MPC stock, even through the free fall that accompanied the sale of the utility’s generation and transmission assets. If anything, one might think Bellessa is a little too gung-ho on utility stocks, but even he is puzzled by the accounting and said, “…we don’t yet have confidence in the parent company.”

Given NorthWestern’s legal obligation to provide essential utility service to hundreds of thousands of Montana’s families and businesses, these reviews are, to say the least, troubling. Unfortunately, when huge executive salaries and payment extensions get tossed into the mix, it gets even more Enron-like. And the $1.1 billion the company owes for its purchase of MPC won’t show up on the books until later this month.

The question, of course, is what this might wind up meaning to the Montanans who are relying on the company to make sure the lights and heat come on when they throw the switch in the dead of winter. And that’s not an easy question to answer.

The PSC has a statutory duty to ensure that the portfolio of power sources and distribution systems upon which Montanans stake their future is “prudent,” which is defined as an action “marked by wisdom or judiciousness.” So far, virtually nothing associated with Montana’s ill-fated experiment in electricity deregulation has even been peripherally touched, let alone marked, by wisdom or judiciousness. Unfortunately, it looks like that trend will not be broken by the upcoming decision.

Energy insiders paint an ugly picture of what might happen. First, the so-called “free-market” competition upon which deregulation is ideologically based has simply failed to materialize in Montana. This is no great surprise, really, given our tiny population and the huge geographic distances to serve it. Who in their right mind would want to maintain such an enormous network of poles, lines, and power supplies to serve so few? As it turns out, just about no one. The PSC (and Republicans in particular) are so desperate to try and fabricate the illusion of competition, that they may even approve as yet un-built and arguably unneeded coal and gas power plants as part of the supply portfolio.

But what happens if financing doesn’t come through, the power plants aren’t built, or the ventures simply fail? Unfortunately, it would mean NorthWestern, as the “default supplier” would have to buy power on the open market. Remember what happened to “market prices” for electricity during last summer’s drought? In Montana, we lost major industries simply because they could not afford the astronomically high prices to which electricity soared. In California, it was even worse, and the state is still in court trying to recoup billions of dollars in overcharges it says were the result of market manipulation by Enron and other energy conglomerates.

If NorthWestern is forced to buy power at market prices, the company would have little choice but to pass those costs on to Montana consumers—or go into bankruptcy. At last summer’s rates, some say it could occur in as little as two months. The PSC would likewise have no choice but to approve new rate increases. And Montanans, caught in a trap of our own devising, will have no choice but to pony up for the high-cost power or do without. Add the possibilities of Enron accounting to this uncertain mix and we just might be up the proverbial river—with dang few paddles in sight.

When not lobbying the Montana Legislature, George Ochenski is rattling the cage of the political establishment as a political analyst for the Missoula Independent.

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