AGA Today
Many Utilities Collect for Taxes They Never Pay
By DAVID CAY
JOHNSTON
The New York Times
Published: March 15, 2006
Many electric
utility companies across the nation are collecting billions of dollars
from their customers for corporate income taxes, then keeping the money
rather than sending it to the government.
The practice is
legal in most states. The companies say it is smart business.
But some
representatives of utility customers say that the practice, which
involves using losses from other subsidiaries to reduce taxes owed, is
not fair. They say that money that utilities are required to collect for
federal and state taxes — typically a nickel on each dollar paid for
electricity — should go for just that, or not be included in electric
bills.
Otherwise, they
argue, these legal monopolies make more than they are authorized to, and
other taxpayers have to make up the difference in higher taxes or
reduced services.
An examination
of regulatory filings by The New York Times shows that companies with
electric utilities in at least 26 states have pocketed money intended
for income taxes, and that utilities can legally do so in 21 more
states.
Because they
are legal monopolies, utilities must charge rates set by state
regulators. These cover all costs — from buying fuel, to building new
power plants, to a virtually guaranteed profit and paying the taxes on
that profit.
Normally,
customer payments for those taxes eventually find their way to federal
and state governments. That is usually the case for independent
utilities like Consolidated Edison, which serves the New York area, and
American Electric Power, which operates in 11 states from Kentucky to
Oklahoma.
But in recent
years many utilities have expanded into unregulated businesses, like
energy trading and aircraft leasing, while others have been acquired by
companies that own other businesses. When those other businesses lose
money or create artificial losses through tax planning, those losses can
be used to offset income earned by the utilities.
As a result,
the parent companies owe less in taxes than their electric customers
paid. Sometimes these companies owe nothing, or receive large tax
refunds. By not remitting the taxes, the parent companies effectively
have more money to invest in their operations or pay to shareholders in
dividends.
The ability to
intercept tax payments is not limited to electric utilities. Natural
gas, water and telephone utilities can use the same techniques. The
potential tax benefits are much smaller for gas and water utilities,
however. And most telephone companies are no longer regulated as
monopolies and their rates no longer include income taxes. (The taxes
and fees that phone companies add to monthly bills are not corporate
income taxes.)
Among the
electric utilities whose customer tax payments are not reaching tax
coffers is Pepco, serving four states and the District of Columbia.
Pepco collected nearly $546 million from customers to cover its income
tax bill for the years 2002 through 2004. Yet the parent Pepco Holdings
did not pay income taxes during those years; indeed, it received $435
million in tax refunds.
Pepco says the
beneficiaries of those refunds were not the company's shareholders, but
utility customers. A vice president, Anthony J. Kamerick, said that
without the ability to use taxes embedded in monthly electric bills to
help finance its unregulated investments, including new power plants,
electric customers would pay higher rates.
Customers paid
Xcel Energy, a big utility in 10 Midwest and Western states, at least
$723 million to cover taxes from 2002 to 2004. But the money did not go
to the government; in fact, the company received cash refunds of $351.4
million.
A spokesman, Ed
Legge, said the refunds resulted from a failed energy trading business.
"Utility customers did not bear the risk of that business, and they
should not benefit either," he said.
Also expressing
the utilities' view, Paul L. Joskow, an economist at the Massachusetts
Institute of Technology, said, "For the customer, the result is the
same." If the utility were a stand-alone company and filed its own tax
return, he added, the customer would pay the same for power.
But critics
argue that when utilities collect taxes the government never receives,
customers do lose.
The Minnesota
attorney general, Mike Hatch, said, "Essentially, the utility ratepayers
pay the tax twice, once through the utility bill and again through the
lost revenue to government that means either higher taxes for them or
less government services." Mr. Hatch is trying to require that any taxes
included in Xcel bills be paid to the government. Xcel opposes this.
The critics say
that while many profitable businesses use losses to minimize their tax
bills, utilities are unique because their taxes are built into the bills
that customers pay.
Critics also
say utility companies are enriched beyond the limits set by law if they
pocket the tax money. "Utilities are entitled to a just and reasonable
return," said Myer Shark, a 93-year-old lawyer who sued unsuccessfully
to recover $300 million in taxes paid by Minnesota customers of Xcel.
"But when they keep the taxes, they are earning an unjust and
unreasonable rate of return."
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Graphic
Pocketing Taxes
Pocketing Taxes
Enron was a
pioneer in turning taxes into profit. Since 1997 the company, now in
bankruptcy, has collected nearly $900 million from customers of a
utility it acquired, Portland General Electric, to cover income taxes.
But none of that money reached the federal government from Enron, and
only a quirk in the law forced Portland G.E. to pay about $800,000 in
income taxes, of which $20 went to the state of Oregon.
Enron could
keep the tax money because it created 881 subsidiaries in the Cayman
Islands, Bermuda and other tax havens, tax shelters that on paper
generated losses for the parent.
The tax
benefits are one reason Wall Street these days likes electric utilities,
long seen as unexciting investments. Warren E. Buffett, Henry R. Kravis
and David Bonderman are among investors drawn to utilities in recent
years in hopes of earning returns through parent companies that can be
several times those typically approved by state regulators for the
utilities themselves.
For decades
utilities have been able to delay paying the government the taxes
collected from customers; the delayed taxes are known as phantom taxes.
But the more recent issue involves taxes the government will never
receive because tax rules have not caught up with changes in the
ownership structure of utilities.
Three decades
ago, said James T. Selecky, a utility-rate consultant to the Minnesota
attorney general, "we had true utility companies with very few or minor
other operations," so the taxes eventually flowed to the government. But
that is no longer true.
Only a few
states have mechanisms to prevent pocketing such money. West Virginia
and Oregon require that taxes be paid to the government, although the
Oregon law, enacted last year, is under attack by utilities there.
In
Pennsylvania, the state Supreme Court ruled in 1985 that "fictitious"
expenses, such as taxes government never receives, cannot be included in
utility rates.
The prospect
that a utility could charge for taxes that the government would never
receive became a major issue in Oregon when David Bonderman's Texas
Pacific Group tried to buy Portland General Electric in 2004.
Texas Pacific
specializes in revamping financially troubled companies like Burger King
and the clothier J. Crew. Such companies typically have tax losses, but
little or no profit to make use of them. If Texas Pacific had acquired
Portland General Electric, whose profits are virtually guaranteed and
which had $92 million a year of taxes embedded in the bills customers
pay, it could have used the losses from its other companies to offset
the utility's profit and keep the money paid by customers ostensibly for
taxes.
Texas Pacific
persuaded Oregon utility regulators to keep most records of the purchase
proceedings secret.
When these
documents became public, they showed that Texas Pacific expected annual
returns greater than 33 percent, three times the expected rate of return
for a utility. That revelation generated public and official criticism.
The state Public Utility Commission unanimously rejected the Portland
purchase a year ago.
In the wake of
the controversy, the Oregon Legislature passed a law requiring that
taxes on electric bills be turned over to the government and rates
adjusted each year to accurately reflect what customers paid and
governments collected.
MidAmerican
Electric, an Iowa utility holding company controlled by Mr. Buffett, and
PacifiCorp, a Scottish-owned electric utility, have been lobbying in
Oregon for repeal of the law.
The National
Federation of Independent Business's Oregon chapter, with 12,000
members, favors the law. J. L. Wilson, its executive director, said it
helped prevent a practice that "just bumps up electric rates."
One way to make
sure customers do not pay for taxes that governments never receive would
be to require each utility to file its own tax return. That way, taxes
would be paid to the government, not to a parent company.
Another
solution has been advanced for three decades by Robert Batinovich, a
California businessman who promoted innovative approaches to regulation
when he was chairman of the California Public Utilities Commission in
the 1970's. Mr. Batinovich, now chairman of Glenborough Realty Trust in
San Mateo, Calif., suggested exempting regulated monopolies from the
corporate income tax. "It's just a disguised consumption tax, just
another way to take from the little guy," he said.
But he said
that if governments wanted to raise money from regulated utilities, it
would be easier just to add a tax, similar to a sales tax, to monthly
bills and require that all that money be turned over.