Legendary Omaha investor Warren Buffett loves stuffing tax dollars into his pockets, which means that money never gets to schools, police, and libraries. Now it looks as if he is about to defeat an Oregon law intended to ensure taxes go for public purposes, not private gain.
Events transpiring in Salem, Ore., give us a perfect real-world economic experiment, one that shows how a simple change in tax law could stop the growing practice of capturing tax dollars for private gain. It also shows a major reason why the use of holding companies is damaging to utility customers and taxpayers and why requiring all utilities to be stand-alone companies would reduce costs, streamline expensive regulatory proceedings, create transparency, and stop the conversion of tax dollars into private profits.
Americans pay billions of dollars each year to cover the corporate income taxes of legal monopolies -- electric, gas, water, cable, and other utilities. The taxes are built into the regulated prices that utilities charge, prices set by the Federal Energy Regulatory Commission for interstate operations like pipelines and by state agencies like the Oregon Public Utility Commission (PUC) for intrastate utilities.
Diverting taxes for private gain was a story that hit Oregon with a wallop nine years ago when I revealed that Enron, which owned the state's biggest electric utility, Portland General Electric (PGE), did not pay income taxes for years. Close to $1 billion of federal and state taxes built into PGE rates never got to government.1
In 2005 the Oregon Legislative Assembly passed a law (SB 408) requiring the state's four corporate-owned utilities to either turn over to government the taxes built into the rates they charge or give the money back to customers.
The next year Buffett bought Oregon's other corporate electric utility, PacifiCorp. It is a subsidiary of his MidAmerican Energy Holdings, which operates utilities from Iowa to Utah to Oregon.
As soon as PacifiCorp became part of Buffett's empire, his lawyers and lobbyists set out to undermine the tax true-up law. They fought to get unworkable rules at the Oregon PUC, and they sought repeal of the law.
The law has worked pretty well at two of the utilities, PGE and Northwest Natural Gas. The reason is that they are stand-alone companies that file their own tax returns, making everything transparent.
PGE customers got back $39.9 million in the first three years, while Northwest Natural Gas customers had to pay $12.5 million more because the taxes embedded in their bills were that much less than the taxes the company paid over to government.
The problem was with PacifiCorp, because it is part of a consolidated tax return filed by its corporate parent. Customers had to pay $53.5 million in surcharges for taxes not collected. The problem is that no one really knows if that is reality or just gifts to Buffett and friends, because it is not a stand-alone company and the Oregon PUC did not make it prepare a dummy tax return as if it were a stand-alone.
Buffett's lobbyists have now persuaded the Oregon legislature that he needs lawmakers to relieve him from the 2006 law by ordering the PUC to scrap its current approach and try a new one. Think of it as the Warren Buffett and friends personal tax relief act. Let's call it the Tax Heists Enriching Financial Titans Act, or THEFT for short.
The Oregon PUC proposal is pretty much a PacifiCorp dream come true.
Here's how Dan Meek, a consumer lawyer who for years has exposed sweetheart deals the utility commissioners gave to those they are supposed to regulate, describes the new plan: The PUC commissioners sabotaged SB 408 from the beginning. They did not follow the law, requiring establishment of automatic adjustment clauses, until I sued the Commission in early 2007 and got a court order in January 2008.
The new move merely repeals the law and replaces it with very vague language that will again allow the Oregon PUC to do what it has always wanted to do -- allow the utilities to charge ratepayers for income taxes, regardless of whether those income taxes are actually paid to government.
They adopted an absurd formula to determine how much of a consolidated corporation's income taxes would be "attributed" to the utility subsidiary. The formula compares the consolidated corporation's worldwide sales, property, and payroll amounts to those three items for the utility for its Oregon service area. All of the worldwide numbers are, of course, not only secret but completely unverifiable by any party in any rate case. Ann Fisher, a utility lawyer who was involved in implementing SB 408 but not in the current fight over its repeal, says that "the dirty little secret" is that the law was bound to fail because "the commission did not want to do it" and tried to find ways to make sure it would fail as quickly as possible. The commission never sought advice from Oregon state or federal tax authorities, which Fisher sees as a sign of this bad faith.
"We spent a lot of time trying to work through perceived roadblocks that the commission and the utilities set up," Fisher said, "but at no time was there any thought about a simpler approach, such as the utility taking all of the tax dollars it collected and putting them into escrow and then being able to petition for the money back to cover actual taxes."
Fisher said the fairest way to think about the issue is to ask "whether the PUC would have let the companies suffer if they collected too little from customers to pay their taxes." Of course not, she said, adding that the reverse should also be true -- that utilities cannot collect more than they need to pay their current taxes.
Even if the Oregon authorities could audit MidAmerican, the expense would be enormous, especially compared with treating it as if it were a stand-alone. The results so far suggest that PacifiCorp customers are much worse off than if the law had not been passed and that those surcharges are just extra money going to Buffett and friends, but of course conditions could change and money might flow back to customers as refunds, something PacifiCorp lobbyists regard with horror.
The one consumer advocate who favors a rewrite is Bob Jenks, an economist who is executive director of the Oregon Citizens' Utility Board, which represents homeowners and other small customers. He thinks the existing law is unworkable when a holding company is involved and dislikes the surcharges, which result in big swings in utility rates from one year to the next, making it hard for most people on budgets to pay for electricity.
If all rate-regulated utilities were stand-alone companies, the only issue about taxes embedded in their rates would be accounting for the time value of tax money that gets paid monthly by customers, but is delayed going to the government for years because of differences in book and tax accounting.
Taxes collected now and turned over to government are a form of forced loan from customers that must be endured only by corporate-owned utilities. Municipal utilities do not pay profits taxes and have no high-cost equity to sustain, explaining much of the reason their rates overall tend to be 15 to 30 percent lower.
2006-2009 SB 408 True-Up Law Results Federal and Oregon State Income Taxes _____________________________________________________________________ 2006 ______________________________________ Per Company Filing Resolution* Portland General Electric Taxes Paid $34,200,000 Taxes Collected $71,300,000 Surcharge/(Refund) $(37,100,000) $(37,496,000) PacificCorp Taxes Paid $87,000,000 Taxes Collected $54,400,000 Surcharge/(Refund) $32,600,000 $34,500,000 Northwest Natural Taxes Paid $32,200,000 Taxes Collected $30,500,000 Surcharge/(Refund) $1,700,000 $1,658,000 Avista Taxes Paid $3,200,000 Taxes Collected $4,300,000 Surcharge/(Refund) $(1,100,000) $(1,500,000) Total Taxes Paid $156,600,000 Total Taxes Collected $160,500,000 Total Surcharge/(Refund) $(3,900,000) $2,838,000) [table continued] _____________________________________________________________________ 2007 ______________________________________ Per Company Filing Resolution* _____________________________________________________________________ Portland General Electric Taxes Paid $75,261,000 Taxes Collected $60,397,000 Surcharge/(Refund) $14,864,000 $14,939,000 PacificCorp Taxes Paid $85,728,000 Taxes Collected $81,954,000 Surcharge/(Refund) $3,774,000 $3,774,000 Northwest Natural Taxes Paid $35,074,000 Taxes Collected $29,546,000 Surcharge/(Refund) $5,528,000 $5,527,000 Avista Taxes Paid $2,255,000 Taxes Collected $4,237,000 Surcharge/(Refund) $(1,982,000) $(1,982,000) Total Taxes Paid $198,318,000 Total Taxes Collected $176,134,000 Total Surcharge/(Refund) $22,184,000 $22,253,000 [table continued] 2008 ______________________________________ Per Company Filing Resolution* _____________________________________________________________________ Portland General Electric Taxes Paid $49,000,000 Taxes Collected $57,700,000 Surcharge/(Refund) $(8,700,000) $(9,403,000) PacificCorp Taxes Paid $120,800,000 Taxes Collected $82,300,000 Surcharge/(Refund) $38,500,000 $1,791,000 Northwest Natural Taxes Paid $31,700,000 Taxes Collected $31,500,000 Surcharge/(Refund) $200,000 $179,000 Avista Taxes Paid $3,047,000 Taxes Collected $3,897,000 Surcharge/(Refund) $(850,000) $(850,000) Total Taxes Paid $204,547,000 Total Taxes Collected $175,397,000 Total Surcharge/(Refund) $29,150,000 $(8,283,000) [table continued] 2009 ______________________________________ Per Company Filing Resolution* _____________________________________________________________________ Portland General Electric Taxes Paid $57,333,324 Taxes Collected $60,040,028 Surcharge/(Refund) $(2,706,704) (7,944,299) PacificCorp Taxes Paid $98,413,398 Taxes Collected $68,979,188 Surcharge/(Refund) $29,434,210 $13,474,662 Northwest Natural Taxes Paid $35,881,988 Taxes Collected $30,752,103 Surcharge/(Refund) $5,129,885 $5,126,585 Avista Taxes Paid $4,628,000 Taxes Collected $3,728,000 Surcharge/(Refund) $900,000 $(1,024,000) Total Taxes Paid $196,256,710 Total Taxes Collected $163,499,319 Total Surcharge/(Refund) $32,757,391 $9,632,948 [table continued] Total ______________________________________ Per Company Company Proposed Implementation _____________________________________________________________________ Portland General Electric Taxes Paid Taxes Collected Surcharge/(Refund) $(33,642,704) $(39,909,299) PacificCorp Taxes Paid Taxes Collected Surcharge/(Refund) $104,308,210 $53,539,662 Northwest Natural Taxes Paid Taxes Collected Surcharge/(Refund) $12,557,885 $12,490,585 Avista Taxes Paid Taxes Collected Surcharge/(Refund) $(3,032,000) $(5,356,000) Total Taxes Paid Total Taxes Collected Total Surcharge/(Refund) $80,191,391 $20,764,948 _____________________________________________________________________ *All resolutions by stipulated agreement between companies and Oregon Public Utilities Commission. Source: Dan Meek from Oregon PUC filings. Dealing with the forced loan balances, known as phantom taxes, was an easy problem to solve. The money is simply treated as zero-cost capital, reducing the amount of equity capital a utility gets to earn a return on. In Oregon, PacifiCorp's government-set return on equity is 10 percent, while stand-alone Portland General Electric gets an eighth of a point more.
Chuck Sheketoff, executive director of the Oregon Center for Public Policy, says the proper approach to this issue is to track tax dollars and make sure they get to government.
"We need more transparency in corporate taxes generally -- that's why I'm an advocate of public disclosure of state taxes actually paid," Sheketoff told me.
Paul Vogel, the PacifiCorp spokesman, told the Oregonian newspaper that the system "is so overblown that it has created another layer of government and cost and waste with little or no benefit to our customers."
Another "layer" of government? A whole layer? Oh my, what tall tales the spokespeople for the Wizard of Omaha get paid to tell these days just so your tax dollars can get diverted from public purposes to private gain.
The real problem here is simple. The state sets a "just and reasonable" rate of return for electric utilities. Any tax dollars the utility or its parent keep create what is by definition an unjust and unreasonable rate of return. There is another word for pocketing tax dollars: theft. FOOTNOTES 1 Available at http://www.nytimes.com/2002/01/17/business/enron-s-collapse-the-havens-enron-avoided-income-taxes-in-4-of-5-years.html?scp=1&sq=enron+and+tax+and+david+cay+johnston&st=cse&pagewanted=all END OF FOOTNOTES Comments (2)
I thought THEFT was the other word for "taxes." Careful, Buffett and Soros are "your" billionaires.
Posted by halpern joseph on Mar. 1, 2011 at 10:30 PM
"My" billionaires? Come again? In a democratic society where we grant our Congress the power to tax (see Article 1, Section 8, where the very first power we grant Congress is to tax) taxes are not theft -- if they go for public purposes.
Posted by David Cay Johnston on Mar. 2, 2011 at 08:00 AM
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