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In response to
Beware risky quick fixes on utility taxes

The Oregonian op-ed by Joan Smith, published July 1, contained many incorrect statements. It also failed to note that she is a member of the board of directors of Idaho Power Company, which is one of the regulated energy utilities that has been charging Oregon ratepayers for "state income taxes" and "federal income taxes" not actually paid to those governments. Oregon ratepayers are now being charged about $150 million per year for these phony income taxes by regulated energy utilities. Why did the Oregonian fail to even mention her very direct financial interest in allowing utilities to continue to charge phony taxes to Oregon ratepayers?

Most of her op-ed consists of vague threats of "serious financial pitfalls" that are never identified. She offers the situation that maybe a utility's actual taxes would be higher in some year than the "expected" amount charged to ratepayers. Senator Metsger repeatedly asked the utilities to provide even one instance in which any utility has ever paid more in income taxes than was included in rates. No examples were provided.

Here are some of the incorrect statements she makes:

  1. "If there is a serious imbalance between a utility's costs and rates, then regulators will adjust the company's rates to ensure that consumers don't pay too much."

With regard to charging ratepayers for phony utility taxes, this is simply false. The Commission under Smith and her successors has been aware for years that the utilities have been charging Oregon ratepayers more than $100 million per year for "income taxes" that are never paid to government, yet they have done nothing.

2.     "Oregon's utilities rarely earn their full rate of return established by the PUC."

Not true. While Joan Smith was a PUC Commissioner (starting November 1990), PGE greatly exceeded its "full rate of return" in nearly every year. As reported by Willamette Week (February 9, 2005), "between 1992 and 2000 PGE exceeded its allowed return eight out of nine years." PGE earned an average 16% on equity during 1996 through 2000, when the authorized rate remained at 11.5%. And that does not even count the phony income taxes PGE charged to ratepayers and then kept for itself or sent to Enron. Counting that, PGE was actually earning a 25% after-tax return on equity for Enron. Any other business in Oregon would have to be earning over 42% on its investment in order to net an after-tax return of 25% (due to the need to pay federal, state, and local business income taxes).

Further, there is nothing in SB 408 that in any way requires utilities to be paid for their past losses. Nor does it require them to give up their past profits. So Smith simply creates a false argument and then refutes it.

The rest of her piece is replete with error. She attributes the entire situation to utilities being consolidated with the corporate parents, like Enron. But the scam happens even when there is no corporate consolidation. PGE was not consolidated with Enron during 2002, reported $66 million of net income, charged Oregon ratepayers $93 million for its "federal and state income taxes," but paid only ten dollars in state income tax and less than $1 million in federal income taxes.

The real problem is that the PUC "estimates" of utility income taxes (which are included in rates) are wildly erroneous. The PUC "estimates" are not based on any review of the utility's actual tax payments. Instead, the PUC simply applies the full income tax rate to the utility's estimated net income, ignoring all deductions, credits, and other adjustments.

Smith states that somehow SB 408 would require ratepayers to pay more for a utility's income taxes that the utility actually owes to the government, if "its parent company does very well." This is flatly wrong. SB 408 would allow utilities to charge ratepayers only for those income taxes that the utility actually pays and are based on the utility's income. It would not in any way allow utilities to charge income taxes based on the other income of the corporate parent. Thus, Smith offers another entirely false argument.

She says that "many regulators have tried to find a remedy for this taxes-collected/taxes-paid discrepancy." Right, and regulators in 19 states that we know of have already implemented adjustments to remedy this scam. None of their adjustments for this have ever been struck down by any court.

She says that SB 408 would be "radically altering established rate-making principles." Untrue. The bedrock ratemaking principle is that regulated monopoly utility rates should be based on actual costs plus opportunity for reasonable profit. Allowing both a reasonable profit and collection of phony taxes to boot is a severe violation of this principle. In 1967, the United States Supreme Court considered whether a utility should be allowed to charge ratepayers for income taxes that the utility actually did not pay, because it was part of a "consolidated" group of corporations that paid little or nothing in income taxes. The Court stated:

Such a private decision [to file a consolidated return] made by the affiliates, including the regulated member, has the practical and intended consequence of reducing the group's federal income taxes, perhaps to zero, as was true of one of the years involved in the Cities Service case. But when the out-of-pocket tax cost of the regulated affiliate is reduced, there is an immediate confrontation with the ratemaking principle that limits cost of service to expenses actually incurred. Nothing in Colorado Interstate or Panhandle forbids the Commission to recognize the actual tax saving impact of a private election to file consolidated returns. On the contrary, both cases support the power and the duty of the Commission to limit cost of service to real expenses.

I guess Smith knows more about the principles of law than the United States Supreme Court.

Finally, she implies that SB 408 must be bad, because it is being considered "in the closing weeks of the legislative session." The fact that the Legislature is considering it at all is a testament to the tenacity of Senators Vicki Walker and Rick Metsger. The bill was introduced on January 26, during the first month of the session. And, as Senator Metsger stated, this bill has had more public hearings and meetings than any bill he has ever seen. Joan Smith attended none of the hearings, offered no testimony, and answered no questions. Now, after nearly 6 months of legislative consideration of SB 408, she lobs spitballs from the peanut gallery, while not revealing her severe conflict of interest.

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