Utility Tax Filings Show Tax Reform Is Working

Do utilities get to keep customers’ tax payments, or do they have to pass that money along to government? This was the heart of the issue for CUB when we began writing and then advocating for passage of SB 408 back in the 2005 legislative session. Feathers were definitely ruffled after it became apparent that former PGE-owner Enron had collected hundreds of millions of dollars in taxes and then kept that money, using tax reductions at the parent company rather than passing it along to government.

The good people of Oregon were not amused. It became a rallying cry to get rid of so-called “phantom taxation” and CUB was at the head of the crowd. So we passed SB 408, the utility tax reform law, and this week we saw the first full tax filings of our major privately held utilities affected by the law, on earnings in the year 2006. The numbers vary, but the results for PGE, PacifiCorp, NW Natural, and Avista (which serves customers of Southern and Eastern Oregon with natural gas) show that the tax reform is working just as it was intended.

Under SB 408, a utility company will always pay the lesser of its share of the tax liability of the consolidated corporate entity, or its own stand-alone tax bill. The Oregonian story which ran on Monday describes SB 408 this way: “The law requires utilities to reconcile the taxes they collect from customers as part of monthly utility bills with what the utility ultimately pays to taxing authorities, then surcharge or refund the difference.”

PGE will be issuing a refund to customers of $37 million (about 2% of one year’s rates) collected during the year 2006 (which includes time that this large Oregon electricity provider was still owned by Enron). Avista customers will see a refund of about $1.1 million. Both amounts indicate that the tax amounts that were forecast were offset by tax deductions at the corporate level. The money was collected by the utilities in rates, and will now be refunded in rates.

Two of the utilities filing, PacifiCorp and NW Natural, show that their actual taxes for 2006 will require a surcharge to customers, each of them for different reasons. PacifiCorp has generated a lot of press saying that the surcharge they will be adding to customers’ bills, of about $27 million, is a good reason to look at the tax reform law again, but the truth is that PacifiCorp has fought against tax reform harder than anyone, from the very beginning. They may not like the utility tax reform law, but it’s not because it’s not working just as it should.

In 2006, PacifiCorp was owned by Scottish Power under a holding company structure, and the rates set for that year included a rate adjustment to subtract the tax reduction that was then being used by PacifiCorp’s holding company. CUB had argued in a 2005 rate case that this $26 million expected tax reduction (later changed to $21 million) should be taken out of the rate increase PacifiCorp sought for 2006 rates, and the Commission agreed. PacifiCorp has since been sold to MidAmerican Holdings Co., a part of the vast corporate conglomerate Berkshire Hathaway. Without the Scottish Power holding company tax reduction, PacifiCorp’s stand-alone tax obligation is $27 million more than was forecast for the year 2006; therefore, that is the amount that will appear as a surcharge to customers. It is a fair amount, almost the same amount that was taken out of rates in the rate case for 2006, and - most importantly - customers can be assured that all of that money is going to government coffers, not company coffers.

The NW Natural filing shows that customers can expect a small surcharge of $1.7 million for the taxes due in 2006. This situation results from higher-than-expected profits for the year, which means under-forecasted taxes. Under the current law, when a utility’s profits are higher than forecast, the utility has increased tax liability and it gets to surcharge that amount to customers. When a utility’s profits are lower than forecasted, it pays less in taxes, and refunds that amount to customers. Utilities have protested this aspect of the utility tax reform law, calling it a “double whammy.” This is the only aspect of the successful utility tax reform law which CUB is open to changing. We think there is room to smooth out any difficulties due to the double whammy, as long as we keep the core of the law - ensuring that large conglomerate companies are not taking taxes paid by Oregon utility customers and retaining that money rather than passing it on to the government. Conglomerate companies often have a great many tax deductions and loopholes. When these are used to reduce the tax liability of a utility, then customers should not be required to pay that “phantom tax” liability.

This is the first time that meaningful tax filings have been available since the passage of SB 408, so we still have a lot of work to do. Each filing will be reviewed by CUB and by the Oregon Public Utility Commission. The proof will be in the numbers.

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