Utilities scam Oregon ratepayers for $1 billion in phony "income taxes"

By Dan Meek of Portland, Oregon. Dan is a public interest attorney who is a leading advocate for utility reform in Oregon. (bio)

For several years, the large electricity and gas utilities regulated by the Oregon Public Utility Commission (PUC) have been charging to Oregon ratepayers hundreds of millions of dollars for "state income taxes" and "federal income taxes" that in fact have not been paid to any government. Currently, the best available estimate of these charges to Oregon ratepayers is $150 million per year.

In their rate case filings to the PUC, the utilities list all of their expected costs to be recovered from customers in the rates the charge. These include salaries, maintenance, office rents, and . . . estimated future state and federal income taxes. The estimates are not based on any review of the utility's actual tax payments. Instead, the nominal income tax rate is merely applied to the utility's estimated net income. For example, if the rates are designed to earn PGE $200 million in net income per year, then the amount included in rates to pay PGE's federal income taxes is $70 million, because that is $200 million times the nominal federal income tax rate of 35%.

But what the utilities actually pay in income taxes could not be more different from these estimates. We know that PGE has charged Oregon ratepayers, since being acquired by Enron in 1997, over $750 million for "state and federal income taxes" that in fact neither PGE nor Enron has paid to either the state or federal government. We know that PacifiCorp charged Oregon ratepayers over $88 million for "state and federal income taxes" in 2002 but paid the state only ten dollars in state income taxes. That fact rather strongly implies that PacifiCorp also paid the federal government little or nothing for federal income taxes that year, because state income taxes are based on the federal taxable income.

The regulated utilities do not disclose their federal and state income tax filings, and their annual reports filed with federal agencies do not report the amounts they actually pay to governments for income taxes. So we cannot provide complete documentation on the size of this scam. But it is fair to say that Oregon ratepayers over the past 8 years have almost certainly paid these utilities over $1 billion for "federal income taxes" and "state income taxes" that have not been paid to any government.

How do the utilities get away with this, despite their very large annual net incomes? Most of these utilities are parts of corporate conglomerates and do not even file their own tax returns. The returns are filed by their corporate parents, such as Enron, which deduct billions of dollars in alleged losses experienced by the corporate parents and affiliates, through their subsidiaries in the Cayman Islands and equally attractive business locations. But even when the utilities are not consolidated, they are not paying in income taxes anything close to what they are charging Oregon ratepayers. PGE was not consolidated with Enron during 2002. For that year, PGE reported $66 million of net income and charged Oregon ratepayers $93 million for its "federal and state income taxes." But in reality PGE paid only the minimum ten dollars in state income tax and far less than $1 million in federal income taxes. So the filing of consolidated corporate income tax returns is part of the problem, but it is not the whole problem.

The Oregon Department of Revenue reported to committees of the Oregon Legislature that, during the years 2000-03, the six largest regulated energy utilities paid, in the aggregate for all of them, between $1.5 and $5 million per year in state income taxes. We know from PUC rate schedules that these utilities charged ratepayers about $30 million for "state income taxes" in each of those 4 years. So about 90 cents out of every ratepayer dollar paid for state "income taxes" is simply retained by the utility or its parent corporation and is not paid to government.

Thus, the utilities are using the mere existence of "income taxes" as a profit center. Charging these unpaid income taxes to ratepayers has the effect of increasing a utility's rate of return on investment, far beyond a reasonable level. The "income taxes" retained by PGE and Enron added about 9 percentage points to PGE's authorized return on equity, nearly doubling it from 10.5% to 19.5%.

This scam is also running on the local level, as the utilities that operate in Multnomah County are charging ratepayers there well over $2 million per year for the Multnomah County Business Income Tax while not actually paying those amounts to Multnomah County.

How can the utilities get away with this? PGE/Enron alone has handed out almost $400,000 to candidates for the Oregon Legislature and both parties.

The Oregon Senate last week enacted a bill to stop the income tax scam, at least as of next year. SB 408 passed the Senate 26-4. A minority report (to require the PUC just to study the matter for 2 more years) lost by 13-17, with all Democrats voting against it except one (Betsy Johnson, who represents the far NW corner of Oregon). Now it has gone to the House and has been assigned to two committees. Conventional wisdom there is that it will never go to the floor of the House.