Randy Moravec, Ph.D., executive director of the Texas Coalition for Affordable Power, penned the following guest editorial for the Coprus Christi Caller-Times. In it, he highlights pending legislation that would increase unfair tax collections by utility companies.
CORPUS CHRISTI — Did you know your electric company may be charging you for taxes that it never pays to the federal treasury? Instead, these phantom taxes can end up in the pocket of a regulated utility’s parent company. And the parent company can spend this money any way it wants.
Our organization, the Texas Coalition for Affordable Power, has released a report examining these phantom tax collections, and explaining the unusual loophole that allows utilities to collect them. Although the practice is legal, we believe it shouldn’t be. But beware. Legislation now pending in Austin would take Texas in exactly the wrong direction. Under a pair of bills winding their way through the Capitol, phantom tax collections in Texas could become worse.
Although the details can get complicated, the core issues are simple. Do you think it’s fair for a utility to charge you for federal taxes that aren’t paid to the federal treasury? Do you think it’s fair for your utility to collect these phantom taxes, but never disclose them on your home electric bill?
In Corpus Christi these phantom taxes are not as great as they are in other areas, and the Public Utility Commission has wisely taken action to further mitigate them. That’s the good news. But phantom utility taxes nonetheless remain a serious problem in Texas, and one that only will become worse under legislation pending in Austin.
How bad can phantom taxes become? Consider the situation in Dallas. Oncor, the transmission/distribution company serving the region, has charged its customers at least $500 million since 2008 for nonexistent federal tax bills. The energy company serving Houston also has collected about $150 million from ratepayers for taxes between 2002 and 2004 — even though it benefited from a massive tax refund during those years.
To understand this issue, first keep in mind that transmission and distribution utilities remain rate-regulated. Much of Texas operates under electric deregulation, with customers choosing among a variety of retail electric providers. But no customer choice exists for transmission and distribution service because these utilities are monopolies. That’s why the Public Utility Commission regulates their rates, including those charged by AEP Texas Central in Corpus Christi.
When the PUC sets these rates, it allows the utility to collect from customers an amount for operating expenses. This can include an amount for federal income taxes. But here’s the rub: Utilities do not make direct tax payments to the federal treasury. Instead, the utility’s parent company files the return. By consolidating its taxes in this fashion, the parent company receives a cash benefit that otherwise would be unavailable to it. This is where the phantom taxes come from.
Sometimes the windfall is enormous — as with the half billion dollars in nonexistent taxes collected by Oncor since 2008. The utility collected these “taxes” from ratepayers as if it files taxes directly to the IRS, even though it does not. Instead, all the “taxes” the utility collected became available to its majority owner, which has not paid a dime in federal income taxes since 2008. In fact, it appears the company received a fat tax refund during some of those years.
Thankfully, the situation in Corpus Christi is not so grave, and the PUC has further mitigated the phantom tax effect by authorizing a $3 million annual discount on electric bills. This is a continuing benefit for everyone in Corpus Christi — but a benefit that would quickly evaporate if the Texas Legislature moves in the wrong direction. Under two bills — House Bill 711 and Senate Bill 1364 — the PUC would lose all discretion with regard to phantom taxes. If these bills pass, not only will Texans see more tax collections on their utility bills, but these tax collections won’t even be fair.
Our organization believes that utilities should only include in rates an amount for federal taxes that the utilities actually pay to the IRS. But failing that, the PUC should at least have the ability to look closely at the issue — and to order adjustments when necessary.
Texans don’t mind paying their fair share of taxes, but there is nothing fair about utility phantom taxes.
Randolph Moravec, Ph.D., is executive director of the Texas Coalition for Affordable Power, a consumer coalition of cities.
TCAP is a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and residences.