Taxpayers get double whammy in energy crunch

John Wolfe "In the end, there is no way out of this mess without costs to both taxpayers and utility customers," opined the editors of the Los Angeles Times in a Feb. 19 editorial regarding California's continuing electric power crisis. Except for government, most utility customers and taxpayers are one and the same. The word "both" means most of us get hit twice with both higher rates and higher taxes.

On the rate side, there is the recently approved temporary 9 percent increase with another 10 percent when the rate freeze ends. But no one knows the full cost of the state proposal to sell billions in bonds to finance the short-term cost of buying electricity in order to stretch out the payback (with interest) over 10 years or so.

This, as columnist Dan Walters reminded us on Feb. 14, is the same scheme that the Legislature used to finance the 1996 "deregulation" that began this fiasco. Then, it was a "10 percent utility rate decrease for four years, financed by bonds that would be repaid by ratepayers over 10 years.," The underlying assumption, of course, was that by now competition would have forced wholesale electricity costs so low that the bonds could be repaid without consumer rate increases. But wholesale electricity costs can't drop in the absence of adequate generating capacity and the ability to buy energy with long-term contracts to smooth out inevitable, if unpredictable, spikes in both usage (cold winters, hot summers, booming economy) and generation costs (natural gas prices.)

How much will consumer rates increase? In addition to the bonds to buy power, Sacramento wants to "buy" the private utilities' portion of the power grid and even get into the generating business. This will be no bargain for consumers, despite the rate stability currently enjoyed by the 25 percent of California's electric customers served by public utility districts and cooperatives.

In a 1994 study done for Edison Electric Institute by Putnam, Hayes & Barlett Inc., PH&B director Joseph Graves concluded: "Government subsidies to public utilities and co-ops have long outlived their usefulness and, in fact, distort the power market in ways that directly harm the vast majority of electricity customers and work to reduce economic efficiency." (Graves was quoted in a Cal-Tax research paper by E. and R. Davis in April 1997).

What are these "government subsidies that distort markets and harm customers? According to the PH&B study, the lead items are exemption of government utilities from federal and state income taxes and other taxes, including property taxes, gross receipts taxes and excise taxes. Who do you suppose compensates for these tax exemptions? If Sacramento seizes the state power grid and makes it exempt from property taxes, that tax loss alone could be $100 million or more annually.

And when electric rates increase for government customers, who will pay the increased taxes that pay for those increases? Taxpayers would get hit both directly and indirectly.

What should be done? The best result would be multiple options. Offer true deregulation of electrical power costs to those customers and suppliers who are willing and able to contract for and effectively monitor supply and demand. For customers who cannot or do not choose to compete for electricity, offer a fair, regulated government-mediated system of investor-owned, taxpaying utilities. Taxpayers and customers would be best served if the state's surplus revenues and good credit were used to buffer short-term circumstances (to keep the lights on) toward this best-end result.

Regrettably, politics probably dictates a lesser solution. The costs of the "way out of this mess" as the L.A. Times so aptly described it, are inevitable. The question remains: How much and for how long?

We know who pays.

John Wolfe is the executive vice president of the Contra Costa Taxpayers Association.

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-- Martin Thompson (mthom1927@aol.com), March 05, 2001