The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (16 page)

After all, Entergy boasts, “We lead the industry with integrity.”

8.
Wouldn’t it be
marvelous if someone else paid your income taxes? Imagine all that extra money in your paycheck. You could pay your debts, set aside a few dollars, or splurge on something special. Of course, if someone else had to pay your income taxes it would not be such a good deal for them. They would have to pay their own income taxes
and
yours. You wouldn’t want to be that person, would you?

Well, in a sense, you already are. There’s a federal regulation that makes us pay someone else’s taxes and, worse yet, that somebody is exempt from federal income taxes, meaning they pocket the tax money we give them as extra profits.

This policy comes from the Federal Energy Regulatory Commission. FERC sets the level of water behind hydroelectric dams and oversees electricity grids and wholesale electric markets whose initial rules were written by Enron and then adopted by government. FERC also sets the rates pipelines charge to transport oil and natural gas across state lines but which are exempt from corporate income tax.

As federal agencies go, FERC is small. Its budget amounts to about a quarter of a billion dollars a year, less than a tenth of a penny on each dollar in the federal budget. And its staff is modest, too, about fifteen hundred people.

Most federal agencies have struggled for years with flat or shrinking real budgets, but not FERC. Its 2010 budget was 9 percent larger than in
2009, which in turn was 10 percent more than in 2008. Congress approved these increases because the energy industry wanted FERC’s budget to grow. That may seem odd, given how often we hear how businesses dislike being regulated. But FERC’s funding is just one of its peculiarities.

As it happens, FERC’s budget does not come from the taxes you pay to Washington. Instead, the commission is financed with fees paid by the industries it regulates, industries that get their money from you. Energy companies gladly pay those fees because they help ensure incredible profits, like those earned by pipelines.

To put this into perspective, tax records show that the 5.8 million corporations in America keep as profit about six cents on each dollar of revenue. The 14,000 largest do better, keeping as profit roughly a dime on each dollar of revenue. And how well do oil pipelines do? Their profit is forty-two cents on the dollar.

Measured against assets, the story of bloated profits is the same. American companies earned 6.7 percent on their assets in 2010, according to calculations done by the federal Bureau of Economic, Energy, and Business Affairs. But among the 175 interstate oil pipelines, three earned more than 30 percent, three more earned more than 40 percent and a pipeline owned by Sunoco made an astounding 55 percent.

One reason they did so well is that you paid these pipelines for corporate income taxes, both federal and state. Problem is, most pipelines do not pay the corporate income tax. That means the taxes you were forced to pay—but that never got passed on to government—were really just extra profits.

How do you pay this tax? You won’t find it cited anywhere on a bill you get. Looking at your utility bills and gas station receipts, you would never know that the federal government lets pipeline owners drill a hole in your pocketbook. But if natural gas warms your home, if you use electricity that comes from a generation plant that burns gas, or you drive a car fueled by gasoline, chances are the fuels travel via monopoly pipelines, meaning you paid your piece.

If you have never heard about this tax-gouging rule, that’s not surprising. The major news media have missed it completely. News outlets rarely cover FERC. When they do, the stories tend to be superficial and based on press releases. Without a watchdog to watch, much less bark, how are you to know you’re being ripped off by an entire industry? The way this rule came about is a perfect example of how big companies use the fine print of regulations to enrich themselves unfairly at your expense.

THE PIPELINE PROFIT

Pipelines collect all of their revenues from their customers, the energy companies that produce fuels and natural gas. The money they collect pays their costs, from pipeline operations to expense-account lunches; what’s left over becomes profits for investors. Since there is no competitive market to determine prices, government regulators stand in for market forces. In theory, the FERC holds hearings, gathers evidence, scrutinizes accounting records and then determines the prices, or rates, that can be charged for moving oil and gas through America’s more than five hundred thousand miles of transport pipelines.

A simple legal principle—“just and reasonable”—is supposed to guide this process. On one side of the equation, investors are entitled to reasonable costs and a reasonable profit so that the business is viable and the service reliable. On the other, customers are entitled to just and reasonable prices so that they pay what they would in a competitive market.

Historically, calculations of what is “just and reasonable” were made on the basis of money actually spent. But FERC had a better idea: it decided you can be charged for fictional expenses, not just actual ones. The real world of costs and prices once defined the limits, but with fiction, there are no boundaries.

This shift to picking your pocket rather than settling for “just and reasonable” rates based on actual expenses began with a provision in the 1986 Tax Reform Act, which passed Congress with bipartisan support and which President Reagan signed. Many excellent aspects of that law looked to make the tax system fairer, but the legislation also harbored hundreds of subtle favors to industries and individuals. One provision—the one that, in time, would allow charging for fictional costs—didn’t make the news. But it changed the way that partnerships, specifically
master limited partnerships
, are treated under the tax law.

Before 1986, any partnership allowing its shares to trade like a stock was subject to corporate income tax. That meant the partnership might as well organize as a corporation, in which the company is taxed on profits and then its owners are taxed again on dividends and gains on shares sold at a profit. This is known as the double taxation of corporate profits. But the 1986 law allowed shares of “master limited partnerships” to trade just like stocks, only without the partnership being subject to the corporate income tax. Investors in a master limited partnership, or MLP,
escape double taxation because they pay only one level of tax, their personal income taxes, on profits.

Historically, corporations owned pipelines. But once the 1986 law changed, so did the structure of the pipeline business. Many corporations created master limited partnerships and put their pipelines into them. Nearly two hundred master limited pipeline partnerships existed by 2012.

With the resulting elimination of the corporate income tax, you might think that monopoly pipeline rates would go down. After all, their costs went down by the amount of the corporate income tax once it was eliminated for MLPs. And since only actual expenses are supposed to be considered when regulators set “just and reasonable” rates, then rates, in theory, should decline.

Yet, even in the absence of a corporate income tax, FERC permitted master limited pipeline partnerships to include a charge for corporate income taxes in their rates. The organization that represents the owners and developers of natural gas wells, the Natural Gas Supply Association, objected. It said that including fictitious taxes in pipeline charges amounted to an “under the table” rate increase. Consumer groups, few and lightly funded, let the issue slide.

From the point of view of a pipeline monopolist, charging customers the corporate income tax and then pocketing the money makes an already lucrative business extraordinarily profitable. Court records from a test case that challenged the nonexistent tax that one oil pipeline charged show just how much. For each dollar of after-tax profit earned under the old system of actual costs, pipeline owners could now pocket $1.75. That 75 percent boost in after-tax profits came out of the consumer’s pocket.

The pipeline that first got approval to charge the nonexistent tax is called the SFPP. Its name comes from the initials of the former Santa Fe and Southern Pacific railroads, which merged a quarter century ago. During the one-term administration of George H. W. Bush, the first Texas oilman to become president, the Federal Energy Regulatory Commission let this pipeline charge rates that assumed it paid a 42.7 percent corporate income tax on profits. Two of the pipeline’s wholesale customers, BP (British Petroleum) West Coast and ExxonMobil, appealed FERC’s approval of the fictional tax to the federal district court of appeals in Washington, which hears challenges to regulatory actions.

The court reversed FERC’s decision. Judge David B. Sentelle and two colleagues held that regulators “cannot create a phantom tax in order to create an allowance to pass through to the ratepayer.” Monopoly rates set by government cannot include “phantom income taxes [the MLP] did not pay.” The court ruled that under the “just and reasonable” rule, including a nonexistent tax was, in short, inherently unjust and unreasonable.

That might have been the end of it. But by the time that case was decided a former oil and gas tax-shelter salesman, George W. Bush, had become president. His administration hustled to remake the regulatory landscape to the liking of the energy industry, especially Enron, which had been Bush’s single largest source of campaign funds. His vice president, Dick Cheney, had created a secretive advisory panel that put forth energy policy proposals which, years later, were revealed to be almost
word for word what Enron and other energy companies proposed. And which companies pushed hard for these new rules to include fictional corporate tax expenses in monopoly pipeline rates? Enron and Kinder Morgan Management, a pipeline company headed by a former Enron president.

Cheney’s point man regarding pipeline regulations was a career regulator named Joseph Kelliher. He must have done a reliable job for Cheney because in 2003 Kelliher got a promotion to FERC commissioner. In 2005, President Bush promoted Kelliher again, this time to FERC chairman.

Kelliher and other Bush appointees wanted to restore the fake tax that Judge Sentelle struck down. They also wanted the matter resolved—and avoid years of regulatory litigation—before someone less in the pocket of the oil industry got to the White House or Admiral’s House, where the vice president lives. A clever trick made things move quickly. FERC announced in 2005 it would develop a “policy statement” on whether to include “actual or potential” taxes in pipeline rates.

Most legal matters in America involve administrative and regulatory law. The regulatory system, however, doesn’t ordinarily recognize “policy statements,” only formal rule making. But by creating this regulatory twilight zone, the commission effectively suspended the rules on making rules. When the rules are in effect and a case is under way, private meetings between commissioners and parties to cases, such as pipeline lobbyists, are generally prohibited. Lawyers call these meetings “ex parte”—from one side only—because other parties are excluded, making the meetings inherently unfair and one-sided.

But in the invented world of “policy statements,” no such limitation existed. Kelliher and other commissioners could, and did, meet privately with pipeline lobbyists while giving little or no time to those who did not share their inclination to allow pipelines to charge for nonexistent taxes.

The Bush appointees’ fealty to the pipeline industry ran deep. Once they had heard all they wanted from pipeline lobbyists and lawyers, they allowed only a brief opportunity for comments on the not-yet-issued “policy statement.” As for the customary practice of letting parties respond to what their opponents say, that went out the window. Each side was given only a few days to file, and no rebuttals were allowed before FERC adopted the policy statement. Then in 2007, Kelliher and the other commissioners relied on the policy statement in approving new rates for the SFPP, the same pipeline controlled by Kinder Morgan that had been the subject of the earlier federal appeals court decision. These
new rates included the corporate tax even though, as a master limited partnership, SFPP was exempt from corporate income taxes.

This decision on the added tax was more than a little odd because the second President Bush had pledged never to raise taxes. Bush signed a no-more-taxes pledge much stronger than what Grover Norquist of Americans for Tax Reform bullied many other politicians into signing. “If elected president,” Bush wrote to Norquist in 1999, “I will oppose and veto any increase in individual or corporate marginal income tax rates or individual or corporate income tax hikes.” Since no major news organization covered the FERC beat, the broken pledge went unreported. Even so, it’s a truism that even if a tax falls in the forest of Washington regulations and no one reports it, the tax is still there.