Shock and Law

[July 18th, 2007]

PacifiCorp is joining a growing list of big utilities in trouble for treating ratepayers' local tax payments as profit centers.

Last year Portland General Electric paid $10 million to settle a lawsuit alleging that it had pocketed about $7 million in ratepayers' Multnomah County Business Income Tax payments. Communications giant Qwest and natural-gas utility NW Natural also similarly refunded money to its customers, totaling more than $7.5 million.

The widespread trend of utilities pocketing local taxes is a big problem, says Linda Williams, a lawyer with the Utility Reform Project—which is currently representing PacifiCorp customers in a case against the utility in Multnomah County Circuit Court.

"I don't think the Public Utility Commission is helping consumers in this area of regulation," Williams says. "The PUC takes a totally hands-off approach when it comes to local taxes."

Ed Busch, the PUC's electricity czar, says the agency considers local taxes outside its purview. Busch also says the PUC lacks the ability to correct previous overcharging because its rate-setting authority looks forward. He adds that Senate Bill 408, which allows utilities to collect only those taxes it owes, ought to correct any problem.

State law lets utilities collect tax payments it owes from ratepayers. The theory is that the utilities will then remit those dollars to the appropriate taxing authority, in this case, Multnomah County.

In the earlier lawsuit PGE got penalized for sending its Multnomah County taxes over a seven-year period to its then-parent company, Enron, which just kept the money.

The case Williams and her law partner Dan Meek filed in late 2005 against PacifiCorp, however, is based on different circumstances.

In 1998, their lawsuit says, Multnomah County instituted a one-year increase in the Business Income Tax. PacifiCorp in turn adjusted the amount it was billing Multnomah County customers.

At the end of 1998, the county returned its tax rate to the pre-increase rate. Yet PacifiCorp, Williams says, did not similarly scale back its billing rate. In a document the utility submitted at Williams' request, PacifiCorp acknowledges it raised the tax on March 24, 1998, but did not lower it on customers' bills until February 2005—six years after the county lowered its rate in 1999.

Other documents show that at least some people inside PacifiCorp, which has about 70,000 customers in Multnomah County, knew that something was amiss with the tax collections. The utility's own documents in 2001 described the tax account as a "pass through," which means that the money collected would be sent on to the county. Yet the documents say "as of 3/31/2001, the account is over a million dollars. This means that the rate should be adjusted downward."

PacifiCorp's outside auditor, Price Waterhouse Coopers, also noticed the discrepancy, according to utility documents: "At year end the PWC auditors questioned this account and asked why it was so large," an internal document says.

An internal chronology the utility produced shows that PacifiCorp lowered the tax rate on customer bills only after Williams and Meek filed suit against PGE in the fall of 2004.

PacifiCorp, the state's second largest utility, does not deny overcollecting the local tax. In 2005, it refunded local customers $1.12 million for fiscal years 2002 through 2004. The utility argued, however, that a law relating to meter-reading errors limited its liability to three years of over-collections. Williams says it is unclear how much the refund for the entire six years might be, but estimates somewhere between $2 million and $3.5 million.

PacifiCorp spokewsoman Jan Mitchell delcined to comment, citing pending settlement talks.

Williams convinced Multnomah County Judge Janice Wilson that the law limiting liability to three years did not apply. In preliminary rulings in the case, Wilson has certified PacifiCorp customers as a "class" and found that PacifiCorp is liable for more than just the three years it refunded.

A jury trial on the total amount of damages the utility must repay is set for January.

"Regardless of what happens, I think what this case is about is a failure of the regulatory system to look out for the little guy," Williams says.