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Fortnightly Magazine - May 15 1996

up as a competitor. A transmission system upgrade could eliminate this premium, leaving the unit's power priced more as a commodity.

Kevin C. Kozminski

Transmission Planning Department

Pacific Gas & Electric Co.

(The opinions expressed above belong to the author - not Pacific Gas & Electric Co.)

Purchased Power:

"I Told You So!"

Robert Rosenberg's article, "Purchased Power: Risk Without Return" (Feb. 15, 1996, p. 36), proves that I am middle-aged, even if I sometimes vainly consider myself young.

During the late 1970s and early 1980s, when I was in my 20's, consumers and environmentalists supported flow-through accounting of utility income taxes instead of normalization. We argued that if utilities continued to build big, expensive power plants under normalization, they would reap huge rewards from "phantom taxes" - taxes collected from ratepayers, but not paid to the government. However, if utilities ever did build less, they would accrue large bills to pay back to ratepayers. Ergo: Rate base rewards would provide a strong incentive for

utilities to build power plants instead of investing in energy efficiency.

We lost that battle, thanks to Ronald Reagan's 1981 tax act; tax normalization is now the law of the land. I myself had nearly forgotten that debate, until I saw a sidebar in Mr. Rosenberg's article on the dangers of declining rate base: "Deferred taxes will reverse and suddenly come due, as the utility pays more in cash taxes than it collects through rates."

Rosenberg contends that competitive generation is bad for electric utilities. Among other consequences, it increases financial risk by forcing utilities to pay off their deferred taxes. Those increased costs and risks should, in Rosenberg's opinion, count against purchased power in any decision about whether utilities should build their own plants or buy what they need.

So, the consumers and environmentalists of the late 70's were largely right: Utilities became addicted to cash from phantom taxes. Now that growth has slowed and generation has become competitive, they may have to repay those phantom taxes. That is why utility supporters attempt to squelch competition in generation with tales of woe about the risk of purchased power - so that utilities can build more plant, keep their rate base up, and pay less of the phantom tax money back to the ratepayers who loaned it to them in the first place years ago.

So I am feeling my age today, along with a little bit of the grumpiness inherent in the aging process. I must really be 43 after all, because "I told you so - over 15 years ago!"


William B. Marcus


Principal Economist


JBS Energy, Inc.


West Sacramento, CA


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