About a year ago I stuck my neck out to predict that electric utilities might end up with stranded investment in transmission lines. I suggested that financial commodities trading-longs, shorts, and hedges-might supplant physical product movements. It's happened in natural gas, where the interstate pipelines have suffered from "decontracting" and capacity "turnback"-a phenomenon that has tended to move from West to East.
Here's another view, from attorney George Galloway (Stoel, Rives, Boley, Jones and Grey, Portland, OR), counsel for PacifiCorp:
"An interesting thing is starting to happen in the West. Transmission may turn out to be last year's battle. Most of the power that is bought and sold doesn't go anywhere. It's the normal trading function."
Galloway continues: "Transmission constraints don't seem to be that important anymore. We may err if we put too much emphasis on transmission bottlenecks going forward in deregulation."
William McCarley, the current general manager of the Los Angeles Department of Water and Power (LADWP), has a problem, and darned if I know the answer.
McCarley sounds as if he wants to play the merger game. He harbors doubts over how well the LADWP can compete against Southern California Edison and San Diego Gas & Electric (SDG&E). In fact, SDG&E recently announced a merger with Pacific Enterprises, the holding company that owns Southern California Gas, the nation's largest investor-owned natural gas local distribution company (LDC).
But how do you merge with an municipal utility?
On the good side, LADWP has been gearing up to play hard ball. According to McCarley, LADWP has trimmed its staff by 20 percent (2,000 employees) over the last two years, and has a proposal pending before the city council to cut rates for more than two out of every three customers. LADWP has even prepared a media marketing blitz complete with glossy, four-color magazine ads. But there's bad news, too. LADWP carries a lot of tax-exempt debt-"A staggering debt load," says McCarley. He adds that LADWP's exemption from the state's stranded-cost charge will not kick in under the new California restructuring law (see this issue, p. 32) unless LADWP grants direct-access rights to city residents, plus reciprocity rights to utilities outside the city.
To achieve a sort of "virtual merger," LADWP has issued a request for proposals for a strategic partner and has narrowed the list down to three. When I asked McCarley for details, he said he envisioned a venture-type arrangement to trade expertise with another company. Meanwhile, a ballot initiative was set for November 5 to allow the voters of Los Angeles to decide whether LADWP should operate outside city limits.
Can McCarley succeed in diversifying a muni? Deborah Kimberly, manager of finance and administration at Salt River Project, warns that nonproprietary activities can jeopardize tax-exempt financing for public power. Speaking at a workshop on income-tax issues at the recent Electricity Forum held in Santa Fe by the Department of Energy and the National Association of Regulatory Utility Commissioners (NARUC), Kimberly noted that the Treasury Department issued proposed regulations a while back on private activity bond constraints and has so far received "over 500" sets of comments.
"This is a key area for public power," says Kimberly." [Public power] supports the idea of independent state and local jurisdiction, but we may need federal legislation on private activity bond constraints."
Meanwhile, McCarley has resigned from his post at LADWP, effective at the end of January 1997.
Last month the U.S. Supreme Court heard oral argument in General Motors v. Tracy, No. 95-1232, on whether the State of Ohio can impose a pattern of sales, use, and gross receipts taxes that may favor natural gas LDCs against interstate marketers.
As I understand it, at least 31 states have enacted separate tax structures to recognize the special attributes of the gas distribution business, including tat least eight states (among them, Ohio) that impose high property taxes on LDCs, and five more (plus the District of Columbia) that draw distinctions according to whether a customer buys gas from an LDC or an unregulated private marketer.
The situation was unique in Ohio. There, the state exempted gas LDCs from the state sales tax because it already imposed an even higher gross-receipts tax on gas utilities. And that exemption for sales taxes created a parallel exemption for LDCs against paying the state's use tax-a tax imposed on interstate marketers selling gas into Ohio. Is that fair?
The answer seems to depend on whether you think gas marketers and LDCs practice the same business.
A large group argues that the Ohio tax scheme violates the Commerce Clause because it discriminates against interstate marketers in favor of local distributors. General Motors and other gas customers have taken that view, supported by the U.S. Chamber of Commerce, the National Association of Marketers, the Process Gas Consumers Group, the Natural Gas Supply Association, and a handful of interstate pipelines, such as ANR and Colorado Interstate Gas Co., that feel Ohio's tax scheme could force them to lose business in transporting gas for marketers.
Ohio defends its tax exemption for LDCs as a quid pro quo for the cost of regulation: "Utilities undertake an obligation to serve....Marketers, by contrast, undertake no statutory obligation....Far from burdening marketers, in fact, it appears that [the Ohio tax scheme] has been a blessing, Marketers no longer dominate the industrial natural gar market in Ohio, and apparently have chosen not to enter the residential market only because of the additional requirements they must meet to make such sales." (See, Brief for Respondent, Tax Commissioner of Ohio.)
"Virginia could use the same logic to exempt sales tax on purchases of furniture from [Virginia] stores that deliver using their own delivery trucks. Virginia stores would be favored over stores in High Point, NC, which are known for selling furniture at deep discount prices, but ship their goods to buyers in other states by common carrier."
If furniture companies can bypass the showroom and all its overhead, why can't gas marketers do the same?
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