Matsui Clause Delays Repayments : Tax Law Helps Utilities but Stirs Refund Dispute

For years, the nation’s utilities have collected money from their customers that is earmarked to pay the companies’ future federal tax bills. With tax reform’s new lower tax rate taking effect Wednesday, the utilities’ tax bills will go down. And the companies will have an extra $15 billion on their hands that they have collected from consum1701999392government.

But consumers will not be getting their money back any time soon. They will be getting refunds slowly--over a period of 30 years--because of a little-noticed provision in the Tax Reform Act of 1986.

The provision was slipped into the massive tax bill by Rep. Robert T. Matsui (D-Sacramento). Matsui, 46, received $42,700 in campaign contributions from utility interests in 1985-86, including $11,450 from Pacific Telesis, California’s single biggest beneficiary of the clause.

Consumer groups have charged that the provision puts an unjustified burden on utility customers and constitutes an involuntary interest-free loan to the utilities.

“The utilities shouldn’t be handed this on a silver platter,� said Sylvia Siegel, executive director of the San Francisco-based consumer coalition known as TURN, or Toward Utility Rate Normalization.

Siegel charged that Matsui was unduly influenced by utility companies. She noted that their contributions accounted for 12.7% of the $337,000 that Matsui reported collecting in campaign contributions in 1985-86. Matsui denies the charge of undue influence.

There is no dispute, however, over the amount of overcharges involved; the debate centers on how quickly utility customers should be repaid and how the cases of individual companies should be resolved.

Fanning the controversy is a broad and unusual coalition of consumer groups, large industrial utility customers and utility regulators. The coalition, seeking to strike the clause Matsui inserted into the tax overhaul package, supports legislation to let the states decide how to handle the refunds.

Until the states can get around to adjusting utility rates--which continue to reflect the firms’ old corporate tax rates--the overcollections will continue, leaders of the coalition contend. Given the slow pace of refunds granted by Congress, the $15 billion in overcollections could double before beginning to diminish, according to one knowledgeable estimate.

Cites Possible Rate Hike

Matsui, first elected in 1978, countered that utilities have invested the funds in needed facilities and equipment. He said that if they were forced by states to make quick refunds, they would have to borrow money to make the payments, a move that ultimately would drive up utility rates.

“It’s really not a question of the utilities having a huge pot of cash called ‘deferred taxes,’ � Matsui said.

In California, utilities have overcharged customers more than $1 billion, according to a survey by the National Assn. of Regulatory Utility Commissioners, which represents state regulators. The association estimates that Pacific Bell owes its customers $613.8 million, PG&E;, $236.1 million, Southern California Edison, $110.6 million, San Diego Gas & Electric, $36 million, and Contel of California, $4.3 million.

The reason that utilities have overcharged customers is that they have been billing customers based on utility rates fixed by state regulators before the federal tax legislation was passed. Then, once the tax reform bill was adopted, the Matsui provision prevented states from requiring utilities to lower their rates to reflect the tax cut.

Offsets Loss in Benefits

Matsui’s clause, in effect, enables utilities to offset the loss of tax benefits they enjoyed before last year’s tax reform, which will lower the top corporate income tax rate to 34% from 46%.

Under the old law, utilities were able to take bigger write-offs based on investment tax credits and depreciation stemming from the declining value of their assets over time. Those tax benefits increased the amount of cash available to the utilities for business purposes.

The Matsui provision cushions the loss in tax benefits and cash flow resulting from the new tax law by providing the utilities with the use of some tax overcharges for up to 30 years.

“You don’t want a hodgepodge of different rebate structures based on the whim of state utilities commissions,� Matsui said.

In response, Caroline Chambers, who handles legislative affairs for the National Assn. of Utility Regulatory Commissioners, said:

“That’s where we differ. This isn’t a tax matter. We’re talking about overcollections through utility rates. It’s much more sensible for the state commissions, which are very intimately familiar with the utilities, to prescribe the appropriate refund schedules for each one.�

Sees Chance for Debate

She said that repealing the Matsui clause would bring the refund issue out into the open. “It would provide a forum for consumer advocates, industrial representatives and the utilities themselves to debate the refund issue in an open forum before the commissions.

“We think the utilities should be asked to justify their needs,� Chambers said.

Utilities defend the practice as a low-cost means of financing needed expansions that benefit customers, but TURN’s Siegel and other critics dismiss that argument.

“Utility customers are, in effect, contributing capital to the utilities, and that’s not our function,� Siegel said. “That’s for the shareholders. It’s outrageous.�

Organizations ranging from the Consumer Federation of America to such corporate giants as General Motors and Du Pont have joined forces in support of legislation, introduced by Rep. Byron L. Dorgan (D-N.D.), to repeal the Matsui amendment.

Dorgan’s bill, HR 1049, has 36 co-authors, including Mel Levine (D-Santa Monica), Jim Bates (D-San Diego) and Ronald V. Dellums (D-Berkeley). Currently in a House Ways and Means subcommittee, however, the bill is not expected to go anywhere until possibly early next year, when Congress may begin considering controversial tax law changes.

Matsui and Majority Whip Tony Coelho of Merced--the House’s third-ranking Democrat--joined with 13 colleagues to sign a letter urging other lawmakers not to sign on as co-authors of the Dorgan bill.

Defends Matsui Clause

The lawmakers’ letter defends the Matsui clause as necessary to “mitigate the negative impact of the (tax) act on utilities as well as their customers.�

Utilities were relatively hard hit by the tax law, since, being capital intensive enterprises, they very heavily relied on such abolished deductions as investment tax credit and accelerated depreciation, acknowledged Michael Foley, financial analyst for the National Assn. of Regulatory Utility Commissioners.

But, Foley contended, the utilities are hardly hurting financially. In fact, he said, many utilities are “cash rich,� as demonstrated by their investments in proliferating unregulated new businesses. He pointed to the case of Florida Power & Light, which has formed a company to look into acquiring a major-league baseball franchise.

In California, Pacific Lighting, parent of Southern California Gas, last year bought the Thrifty drugstore chain. San Francisco-based Pacific Telesis, parent of Pacific Bell, has acquired and started up a portfolio of new, unregulated companies in such businesses as computer services and real estate--though insisting that utility revenues have never been invested in them.

Commission Backs Repeal

The position of Matsui and Coelho also runs counter to that of the California Public Utilities Commission, whose president, Stanley W. Hulett, wrote Matsui this spring to ask him to reconsider and “co-sponsor or support� the Dorgan repeal. (Far from changing position, however, Matsui made a videotaped appearance before the annual meeting of the Edison Electric Institute, a lobbying group, this month to urge the utilities to prepare to defend the legislation.)

Hulett wrote that the regulators “are at a loss� to understand why Congress is precluding states from refunding the overpayments more quickly than “on a piecemeal basis over a long period of time.�

Donors to Matsui’s campaign included not only Pacific Telesis but American Telephone & Telegraph and the six other regional phone companies created after the breakup of the Bell System. All other major California utilities also are represented, along with a smattering of out-of-state companies.

Details Contributions

Matsui, in an interview, readily acknowledged receiving strong support from utilities. But he added that about half of the $337,000 he reported raising overall came from a Sacramento fund-raising event--�in other words, from individuals�--and about half from a very broad spectrum of interest groups, including labor, agriculture and other industries, in addition to public utilities.

Dorgan’s supporters do not expect the measure to be included in the hefty compendium of supposedly non-controversial, technical corrections to the tax law introduced in Congress this month.

“This item is certainly controversial,� observed Dorgan aide Andrew Kentz. But, he added, meatier tax amendments likely will be offered early next year, and the Dorgan bill could find a home there.

“We’re talking about a long battle,� he said.