Free Lunch (25 page)

That
electricity is sold in what are called markets, but are really mechanisms to rig prices and cheat customers, has become obvious
even to the large industrial and commercial customers who initially bought into Enron's campaign to make generating electricity a
competitive business. They have seen their own prices rise, not fall. Robert A. Weishaar Jr., a lawyer for many big industrial
customers, told the Federal Energy Regulatory Commission that his clients were being taken for a ride and damaged by
commission policies that allow price gouging. “The ‘markets' that are rolling off the commission's production line are not fit for
their public purpose,” he wrote.

The Federal Energy Regulatory Commission, however,
rejected all such complaints out of hand. Under its circular logic, once it declares that a market for electricity has been created,
whatever prices markets produce must by definition be fair and just, because markets produce fair and just prices.

Faux markets are not the only way that customers are having their pockets picked under current policies
originally promoted by Enron. When competition began, most states that adopted the Enron proposals required utilities to sell their
power plants. They not only allowed them to be sold to sister companies that were unregulated, they allowed them to be sold at
bargain-basement prices.

Most plants were sold for the cost of construction minus the amount
that had been depreciated, that is, the amount written off on the company's books. This was allowed even when the plant had
actually risen in value. Said Lynn Hargis, who was a longtime federal government energy lawyer before joining Ralph Nader's
Public Citizen: “Selling a power plant for its depreciated value is the equivalent of selling my grandmother's house for what she
paid for it decades ago, less depreciation, while ignoring its real value. Nobody would do that.”

For electricity customers it was even worse than that. The utilities demanded that they be paid in full for the
value of the plants that they had not yet written off. These were the “stranded costs” in the Trojan Horse bill that the Texas
legislature, and the legislatures of many other states, passed to mollify the utilities.

Across the
nation, state utility regulators let the utilities sell bonds so they could immediately pocket in cash the value of the plants that they
transferred to their unregulated sister companies. Then the cost of these bonds, plus interest, was added to electric bills. For
residential customers of Centerpoint, the old Houston Lighting & Power, this will add an average of almost five dollars to their
bills every month for 14 years.

Some of these plants were then resold at huge profits.
Centerpoint sold 60 power plants that generate most of the power for the Houston area to a joint venture of four investment
firms—the Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts, and Texas Pacific Group. The price was less
than $1 billion. Just eighteen months later, the four investment firms resold the plants for a profit of almost $5 billion. It was a deal
that even by the standards of Texans produced awe, though no shock.

Sempra Energy, parent
of the utility in San Diego, and two investment partners bought nine Texas power plants in 2004 for $430 million. Less than two
years later, it sold just two of the nine plants for $1.6 billion. A group led by Goldman Sachs, the investment bank, bought power
plants in upstate New York, Pennsylvania, and Ohio starting in 1998. It sold them in 2001 for a profit of more than $1
billion.

The prices of these and many other plants rose because of the easily rigged markets
for electricity that make it possible for owners to inflate prices. Robert McCullough, the utility economist whose fax on price
manipulations Vice President Cheney dismissed without reading it, said that from Maryland to Texas to California, the sale of power
plants by utilities to sister companies had no benefit for customers. “The same energy is generated by the same plants, owned by
the same owners, and sold to the same customers, simply at a vastly higher price,” he said.

Ralph Nader said regulators should have required price protection to shield consumers from a
“double-header corporate gouge, where the defenseless customer is paying twice for the same power plants.”

But wait. There's more.

Paying twice for the power plants is not the only
way that electricity customers are forced to double up their costs. Across the country, electricity customers pay taxes that are
embedded in the rates they pay. Because utilities are legal monopolies, they must recover all of their costs from customers,
ranging from the price of fuel and the chief executive's expense-account lunches to income taxes on profits.

These taxes do not always make it to government, however. When state utility boards set electric rates, they
assume that the utility will file its own tax return. But often when the utility has a corporate parent, the parent files the tax return and
the parent may not pay any taxes. When that happens, the utility and its parent company eat a free lunch at the expense of their
customers.

The system that allows the corporate parents of utilities to pocket taxes has many
defenders. Paul Joskow, a Massachusetts Institute of Technology utility economist, said, “For the customer, the result is the
same.” He meant that if utilities filed their own tax returns and paid the taxes, their rates would be the same as when they pass the
taxes on to their corporate parents.

Mike Hatch, when he was Minnesota attorney general, said
Joskow's argument is hollow. “Essentially, utility ratepayers pay the tax twice,” Hatch said, “once through the utility bill and again
through the lost revenue to government that means either higher taxes for them or fewer government services.”

Hatch provided help to Myer Shark, a Minnesota lawyer who spent the last years of his life trying to recover
$300 million in taxes, embedded in the rates paid by that state's electric customers, that never reached government. The taxes
benefited Xcel Energy, which operates in ten states, though Shark sought recovery just in Minnesota. To Shark, who was in his
nineties when he took on Xcel, pocketing taxes violated laws prohibiting “unjust enrichment” by legal monopolies like
utilities.

“The law says that utilities are entitled to a just and reasonable return, but when they
keep the taxes, they are earning an unjust and unreasonable rate of return because those taxes add to their profits,” he said. Just
days before he died in 2007 at the age of 94, Shark filed the last legal papers intended to make sure a court would decide his case
and reject any efforts to dismiss it because he would not be around to argue further.

The
champion at pocketing taxes was Portland General Electric, during the years 1997 to 2004 when it was the only operating business
owned by Enron. Each year Oregon residents and businesses paid about $92 million to cover Portland GE's income taxes. But
Portland GE, like virtually all electric utilities with a corporate parent, did not file its own tax returns. Instead, Enron filed the tax
returns. Enron did not pay taxes, thanks to its use of hundreds of shell companies in the Cayman Islands and other tax havens.
That meant that Enron pocketed an extra $92 million a year from Portland GE customers, a total of nearly $1 billion dollars during
the years it owned the utility.

News that Portland GE did not pay taxes caused an uproar in
Oregon. The state was so hard-pressed for money that some counties could not afford sheriff's patrols. The Oregon legislature
passed a law in 2005 to require that any taxes embedded in utility rates be turned over to government. Not only did Portland GE
fight the law, so did Warren Buffett, who had just acquired Oregon's other big corporate-owned utility, PacificCorp. Both wanted to
profit off taxes.

Buffett is a master at delaying the payment of taxes not for a little while, but for
a generation. His MidAmerican Energy Company owns electric and natural gas utilities, with operations from Oregon and Utah
through Iowa and east to Britain. It paid just 4 percent of its American profits in federal corporate income taxes in 2006, far less than
most Americans paid on their incomes. On its overseas profits, MidAmerican paid a 21 percent tax.

MidAmerican will have to pay the rest of his American taxes, but not for a long time. It deferred $666 million in
taxes in 2007. In 2035 it will have paid just half of those taxes. A tax not paid today but in the distant future is like getting an
interest-free loan from the government, which is to say from the rest of the taxpayers. Imagine how rich you would be if you had
bought a house 28 years ago, got an interest-free mortgage, and only now had to pay the price you agreed to so many years ago.
Like Buffett you would be rich. When the government finally gets those taxes from Buffett's company it will get about 40 cents on
the dollar. You will have to make up for those missing 60 or so cents through higher taxes, fewer services, or interest payments on
more government debt.

This interest-free loan has not meant cheap electric rates. When it
comes to charging high prices, Buffett plays hardball, extracting every dollar the regulators will allow his utilities to charge, as
people in six Iowa cities discovered. For years Iowa had nine corporate-owned electric utilities plus a sprinkling of city-owned
systems that sold power at lower prices. Then MidAmerican and another firm, Alliant Energy, consolidated the corporate-owned
utilities into just two entities. Because consolidation lowers costs, people in Johnson City and five smaller towns tried, without
success, to get lower rates, hoping this would both save them money and help local manufacturers create more jobs. Rebuffed,
they organized to buy out MidAmerican and run municipal systems so they could get their power for less.

Buffett's agents immediately went to work to make sure electricity prices would not fall. His firm spent more
than half a million dollars in Johnson City. It also filed a petition to lower rates, though more than four years later rates remain
unchanged.

But Buffett's key move was getting legislation to thwart not just six towns but to
punish the people in the nine cities with municipal power for giving advice on how to convert from corporate power to municipal
power. MidAmerican drafted bills that would have made the existing city-owned systems pay taxes, prevented them from making
changes as technology and the times always require, and blocked them from offering any new services, such as municipal Internet
or cable television service. Buffett's lobbyists bluntly told the Iowa Association of Municipal Utilities that it would make the
legislation go away on one condition: that the association stop giving advice to the six towns on how to switch to municipal power.
Bob Haug, the association's executive director, told his members that the influence of Buffett's lobbyists showed how the state of
Iowa had been transformed into “Iowa Inc.” He said that given MidAmerican's grip on the legislature the association had no choice
but to bow to MidAmerican's demand that it adopt a resolution promising to never help any Iowa citizens seek a municipal power
system.

Carol Spaziani was a librarian in Johnson City before she retired. She became a leader
of the municipal power campaigns. Spaziani said that she watched in amazement and horror both at how Buffett used government
to enrich himself at the expense of others and at how eager state legislators and others were to bow to the will of his lobbyists. She
said she was also struck by the inability of the news media to articulate the issues of a matter crucial to the local economy, and,
when they were covered, how it was written up as a political dispute worthy of only a few words on the inside pages.

“On television I keep seeing this beneficent billionaire who is portrayed as someone we should all respect
because he is so rich, and he has given so many billions to charity,” Spaziani said. “What I don't see is coverage about how
Warren Buffett is forcing people in Johnson City to pay more than we should for electricity, and how that means fewer jobs and
hardship for people just so he can make more billions.”

But wait. There's still
more.

State regulators generally allow utilities to earn a profit of 10 percent or so. Yet despite
this limit on profits, investors famed for earning much bigger returns, like Warren Buffett, are buying electric utilities. Kohlberg
Kravis Roberts & Co. and the Texas Pacific Group, which teamed up to make those enormous profits buying Texas power
plants, are in the game. The two firms worked jointly in 2007 to buy TXU, the big Dallas utility involved in the hockey stick bids. This
joint venture came after KKR failed in its attempt to buy Tucson Electric Power in Arizona and Texas Pacific tried to buy Enron's
Portland General Electric.

Why would investors famed for much bigger returns want electric
utilities earning a solid, but modest, profit? The answer reveals how much government has become an ally of the rich in exploiting
those with less.

After Enron bought Portland GE it raised rates, ending decades of cheap
power. The revelation that it pocketed almost a billion dollars of taxes customers were forced to pay in their monthly electric bills
turned many in Portland against both Enron and the local electric utility.

Then, in October 2003,
the city's long Enron nightmare appeared to be coming to an end, thanks to Neil Goldschmidt, the most influential politician in the
state. Goldschmidt was elected mayor in 1972 when he was just 32, the youngest mayor of a major American city. He went on to
become transportation secretary under President Carter and governor of Oregon. He was instrumental in making Portland a
vibrant, livable city, with mass transit, bicycle lanes, and ways for minorities and others to have a voice in city affairs.