The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (44 page)

Reform advocates can frame the debate with a simple question to utilities:
Why do you want to be taxed?

The idea of exempting rate-regulated monopolies from the corporate income tax was put forth in 1977 by Robert Batinovich, a wealthy businessman who was president of the California Public Utilities Commission. Batinovich still believes the efficiencies and transparency of such a reform would pay for itself many times over. It is likely that eliminating the corporate income tax will cost the government not so much as a dollar in revenue. All Congress and the state legislatures need to do is impose a gross receipts tax—a kind of sales tax—on the bills of legal monopolies exempted from the corporate income tax. No more need for two sets of books or regulatory hearings on corporate income tax costs and no more opportunities to pocket taxes embedded in electric, gas and other utility rates.

Action Three

I would go further than Batinovich. A progressive utility-consumption tax could be imposed on customers—the more kilowatts, the more water, the more telecommunications bandwidth you use, the higher your tax rate.

The tax rate for running a mansion where the air-conditioning is turned to 65 degrees in August and the outdoor swimming pool is warmed all winter could be set at two or five or ten times that for running a household where people turn off the lights in empty rooms because they cannot afford to leave them on.

A progressive add-on tax on electric utility bills would discourage consumption, which in turn would help reduce the burning of fossil fuels that is causing increased concentrations of carbon dioxide in the atmosphere. It would also encourage investment in more efficient use of fossil fuels and water.

A progressive utility-bill tax would also align the tax burden with the ancient principle that taxes should be levied according to ability to pay.

While some industries and businesses are more intensive than others in their use of electricity, natural gas and water, raising their ultimate costs would simply reflect the real economic cost of production, a virtue
no honest economist could dispute. A progressive tax on utility bills would discourage waste while encouraging investment in making machinery, lights, pumps, chillers and other equipment efficient in design and use.

Action Four

Address the one-sided nature of rate-making proceedings. The utilities, pipelines and railroads have an intensely concentrated interest in the outcome, while each individual customer has a very small interest and even less knowledge about how to fight back.

An elegant solution to this problem comes from utility lawyer Patrick J. Power, who has worked for every side of the issues, including a stint as Batinovich’s aide. Power is now an administrative law judge with the Oregon Public Utility Commission.

Judge Power proposes a match, with a dollar going to customer advocates for each dollar a utility spends in a rate case, on lobbying or other advocacy. He would divide the money among residential, commercial and industrial users in proportion to their shares of utility revenues.

“We all know going up against any big corporation is David versus Goliath,” Judge Power says, “but [under the present system] in rate cases David pays Goliath’s lawyers.”

Power’s reform would add credibility to the rate-making process by adequately funding adversaries with competing economic interests, thus promoting restoration of the badly damaged “just and reasonable” doctrine that is the foundation of all rate regulation of monopolies.

Another benefit of Power’s plan would be that it just might discourage utility game playing. In rate cases, utilities routinely claim that crucial information is not available or too costly to get; they then deliver it at the last moment when there is little time for serious scrutiny. If every dollar a utility spends hiding evidence gets matched by a dollar to uncover the facts, maybe the utilities will find that candor and integrity are to their benefit.

It is already the law in many states that advocates can be paid for participating in rate-making and other similar proceedings. But outside of California and a few other states the sums are trivial. Power’s plan would promote a level playing field. Well-funded customer advocacy would promote efficiency by exposing wasteful utility practices and encourage adequate staffing to reduce outages, fires and explosions.

Power’s plan would also help advocates of very low-cost, limited services, such as Lifeline, a government policy that provides phone service for the poor, disabled and elderly for as little as a dollar a month. Society
derives significant benefits from universal access to electricity, natural gas, telecommunications and other services vital to living in the modern world. Being able to dial 9-1-1 in a medical emergency can save far more money than the marginal cost of providing a connection to the telephone system. Being able to get a modicum of electricity to run a refrigerator and keep a few lights and appliances on helps elderly and disabled people with small incomes to live independently, which costs taxpayers much less than maintaining people in assisted-living and other care facilities. Yet your and everyone else’s legal right to a landline telephone at any address in America is quietly being legislated away in our state capitals.

Judge Power has a related proposal that is also smart: make shareholders pay half the cost of executive salaries that are higher than those paid to the managers of utilities run by nonprofits, cooperatives and government.

Why is the head of Southern California Edison paid $3.5 million a year or more and the head of its holding company, Edison International, $4.5 million and the head of Entergy, the New Orleans utility holding company, at least $27 million? The general managers of the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District each make about $350,000. These utilities have for years provided reliable service at lower cost than the corporate-owned utilities.

I would go further, making shareholders bear the entire cost of executive salaries that are higher than the average compensation of the ten highest paid municipal, cooperative and other noncorporate utilities in the same field.

Shareholders should be free to pay any salary and bonus and give any perks they want out of their profits. But since utilities, railroads and pipelines are regulated monopolies rather than competitive businesses, any premium pay should come from shareholders, not customers. In an ideal world, Congress would contribute to holding down executive pay by disallowing a tax deduction for any pay to utility executives that is greater than the average of the top ten noncorporate utilities and by requiring clear disclosure of these costs to investors.

Action Five

If Congress will not do away with the holding company for monopolies or their corporate income tax, another approach may persuade owners to move to stand-alone utilities. This reform would also create an opportunity to join the interests of consumers, locally owned businesses and opponents of the corporate income tax by making dividends paid by
stand-alone utilities tax deductible to the company, while fully taxable to the recipients. That would encourage cash payments, making utilities a reliable investment for older people who need reliable income from their investments. The key is to allow tax-deductible dividends only when there is no holding company atop the utility.

Converting utilities from corporate-owned to publicly owned should be made simpler. Making public takeovers easy will also be a way to discipline utilities because, if they charge too much or provide poor service, they can lose their franchises.

Pacific Gas & Electric used wildly inflated claims of how much its property and equipment were worth when voters wanted local public ownership of the Sacramento Municipal Utility District in 2007 and when the South San Joaquin Irrigation District acted to buy a small piece in 2009. The price for assets of regulated public utilities should be set at the depreciated value on the company books plus any deferred taxes on those assets. State legislators can put this on the books and communities can put it in their franchise agreements, which should require frequent renewal, perhaps every ten years.

ARBITRATION

As an alternative to litigation in the courts, arbitration is a good idea. But as we saw with the cases of Barbara Keeton, the Casarottos’ Montana Subway sandwich franchise and Ernestine Strobel’s stocks, the system has become twisted to benefit big business.

Action One

A simple reform would be to require that an arbitration take place where the customer lives, not where the company chooses. Making people fly across the country to have their cases heard is an unreasonable burden on the less well-off and elderly.

Action Two

Solve the repeat player problem, in which businesses who often use the system tend to rely on those arbitrators they find friendly to their interests. This problem is tricky, but one way to shine a light on abuses would be to require a posting of how many cases an arbitrator has handled, the number
and percentage decided for each side, and the average and median (half more, half less) awards not in dollars, but as a percent of the sums in dispute.

Action Three

Since arbitration is supposed to relieve congestion in the courts, let’s finance it not with user fees for each arbitration, but with a fee charged to all litigants (except those who can show they are paupers). This would benefit those whose cases are heard in court by reducing demands on court time. Because arbitration fees and expenses would come from a pool, not from the warring parties, the bias in favor of repeat business litigants would shrink.

BANKING AND INSURANCE

We know how to regulate banks. We also know that lack of regulation is disastrous.

Action One

Make banks eat their own cooking, requiring them to hold on to the loans they make and buy back every loan that sours. That would be a simple, effective and self-reinforcing way to address control frauds by bank executives more interested in fast fees than interest payments.

Action Two

Increase the reserves that banks must hold to around 10 percent, with higher reserves for riskier loans. That would also help improve the integrity of lending. So would changing a host of accounting-industry rules that give lip service to the principle of providing a reasonable picture of finances but in fact hide the salient facts. For example, the Financial Standards Accounting Board should prohibit temporary swaps that on the last day of a quarter or year make liabilities appear to be assets.

Action Three

The sale of derivatives, which was at the core of the Great Recession, requires transparency, if not regulation. The pension funds, endowments,
investment pools and other money held in trust for others should be barred from trading in derivatives unless there is complete disclosure of fees, costs and spreads on trades. (A spread is the difference between what the buyer and seller get—the slice taken by the trader or his proxy.)

Action Four

Credit agreements need to be in plain English. The original credit card, issued by Bank of America a little more than half a century ago, came with a half-page contract. Some Visa and other credit card contracts today run four pages of very fine print. There is no reason these cannot go back to the old length. Banking regulators can use their power to approve deals to achieve just that—simple, clear, plain English.

JOB SUBSIDIES

We need to call the so-called job subsidies what they are: wealth destruction, not job creation. Let’s cease giving the likes of Alcoa a $141,000 annual discount on electricity for each job that pays less than half that much or giving Verizon $3.1 million for each job at a computer server farm. Why should we take the eternal energy from Niagara Falls and virtually give it to a few big users? Likewise, building factories for foreign companies with American tax dollars is not capitalism, but globalized corporate socialism.

Since most state constitutions already prohibit such giveaways, this problem should be easy to solve, but so far the courts have looked kindly on corporate welfare. Some inventive lawyers are arguing that the money is not a gift of taxpayer dollars, but a contract in return for creating jobs.

Action One

Here the best solution is not litigation, which we should be trying to reduce, but legislative action. Voters, especially those whose primary concern is tax burdens, should organize and press for either strengthening existing state constitutional prohibitions on gifts to corporations or new statutes that require disclosure of every aspect of the deals and require clawbacks (return of monies) when promised jobs are not created. How about requiring a bond to make sure the clawback money is there? That should be enough to dampen the competition to give away ever more.

Action Two

Don’t underestimate the shame factor. Staking out CEOs and directors at public events where they can be called out for taking welfare that robs people in need of education, disability benefits and lower taxes might just make the personal price of greedy policies too high.

TAXES

No one should have to pay to have their tax return filed electronically, nor should people with modest incomes that come from their labors have to pay someone to prepare their tax returns. Thanks to professors Joseph Bankman, Dennis Ventry and others, the solution to this problem exists.

Action One

Institute a national ReadyReturn. There will be a battle—Intuit, the maker of TurboTax software, and H&R Block will fight it—but at least two-thirds of American taxpayers should not have to prepare a tax return unless they want to. If you take only the standard deduction and exemptions for yourself and any dependents, there is no reason the government should force you to spend time and effort on filing a tax return or paying someone to do it for you. The government already has the data to determine the proper amount of tax.