Case Overview, Tax Concessions Related to Electric Utility Restructuring that must be Agreed to by both Public Power and Electric Companies

This document provides background information and summarizes the debate over tax concessions related to electric utility restructuring. The links to the left will lead you to public documents that we have found..

           In the United States there are two basic types of electric companies. Approximately three-quarters of all electric utilities are private corporations and, thus, are in the business of selling electricity to make a profit for their shareholders. The remaining quarter of utilities are owned by municipalities. Most of the municipal utilities are in small towns, though there are a few exceptions (like the electric company in Los Angeles). Historically the two sides of the industry are bitter rivals. Said one lobbyist, "There has been something of a Jihad between the utilities for quite some time."

           Each side resents the other because of advantages it believes the other possesses unfairly. One observer explained:

In particular, public utilities can issue tax-free bonds for their large infrastructure needs (and just about everything in this industry is a large infrastructure investment). Private utilities typically charge more, provide returns to shareholders, and are unhappy with the tax advantages that the public companies get. The public companies point to various depreciation allowances and tax abatements that the private companies get, and basically there is a lot of ill-will between the two groups. . . in terms of culture, tax treatment, financing, and relations with local authorities, they are very different and hostile.

           Despite their differences, the two sides of the industry have been pushed toward a better working relationship because of the pressures of deregulation. Twenty-five states have initiated at least some form of deregulation. That is, in some localities the consumer can choose a company to provide electricity to their home or business. As Congress began to grapple with many of the policy issues raised by the deregulation movement, its efforts were complicated by the rival interests of the two sides of the industry. Instead of trying to negotiate the differences themselves, legislative leaders told the key trade association officials that it wouldn't move forward on necessary legislation until the industry came together. In an interview one lobbyist recalled, "we were told by [Sen.] Murkowski and [Sen.] Gorton to 'go work it out and come back when you have a deal.'"

           The major trade associations did go to work, with the Edison Electric Institute representing private companies and the American Public Power Association and the Large Public Power Council representing the municipal providers. Despite what one participant called their "religious" differences, the two sides negotiated seriously and each side came away with some of what it wanted while giving the other side some of its priorities. The primary issues involved the level and types of taxes paid by private utilities on investments, new limits on the use of tax exempt bonds by public utilities, and some changes in the tax exempt status of rural electrical cooperatives. With agreement between the two sides of industry in hand, the ball was thrown back into Congress's court. Congress, however, became wary of the issue as the power crisis in California was blamed in large part on partial deregulation of the industry there. The bill died in committee and similar legislation introduced in the 107th Congress floundered too.