Making Amends

Three years ago, every special interest was scrambling to protect its flank against provisions of the sweeping federal tax reform act. At that time, Rep. Robert T. Matsui (D-Sacramento) came to the rescue of American utilities. He managed to insert a provision that allowed utilities to keep $19 billion in taxes collected in advance from consumers for as long as 30 years. Over time, the money would have to be refunded to electric, telephone, gas and other customers, but not until the utilities had the use of the money for capital investment and other purposes.

Today, Matsui recognizes his utility amendment was a mistake and has joined Rep. Byron L. Dorgan (D-N.D.) in sponsoring legislation to repeal it. Congress should not hesitate to agree with them.

Over the years, state regulators have allowed utilities to bill their customers in advance for taxes they expect to pay. The tax money in question wound up not being owed because the Tax Reform Act of 1986 lowered the federal corporate tax rate from 46% to 34%. The Matsui provision allowed the firms to keep the money in part as an offset to the firms’ loss of tax write-offs in the 1986 law. Requiring utilities to refund the money immediately could force companies to run short of cash needed for plant investment, he argued at the time.

Matsui got considerable criticism because utilities had been rather heavy contributors to his election campaigns. That had no effect on his decision to sponsor the legislation, he argued, saying he believed the utilities when they contended it would hurt consumers if they had to turn back the tax money immediately. The utilities claimed they were “cash-poor” and could not borrow the large amounts of money needed to make such refunds.

Experience has shown that such arguments were specious, Matsui says now. Some utilities have so much cash they are using it to diversify into such nonutility business as land development and drugstores. Matsui is seeking to rectify his mistake by allowing state regulatory agencies to rebate the funds through rate reductions over a period of several years. Even with the $19-billion rebate--including nearly $2 billion to California customers--the utilities will have enjoyed a windfall and still have $54 billion in accumulated tax reserves on hand for plant investment, Matsui said.

The utilities will not give up a bird in the hand without a fight, so passage of the bill is no cinch. But it is clearly in the interest of consumers throughout the nation and deserves vigorous support from the Congress and the Bush Administration.