Windfall Profits Tax

Elizabeth & Christian: I had trouble forwarding an e-mail relating to the
same but have copied it below. It describes a movement by certain CA
legislators to attempt to enact a "windfall profits tax" on electricity
sellers that essentially would be designed to claw back profits on
electricity sales. You will recall this was one of the items addressed in
our "pass through" clause in the proposed CDWR contract. I know that we, as
Firm, looked into the various constitutional and other legal issues relating
to such a tax a few months ago, so let me know if, in your spare time, you
would like me to pull anything on it. John

Proposed Windfall Profit Tax

The key state democratic legislators are working
behind the scenes to develop a Windfall Profits Tax bill in
<retaliation for high wholesale prices. It is not yet in print. Here
< is an analysis of the expected bill by an attorney for the Independent
< Energy Producers.

<Preliminary analysis of State Windfall
< Profit Tax. This will be discussed during the cc scheduled for 9:00 a.m.
< today, Wed.
<
< Wednesday, April 04, 2001 8:33
< AM
< To: Steven Kelly
< Cc: Douglas K. Kerner
< Subject: Proposed Windfall
< Profit Tax
<
< Gentlemen:
<
< I understand that the some of the
< Democratic leadership of the
< California Legislature is contemplating a charge
< against the
< electric-generating industry in retaliation for
< recent price increases. The
< charge is to be styled as a "windfall profit
< tax" modeled on President
< Carter's tax on oil company profits following
< deregulation of oil prices in
< 1980 (The Crude Oil Windfall Profit Tax Act of
< 1980, 26 USC 4986 et seq.).
< The Carter Windfall Profit Tax was levied on the
< difference between the
< current wellhead price of the oil and the sum of
< the adjusted base price set
< by Congress, multiplied by the applicable rate.
< I understand the California
< charge will similarly be calculated by reference
< to a 1999 base price and
< current prices, to which difference some sort of
< tax rate will be applied.
< You asked whether this approach to punishing
< electric wholesalers was infirm
< from either a policy or legal perspective. The
< basic policy problem is that
< the tax will discourage sales of electricity in
< California. California will
< become the market of last resort. Another
< problem is that the Tax might be
< seen as promoting a "California First" policy at
< the expense of other
< states. This is so because the Tax could well be
< included in the FERC rate
< base as "taxes other than income taxes," and
< thereby be shifted to other
< customers.
<
< The Tax may suffer from legal flaws as
< well. The principal problem is
< preemption by The Federal Power Act. The states
< are prohibited from
< regulating wholesale power rates as a direct
< burden on interstate commerce.
< The proposed charge, whether called a "windfall
< profit tax" or an excise tax
< or a sales or use tax or something else, is
< underground rate making. There
< is little or no practical difference between a
< rate cap and a tax on all
< revenues measured with reference to a certain
< price point from the
< perspective of the interstate electric
< wholesaler. Thus, the burden on
< interstate commerce posed by direct rate
< regulation and taxing revenues
< using a price base is comparable.
<
< The Tax may also constitute an
< unconstitutiional taking if the price
< allowed is less than the cost of production and
< a reasonable return. The
< proposed historical base price will not, for
< example, reflect recent fuel
< price increases.
<
< Two other potential issues arise as well.
< First, the tax has many of
< the hallmarks of a use tax, i.e., the tax is
< levied on the purchase of goods
< from an out-of-state provider for delivery to
< and use in California. The
< gross receipts form the sale of electricity have
< been exempt from sales and
< use tax for more than 50 years. Rev. & Tax. Code
< Section 6353. While this
< statute could, presumably, be amended, doing so
< would be a major policy
< departure and a big step towards imposing sales
< tax on utility sales. A
< second concern is the possible impairment of
< existing contracts as a result
< of the Legislature's meddling in rate
< regulation.
<
< I was unable to identify any instance in
< which a state imposed a
< windfall profit tax on electricity sales.
<
< The forgoing is the product of my
< conversations last evening with
< Doug Kerner and a few hours of LEXIS research.
< The issues are complex and
< could not be much developed in the time
< available. This material is best
< viewed as informed "issue spotting."
< Nevertheless, I feel strongly that
< the proposed "Tax" can fairly be characterized
< as rate making.
<
<
<
<
<
<
<

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John Klauberg
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
212 424-8125
jklauber@llgm.com