The fourth branch of government

You might be tempted to pass on a story in Sunday's Arizona Republic with the process-y headline, "Case Asks Who Must Pay Taxes for Utility." Don't.

Ably reported by Ryan Randazzo, the article lays out a controversy in Sun Lakes. The small company that provides water for the "active living retirement community" wants a rate increase of about $6 a month from residents, the first such hike since 1994. Sounds reasonable. But it wants more: "About 40 percent of the increase would pay the utility owners' income taxes." The Residential Utility Consumer Office contends that the water company's "shareholders might have other business interests that lose money, and if they combine the tax credits of those operations with the tax liability from the water utility, they might not pay taxes at all, even though the customers would be paying a 'phantom tax.' 'When this happens, this is essentially free money for the shareholders paid by the ratepayers who receive no benefit from these payments,' RUCO wrote in a brief for the case."

This is about more than Sun Lakes. My sympathy is limited for people who want to buy houses in a leapfrogged, 98-percent white development with streets named after Michigan, Minnesota and Indiana, profaning our desert. But the case is a rare window into how power and influence work in the state. Power, especially, at what insiders call "the fourth branch of government," the Arizona Corporation Commission.

Outlanders, and even many natives, assume it is simply a public utilities commission. It appears in the news rarely, and when it does the coverage is limited to a utility rate increase. Yet the commission is so much more. Established in the Progressive Era state constitution, the ACC was intended as an independent check and regulator on businesses that affect the common good. At the time, that especially meant railroads. But its powers are much more far-reaching, ranging from securities to pipeline safety. When I was licensed as an emergency medical technician back in the 1970s, the regulatory agency wasn't the health department but the ACC. More importantly, the five elected commissioners are not merely regulators. They act in executive, legislative and judicial capacities. This is a tremendous amount of largely unaccountable power vested in one body that is rarely covered by the media. And needless to say, it long ago was co-opted by the powerful interests it was established to oversee.

The Sun Lakes case, which almost sneaked in without any coverage, is an instructive example. Sun Lakes was begun 40 years ago by Ed Robson, a hard-scrabble, old-school Arizona developer. When we would run ambulance calls there in the late '70s, it was far away and bleak. Now metro sprawl has reached it. Robson and his family own Pima Water Co., the monopoly that supplies Sun Lakes. If the case is decided in his favor, he will have essentially found a way to charge his own personal salary, profits and personal income taxes to his customers through the arcane rate-making process of the Arizona Corporation Commission. It's also a neat bit of estate planning for his family. You can say the boobs from the Midwest deserve it. But it would also reverse long-standing commission rules and have wide-ranging implications.

If I read the briefs and testimony correctly, Robson has come well-armed. For example, Mark Spitzer testified for approving Robson's request. Spitzer is a former commissioner himself (and served as chairman), as well as a former state senator and Bush appointee to the Federal Energy Regulatory Commission. In January, he joined the well-connected law firm of Steptoe & Johnson. There's nothing necessarily unseemly about this. Spitzer is a nice guy. But the Sun Lakes customers can't nearly match such high-profile lobbying firepower.

If Robson succeeds, the precedent will be used by developer/monopoly water providers around the state to get richer. If you live within the Salt River Project, good for you. But Arizona has some 200 small, private water companies. They are already "lightly regulated," to put it nicely. The state's water ownership is full of complexity and intrigue. The developer-connected water companies (the Johnson interests come to mind) know how to work the system with "ins" that the rest of us don't have. And the broader consequences for land use, water resources and sustainability are swept under a very crowded rug.

Thanks to air conditioning, Arizona leapfrog retirement developments made some people very rich in the second half of the 20th century. They were able to unload the externalities, such a traffic congestion, inadequate infrastructure, pollution, disrupted ecosystems, loss of farm land and the local heat island, onto the public. Most of those costs have still not been paid (e.g. the disaster along Hunt Highway). In some cases, freeways, flood control and wider highways were publicly financed to make otherwise worthless land valuable to well-connected players, no matter the damaging effect to the public good.

It's an open question whether the Ponzi scheme can return after the Great Recession. Too many in the target demographic were financially ruined. Debt and leverage is heavy for the Real Estate Industrial Complex. Tastes are changing, too, with many baby boomers seeking "active retirement living" in vibrant cities. At least a stopgap measure for the players who survived the crash would be padding profits from the captive audience of house buyers at existing developments, such as Sun Lakes, by changing the rules. In theory, if you clone the retirement "community" model to many locations, as well as ownership of the utility companies serving those developments, and finally you get house owners to pay your salaries and income taxes on a continuing and forward basis, this is nearly a no-cost business model that would accrue to the developer and his family for generations. This is not the "free market," but a market fixed by public policy, set by an obscure governmental entity of great and quiet power.

It's a model that requires the right influence. The ordinary small-business owner needn't apply.

The Robson case is unique in its sweep. But the problem of accountability is widespread. Readers regularly send me complaints about little-known water companies tied to developers (some to very big developers) and the favorable treatment they receive on rates and mergers. One customer wrote, "We have communicated with the five ACC Commissioners about these issues and have participated as a community in the rule-making processes. Throughout the years I have been struck by the non-responsiveness of the ACC Commissioners (except one) and the insulated role they occupy." Phrases such as "the fix was in" and "behind-the-scenes deal" are common.

The commission will hold a hearing on the Robson case 10 a.m. Tuesday at the Sun Lakes Country Club's Navajo Room, 25601 N. Sun Lakes Blvd. Yes, Arizonans should vote in greater numbers, paying more attention to the ACC. But we also need a press that is a consistent watchdog over the fourth branch of government, the commissioners and the many ways the system can be gamed.

 

 

Comments

[eclecticdog]

If these private monopolies were converted to public utilites under imminent domain, the problem would be fixed (rather than the fix being in). But that's probably too progressive (read socialist)! It's telling that the Republic article has only two comments. I doubt the meeting will be packed with Tea Party-ers demanding the gub'nent to protect them from such predations.

[ptb]

The cynic in me is wondering whether we should let the free market sort it out by letting one or two of these corrupt water companies go belly up if they so choose. Make it a disclosure issue rather than an assured supply of water issue -- ain't got water? Better tell all. Sure, some of our state's residents would be left high and dry (in a very literal sense), but perhaps we could focus on the longer term "what if" scenarios. Maybe go back to stronger requirements for actual groundwater/reservoir certification and allow a municipal or pseudo-governmental provider to take over sound developments? If it means we end up with a few more SRPs, then I'd say that's a good thing. If not, then I could see real estate values potentially dropping in the outskirts as people become more savvy about such issues -- maybe not a bad thing. BTW, have you written a column about the history of SRP? I bet that many Phoenicians would be shocked to learn about how all those commie farmers in Laveen and south Phoenix banded together with others in the Valley, TVA-style, to ensure the greater public good and accountable smart growth.

[cal Lash]

Good piece Jon. Along that line, try this piece from Utne Reader. "Zombies invade Grand Teton."
A quote from the piece. " The politics of growth in Teton County begins with the Mormons." "Who owned most the farm land and allied with the developers to keep land- use regulations weak."

[cal Lash]

Maybe we can get the Fourth Branch to take a look at the cheap price of illegal drugs. I think we stand a better chance of getting illegal drugs, legal under Romney as he better understands the "profit" motive.

http://www.nytimes.com/2012/07/04/business/in-rethinking-the-war-on-drugs-start-with-the-numbers.html?_r=1&ref=business

Water and drugs not far off topic as seems we can't do without either.

[cal Lash]

July 9th is the date in the lower right hand corner of the Declaration of Independence.

[phxSUNSfan]

Cal, maybe you are talking about a copy that wasn't ratified? The original, or at the least the one displayed at the National Archives, only has the July 4th date along the top. There were several different copies created at the time. Though it was ratified on the 4th of July, it wasn't actually signed until Aug. 2.

The July 9th date may also be a "New York" copy: the New York delegation didn't vote with the other 12 colonies until the 9th...

[cal Lash]

Probably the NY copy
All I have looked at had July 9 at the lower right hand corner.

[cal Lash]

anyway I turned 72 and 9 months today in China

[phxSUNSfan]

LOL, Happy Chinese Birthday, Cal!

[Emil Pulsifer]

This is fascinating, but complicated and beyond my purview.

I guess my first question would be, given that:

"Years ago, companies organized as "S corporations" such as Pima were able to collect their income-tax expenses in their rates, but in the 1980s the Corporation Commission changed that policy",

why is this an issue? The company is proposing something in contravention to a decades old policy supported by case law. It cannot succeed unless the Corporation Commission reverses or suspends its own policy. Isn't that correct? Or am I misreading the Arizona Republic article?

Second, I'm not even sure how much of a tax liability the shareholders of an S-corporation have. Mr. Talton has raised one aspect (offsetting tax credits), but there are others.

First: "Earnings representing 'return on investment' (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business."

http://www.residual-rewards.com/arizona-s-corporation.html

Who is to say which earnings "represent return on investment"? No doubt there is a raft of tax law and case law determining such things, but whether the loopholes are bigger than a house or smaller than a mousehole, would require a tax expert.

Second, there are plenty of other tax shelters (trusts, tax-free investment accounts, etc.) which can be used to defer capital gains taxes.

The thing about an S-corporation is that, unlike a conventional corporation, it pays no income taxes on its profits. Its profits are distributed, untaxed, to shareholders as dividends, and the shareholders pay taxes on the dividends. So, the ratepayers are apparently being asked to fund all (nominal) tax liabilities of the corporation and its shareholders.

The company is arguing that it should be treated no differently than a conventional corporation, which has to pay corporate income taxes before distributing the after tax profits as dividends. It argues that a conventional corporation passes that tax liability to customers by including them in its bills to customers, and that it should be allowed to do the same.

But this is a presumption: utility rates are regulated and there is no evidence that the Commission allows C-corporations to pass along their tax liabilities.

It is also an erroneous argument, since even if C-corporations are in fact allowed by the Commission to pass their tax liability on to consumers in the form of higher rates, the personal tax liability of their shareholders remains. By contrast, since S-corporations pay no corporate income tax, pass-through of shareholder personal tax liability to customers essentially eliminates all tax liability whatsoever.

Incidentally, rate increases (in and of themselves) can't fully eliminate the tax liabilities of shareholders, but they can greatly reduce them.

Let's say that before the rate increase profits were X and the tax liabilities of shareholders were Y. After raising rates to include Y, the income and profits of the company now equal, not X, but X+Y, to which even larger tax liabilities apply.

To make this concrete, assume that the company has a million dollars in profits which it distributes to its shareholders. If they pay a 15 percent capital gains or dividends tax they collectively owe $150,000 in personal taxes. If they raise rates to include this, so that the company collects $1,150,000 instead of a million, the taxes on the distributed profits are now 15 percent of this or $172,500. But because profits include $150,000 in new pass-through, they have effectively reduced their tax liability to just $22,500.

[Emil Pulsifer]

"Some of the increase is for upgrades the company has made to its utility system in the past 18 years since it raised water rates (12 since wastewater prices went up)."

The article notes that 60 percent of the proposed rate hike is to cover these "upgrades".

Presumably the company was making a profit over the past 18 years. That is, after costs (such as upgrades and other infrastructure improvements) were factored in, its net income was positive.

If rate increases allow the company to recoup all nominal investment costs, and the shareholder-employees have already been paid their salaries from past profits, exactly what costs does the company bear? None, it seems.

The rates should be raised only if doing so is necessary to allow the company to continue making a reasonable profit in future years, given inflation and increased operating costs, not to recoup past investments that have already been paid for from past income.

The Commission has already indicated that it will likely approve the 60 percent of the proposed rate hike reimbursing the company for past infrastructure improvements. Could the issue of the remaining 40 percent be a red herring designed to convince residents to allow a rate hike they might otherwise complain about?

If the Commission shoots down the 40 percent but allows the 60 percent, the residents suddenly feel that they have won a victory even though their monthly bill will be increasing nearly 11 percent (instead of 18). It's almost like good-cop / bad-cop.

With an increase approved for this company, other private companies will follow suit, with the precedent already set and accepted, and the Commission not only politically covered but shining like heroes in the eyes of the rubes.

This political coverage may be particularly important to the three Republican members of the five-seat Commission, who have probably signed anti-tax increase pledges and who will be making the decision to approve a rate increase.

[morecleanair]

There's an unseen thread here about Mormon-owned water companies and their checkered past in the Valley.

[pat L]

Happy Birthday Cal!!

[Donna]

I doubt the meeting will be packed with Tea Party-ers demanding the gub'nent to protect them from such predations.

Well, a teeny tiny tangential part of the rate increase could be attributed to compliance with the dreaded socialist Renewable Energy Standard! That would bring the Teahadists out in droves.

Also too, where are those keen-eyed watchdogs of the taxpayer, AKA the Goldwater Institute, on this?

[eclecticdog]

Donna, I think the acronym for the Goldwater Institute (GWI as the papers have been using) should be GI as it is a better indication of where the institute's head is.

[cal Lash]

"We dont need no goberment regulators."

Dont expect the underwear boys to lose on much when it comes to wheeling and dealing. The bank of Zion dosent need a bailout and is not likely to ever fail.

You get John Calvin and Joe Smith together and you got the perfect religion. The more money you make and the more kids and wives you have the bigger slice of heaven you get when you become a male god.

Heres's betting the CC votes for the boys but with some window dressing, unlike some of our rougher acting politicos.

[cal Lash]

Emil said, "This is fascinating, but complicated and beyond my purview."

I dont agree, I think Emil's logic was fine,
however I would find it illogical that the folks making the decision on this issue will factor in much logic.
Just some good ole boy politics, thank you brother.

[morecleanair]

Jon's former Republic associate, Jack Kurtz, picked up on this at the same time. Jack was a crack photo journalist who also slid out the door during the most recent "newsroom reorganization" . . aka CUT-DOWN. Opinion: anything involving the LDS-owned water companies bears watching. I spent considerable time on a desalination project some years ago and ran across some very well-connected Mormons in the water business . . mainly small water companies like the Arizona American folks who boogered up their involvement with Scottsdale water. Nothing overtly wrong with their modus operandi, but there was a ton of money being made . . . quietly.

[Rogue Columnist]

With these little water companies, we see the workings of what academics call a "hydrological society." Who controls the water has the power. It was the same for the Hohokam. See Donald Worster's classic "Rivers of Empire."

[Francine Hardaway]

John, As you know I admire you and your writing. But

1) Ed Robson isn't a Mormon
2) He's my friend and mentor. I was there when Sun Lakes began
3)He doesn't need anything from the water company to pay his personal salary and expenses, or those of his family. Those were taken care of a long time ago.
4) He's at the point where all he cares about is a legacy; he's 82.
5) I really hate it when journalists talk about people they don't know in monochromatic colors. Ed, of all people, is a colorful guy. It would be fun to ask him what his take is on this, and I plan to do that.
All of that to the side, this probably is not a good policy. Ed might not take advantage of it, but others will.

[cal Lash]

Talton said, and I think this is what his piece is about.

“This is about MORE than Sun Lakes.” “But the case is a rare window into how power and influence work in the state. Power, especially, at what insiders call "the fourth branch of government," the Arizona Corporation Commission.”

I didn’t take Jon’s piece to say Robson was a bad guy and no one said Robson was a member of LDS.

Jon’s piece is about the political and financial powers in Arizona (and likewise in other western states).

There are many people in the world opposed to outside interference in their daily life by government. But in Arizona the power has been strongly influenced by LDS organized religious administrators for over a 100 years and has grown stronger ever year, particularly after 1950. And there has been vengeful efforts to insure that power by some LDS members who fear the coming Mexican horde. Finally LDS powers recognized that politicians like Russell l Pierce were going to create havoc that could rebound with devastating effects. So the church shut him down.

Again I think Taltons piece outlines a legitimate problem, power centered too much in a few. And those few have known for a long time that water was gold and they have moved to control the source and quantity of water, while in many cases not tending much to the quality for human or wild animal consumption.

There are a good number of exceptions to these actions and Mark Udall comes to mind. Also late in life Stewart Udall came to believe he might have been mistaken in his efforts regarding water and Arizona.

Talton said, “My sympathy is limited for people who want to buy houses in a leapfrogged, 98-percent white development with streets named after Michigan, Minnesota and Indiana” (profaning our desert. )

I have no sympathy for the people that bought houses in places like Sun City, Sun Lakes or Johnson City. The desert was not a monochromatic place until devastated by developers building row look-alike houses forever across the wild and beautiful desert.

I am like the kid who wants to see the “Dream Act” become his or her reality, I came to the desert as a child drug here by my parents to this brown hot barren appearing land. A land I came to love as the great Sonoran desert. And have come to believe that not only have we profaned the desert but stripped it bare and raped its living organisms like Sahuaro Cacti.

[cal Lash]

Let me be clear about my political activism here. If I lived in Italy and the Catholic Church wanted to plow under a grape orchard I would be rooting for the grapes. Hoping a wise priest would recognize what could be gained by saving the orchard and maybe building a smaller worship building. But who needs a building, why not just pray out in the open planetary cathedral that “your “ god" created.

Let me be clear about my opposition to political power (it’s bad) and political power rooted in religion (that’s really bad) and particularly theocratic divined power. ( Now that’s evil).

I first questioned the existence of god during a Jonah the whale story in the basement of a rural Methodist church situated on a y between two roads. By 14 I was a stone cold atheist but slowly I worked my way into militant agnosticism and now at 72 am playing with Scientism. If I were to create a god I would name him Ed Abbey.

[AzRebel]

To amplify cal's comment about power and influence from the past, I am of the opinion that the control of land, minerals and water were fought for and won over 130 years ago.

The five million johnny-come-latelies who now reside in the state have very little idea how tenuous their residency is compared to the old guard.

Unlike cal, I do believe in God, but I do question that out of 200 billion stars in our galaxy among billions of galaxies, "We're his best work"??

Man, I hope not.

[AzRebel]

By the way, up north, we have our own water district. A couple of years ago, we instituted an extreme, punitive water rate schedule, so that if you abused the use of the water you would face a bill of $500 to $600 per month.

So don't talk to me about $6 a month.

If you want to create instant water conservationists go with our rates.

When it comes to modern Americans, you can either ask politely or you can hit them between the eyes with a sledge hammer. Guess which works better?

[cal Lash]

AZREBEL, Thanks for that support you grouch old devil you. Regarding your gods creations I quote some dude i met in a book store. "We are just an insignificant lumpy piece of pollution in the ever expanding universe."

Like gods got time to worry about the Sun Lakes water rates.

[morecleanair]

Off topic a bit, but Fountain Hills' water company has come up short on effluent for the town's golf courses and is resorting to potable water as an interim measure. Golf courses can use a MILLION gallons a day and fortunately most are on effluent.
There's vague reference to the source of that fresh water, but some believe it may turn out to be a lease deal with one of the tribes who now own rights to almost 50% of Arizona's share of the Colorado River flows. Nobody talks about this deal except maybe Sen. Jon Kyl (water law specialist) who brokered it several years ago. Interesting huh?

[Emil Pulsifer]

"eclecticdog" wrote:

"Donna, I think the acronym for the Goldwater Institute (GWI as the papers have been using) should be GI as it is a better indication of where the institute's head is."

A deep-pit latrine? Or a urine soakage pit?

[Emil Pulsifer]

Whoops. Almost forgot the GI field facility link:

http://www.armystudyguide.com/content/army_board_study_guide_topics/field_sanitation/field-facilities-for-huma.shtml

[Emil Pulsifer]

"morecleanair" wrote:

"Off topic a bit, but Fountain Hills' water company has come up short on effluent for the town's golf courses and is resorting to potable water as an interim measure."

They should ask the GI. I'm sure their head is overflowing with...ideas.

[Emil Pulsifer]

P.S. Regarding my opening paragraphs above, I seem to have confused, in my own mind, an instance of community feedback in the Arizona Republic's article, with a remark by a Commission member. Thus, perhaps more of "an issue" than I initially thought.

[Emil Pulsifer]

AZRebel, how far north is "up north"? Regarding your previous comments (in the climate change thread) about a decrease in seasonal rain in Phoenix, I'm a little surprised: I see regular lightning on the outskirts of the city (especially north and east) at night, where I presume the heat island effect is less strong.

[morecleanair]

Emil: your posts are getting shorter and (dare I say) punch-ier! If I had your intellect and your research talent, mine would no doubt be more substantive!

[AzRebel]

Emil,

10 miles west of Show Low.

[Buford]

I remember Jon criticizing the ACC 35 years ago.

From the Gilbert & Southern Songbook c. 1977 "Code 3 Lee (That EMT):

"But by raking up the china berries in the back and spying on the employees
They're sure to make that boy the shift supervisor or the head of the ACC"

This scans well to Rapid Roy (That stock car boy) by Jim Croce

[LeftCoastDood]

Didn't SRP become profitable simply because natural gas is half the price it was 12 years ago? Just spit balling here...

BTW, Got a contract on a nice grassy house off of the 51. I'm no longer a big driving suburbanite with desert landscaping. I'm excited about the irrigated lot.