The Front

Cash in the Pipeline

AN OBSCURE ACCOUNTING gimmick in Trans-Alaska Pipeline System (TAPS) shipping charges is pouring millions of dollars of hidden profits into the pockets of the pipeline owners each year, at the expense of pipeline shippers, including the state of Alaska. Hidden Billions: The TAPS DR& R Provision, a report written by Richard Fineberg, a former oil and gas specialist in the Alaska governor's office, estimates the value of the dismantling, removal and restoration (DR& R) element of the TAPS shipping charge. Fineberg's estimates indicate that TAPS DR& R collections and their earnings now exceed $3 billion and will grow to an estimated $12 to $22 billion by the year 2015. However, in implementing the provision which allows pipeline owners to charge for DR& R, the state of Alaska set the expected costs of dismantling the pipeline at only $872 million (in 1977 dollars).

 The 1985 TAPS settlement between the pipeline owners and the state of Alaska determined the rate TAPS owners can charge for shipping oil through the pipeline. Oil from the North Slope of Alaska, which is transported via the 800-mile pipeline to Valdez in the southern part of the state, is expected to stop flowing in the early 21st century. Provisions of the settlement allow the pipeline owners - principally ARCO, British Petroleum (BP) and Exxon, the major North Slope producers - to collect sufficient funds to carry out whatever is necessary in terms of DR& R. The provision, according to Fineberg's report, was not intended to be a money-making item - his analysis of the 1985 agreement shows that it was intended that DR& R payments virtually extinguish the DR& R fund when dismantling was completed.

 The TAPS owners collect the DR& R funds from pipeline shippers. Pipeline shippers who do not have an ownership stake in the pipeline, such as Conoco - and the state of Alaska as a royalty owner and shipper - bear the brunt of higher TAPS tariffs.

 Several unusual characteristics of the provision have led to the oil company windfall, according to Fineberg's report. The TAPS settlement calculations assumed a pipeline shutdown date of 2011, with DR& R outlays taking place between 2010 and 2015. But unlike normal rate-making provisions extending into the future, the DR& R payments were not subject to periodic revisions as inflation and tax rates changed - the settlement instead fixed the DR& R payments through the theoretical life of the pipeline.

The report explains, for example, that the DR& R payments reflect the 46 percent federal income tax rate in effect at the time of the TAPS settlement. In 1986, the tax rate was reduced to 34 percent, but the DR& R terms were carved in stone at the higher rate.

Further, the collections were accelerated, or "front-end loaded," enabling the pipeline owners to take in the majority of the DR& R payments during the early years of the pipeline's operation. The report notes, "Front-end loading is a legitimate accounting practice designed to allow investors to recoup their investment rapidly. In the case of TAPS DR& R, the technique appears to have been misapplied: To date, the TAPS owners have invested almost nothing in DR& R. Consequently, there is no DR& R to pay back by any depreciation method, accelerated or otherwise. In this case, the TAPS owners were allowed to charge shippers over a billion dollars in the early years of TAPS operations to make DR& R payments at an unspecified date."

 The TAPS settlement calculated earnings on DR& R on the assumption that the TAPS owners would invest the money in such a manner that they would earn an amount characterized as a relatively conservative return, approximately equal to that which might be earned if the DR& R funds were placed in escrow. In fact, Fineberg writes, the "major TAPS owners' average return on equity exceeded 20 percent, beating the corporate bond rate in the stipulated DR& R agreement by more than 8 percent per year."

 Fineberg's report concludes, "Primarily due to over-estimation of tax payments and under-estimation of the earning power of funds held by the TAPS owners (the North Slope producers), DR& R collections appear to have overshot their mark by a vast amount. By current estimates, the DR& R provision has generated at least $3.3 billion dollars for the TAPS owners. By the year 2015, if dismantling, removal and restoration are performed in accordance with the settlement provisions, on completion of its mission the DR& R fund will have a tax-paid surplus of $11.7 to $22.1 billion."

 The report says that even if the actual costs of DR& R turned out to be twice that of the settlement estimate, the TAPS owners would still only have to pay out a small portion of the excess they are amassing. And if actual DR& R costs are less than originally estimated, the pre-collected DR& R money and its earnings will be left in the pockets of the TAPS owners.

 "Oil and gas economics always seems complicated, but DR& R is straightforward," says Stan Stephens, an oil company watchdog who commissioned the report. "The DR& R provision of the 1985 TAPS settlement was overly generous. Through the magic of compounding, the TAPS owners are making hundreds of millions of dollars every year."

 Stephens emphasizes that funds collected for DR& R are not placed in an escrow account managed by an independent trustee but are available funds for the oil companies to distribute to shareholders, co-mingle with internal accounts or re-invest. "This is probably one reason that the North Slope producers typically outpace other oil companies," Stephens says.

 The state has allowed the companies to put the funds away in such a manner that DR& R represents "something of a cash cow to them," says Stephens. He does not believe officials involved in the complex TAPS settlement negotiations realized what a windfall the provision would prove to be for the North Slope producers. He adds, however, that Alaska's state and local governments "place a great deal of trust" in the oil companies, "which know how to take advantage of that trust."

 Stephens says he commissioned the report in response to repeated claims by pipeline operator Alyeska that the costs of implementing environmental protection measures might force an early shutdown of the North Slope. He questions why the excess DR& R funds cannot be used to finance environmental protections such as double- hulling oil tankers or hard-piping the tanker loading facility to contain potentially hazardous emissions.

Stephens points out, however, that he and Fineberg were unable to determine where the pipeline owner companies actually hold the funds and how they account for them. According to the report, an attorney who reviewed the financial statements of one of the North Slope producers concluded that they provided "no basis for understanding or quantifying DR& R." Stephens asks, "If the TAPS owners are holding that money, why can't they use some of the excess to honor their environmental promises? If the money is gone, where did it go?"

 So far, the report has received little governmental attention although it has been sent to state and federal legislators, and to the Alaska attorney general. Stephens is baffled by the lack of interest on the part of government officials. "This is a great deal of money," he points out.n

 -Holley Knaus

 

LA Tax Dodgers

FACED WITH GROWING CITIZEN DEMAND that corporations profiting from Louisiana's 10- Year Industrial Tax Exemption Program pay their fair share of taxes to support schools and other public services, 25 corporations in the state, led by Exxon, released proposals in January 1993 for further cuts in the school budget of the East Baton Rouge Parish. The proposals, which include cutting 400 food service jobs - the children could eat more ready-to-eat processed food - and bus drivers - cut down on the number of routes by having children walk farther to their bus stops - are an attempt to keep intact the Tax Exemption Program which allows the corporations to avoid paying local property taxes which would finance schools.

 Meanwhile, the state legislature has called a special session for March 1993 to address the state's $600 million budget shortfall. Of the many tax reform and revenue raising proposals, one, backed by citizen groups, including the Louisiana Coalition for Tax Justice (LCTJ) would no longer allow corporations to be exempt from paying school taxes. Says LCTJ field director Bill Thrift, "LCTJ's goal is to make sure that the moneymakers, not poor and working Louisianans are the ones who pay for the budget shortfall."

 LCTJ's 1992 report, The Great Louisiana Tax Giveaway: A Decade of Corporate Welfare, 1980-1989, a study of Louisiana's "10-Year" Industrial Property Tax Exemption, documents how corporations, particularly the oil, chemical, paper and utility industries, have failed - to the tune of $25 billion in industrial property tax exemptions - to pay their fair share of Louisiana taxes. Between 1936, when Louisiana adopted the 10-Year Industrial Property Tax Exemption, and 1988, the state granted more than 11,000 industrial property tax exemptions. Under the exemption program, the state can grant industries exemptions from paying local parish property taxes on new buildings, machinery and equipment (but not land) for up to 10 years (an initial five years and a five- year renewal). At the end of the 10-year exemption period, corporations begin to pay taxes on the property, but at its depreciated value. And often taxes are never collected on property such as dismantled or obsolete equipment.

 The jobs scam

 Ostensibly, the tax exemption program exists to create new jobs and entice industry to Louisiana. However, LCTJ contends that the program has failed miserably at both of these goals. According to the report, "almost three-quarters of all industrial property tax exemption contracts granted from 1980-1989 created zero new permanent jobs." And during the same period, jobs in the chemical, oil and paper industries (which received the most exemptions) declined by 13 percent - almost 8,000 jobs. Of the tax- exempted projects that did create new jobs, the cost to the taxpayer was enormous - the revenue lost in tax exemptions was the equivalent of an average of $41,508 for each new full-time job created. Additionally, instead of hiring unemployed Louisiana workers, many corporations benefiting from the tax exemptions hired out-of-state non-union contract workers.

 As for attracting new industry to the state, "all but a handful of the exemptions went to existing plants; only 6 percent of the contracts went to companies building new plants," according to LCTJ. An estimated $135 million, or 21 percent, of the exemptions went to routine maintenance and upgrading.

 According to Oliver A. Houck, Tulane University law professor, "The exemption program could not be more self-defeating. Louisiana's educational and environmental miasma is well publicized and nationally known. Together, these problems constitute a formidable barrier to the inducement of any business that cares about its employees - the kind of business Louisiana should be most anxious to attract. The barrier is the image, and Louisiana is financing the wrong kind [of business]."

 The Human Cost

 Louisiana makes up for the lost revenue from industrial property tax exemptions with one of the highest sales taxes in the United States, a regressive system which, the report says, "punishes the poor, while rewarding the rich." For example, Louisiana families earning $10,800 pay a 14 percent share of their income in sales taxes, while families earning $608,700 pay only a 5.5 percent share, according to a study by the Washington, D.C.-based Citizens for Tax Justice. Sales taxes, which disproportionately hit low- and middle-income families, account for 51 percent of all state and local taxes.

 The corporate tax breaks and regressive tax structure have contributed to Louisiana's severe economic and social problems. The state ranks: last in the nation in workplace health and safety and in high school graduation rates; 49th for the gap between rich and poor; 49th in poverty (with 25 percent of residents considered poor); 47th in surface water discharges, heart disease and adult illiteracy; 46th in hazardous waste generation and teen pregnancy; and 45th in long-term unemployment, unemployment duration and health coverage. Louisiana is also first in the nation in lung cancer deaths, and in the top 10 percent of all states for all cancer death rates.

The Winners: Big Business

 According to LCTJ, 90 percent of the $2.5 billion in industrial tax breaks went to the 50 largest corporations located in Louisiana. And 87 percent of all tax exemptions went to four industries, all high in toxic emissions and pollutants: utilities (36 percent), chemical plants (25 percent), oil refineries (19 percent) and pulp and paper mills (7 percent). Furthermore, LCTJ found that nine of these corporations sent more than half of the $2.5 billion in tax benefits to their out-of-state shareholders.

 The exemptions are rarely linked to corporate conduct. For example, Exxon's Baton Rouge petrochemical complex, and other Exxon locations, received exemptions on $878 million in property between 1980-1989, saving the company an estimated $92 million. The state left these exemptions untouched even after a 1989 explosion at the Baton Rouge complex shook nearby homes off their foundations and covered the neighborhood with asbestos and for which the Occupational Safety and Health Administration (OSHA) fined Exxon $3,000 for negligent maintenance that led to the explosion.

 In a particularly heinous abuse of the exemption program, the state awarded Shell Oil a 10-year tax exemption of approximately $450 million to rebuild a refinery unit (which Shell's insurance covered) destroyed in a 1988 explosion that killed seven workers and injured 48 others. OSHA faulted Shell for improper maintenance procedures that led to the accident and fined the corporation $3,630. Yet the state gave Shell a $2,500 tax credit for each new employee to replace the seven who died in the explosion.

 Citizen Groups Work for Reform

 Since its creation in 1990, LCTJ has worked to reform the tax system to ensure adequate funding for education and other public services through direct action organizing. In October 1990, LCTJ members awarded state officials a giant "rubber stamp" for automatically approving $2.5 billion in tax breaks to corporations at the expense of citizens and the environment. LCTJ later called for the resignations of members of the state board that awards the exemptions. And in a March 1991 protest, more than 55 citizens from 12 parishes and 36 groups expressed their dissatisfaction with the Board by carrying brooms symbolizing the need for a "Clean Sweep."

 LCTJ calls for elimination of the 10-Year Industrial Property Tax Exemption and other corporate tax breaks or at least for the following reforms:

 Louisiana citizens are determined to reform an economic system that has worked only for corporate tax dodgers. Says Mike Tritico of the environmental group RESTORE, "We're tired of watching our public officials grovel and beg outsiders to come in and give us jobs while giving away our health, resources and labor."

 - Katherine Isaac