David Johnston has provided the stark facts of our economy posted by our government which most of us can easily understand -- and without 30-second political promos! Those of us willing to read this just might change our minds about things in the 2012 elections... for your sake, not mine.
Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday.
The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.
These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.
There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.
The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.
The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.
More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008.
This means 3.3 percent of people who had a job in 2007, or one in every3330, went all of 2010 without earning a dollar. (Update: the original version of this column used the wrong ratio.)
In addition to the 5.2 million people who no longer have any work add roughly 4.5 million people who, due to population growth, would normally join the workforce in three years and you have close to 10 million workers who did not find even an hour of paid work in 2010.
SIX TRILLION DOLLARS
These figures come from the Medicare tax database at the Social Security Administration, which processes every W-2 wage form. All wages, salaries, bonuses, independent contractor net income and other compensation for services subject to the Medicare tax are added up to the penny.
In 2010 total wages and salaries came to $6,009,831,055,912.11.
That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.
While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.
The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each.
At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.
What these figures tell us is that there was a reason voters responded in the fall of 2010 to the Republican promise that if given control of Congress they would focus on one thing: jobs.
But while Republicans were swept into the majority in the House of Representatives, that promise has been ignored.
Not only has no jobs bill been enacted since January, but the House will not even bring up for a vote the jobs bill sponsored by President Obama. His bill is far from perfect, but where is the promised Republican legislation to get people back to work?
Instead of jobs, the focus on Capitol Hill is on tax cuts for corporations with untaxed profits held offshore, on continuing the temporary Bush administration tax cuts — especially for those making $1 million or more – and on cutting federal spending, which mean destroying more jobs in the short run.
At the same time, nonfinancial companies are sitting on more than $2 trillion of cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation.
All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, which will not and cannot happen until more people have jobs and wages rise, creating increased demand for goods and services.
More of the same approach we have had for most of the last three decades and all of the last ten years is not going to increase demand, create more jobs or enable overall prosperity. In the long run, continuing current policies will make even the richest among us less well off than they would be in a robust economy with government policies that foster job creation and the capital investment that grows from increased demand.
On top of this are the societal problems caused by something the United States has never experienced before, except during the Depression — chronic, long-term unemployment.
Having millions who want work go years without a single day on a payroll is more than just a waste of talent and time. It also can change social attitudes about work and not for the better.
The data show why protests like Occupy Wall Street have so quickly gained momentum around the country, as people who cannot find work try to focus the federal government on creating jobs and dealing with the banking sector that many demonstrators blame for the lack of jobs.
Will official Washington look at the numbers and change course? Or do voters need to change their elected representatives if they want to put America back on a path to widespread prosperity?
(Editing by Kevin Drawbaugh)
The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.
These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.
There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.
The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.
The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.
More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008.
This means 3.3 percent of people who had a job in 2007, or one in every
In addition to the 5.2 million people who no longer have any work add roughly 4.5 million people who, due to population growth, would normally join the workforce in three years and you have close to 10 million workers who did not find even an hour of paid work in 2010.
SIX TRILLION DOLLARS
These figures come from the Medicare tax database at the Social Security Administration, which processes every W-2 wage form. All wages, salaries, bonuses, independent contractor net income and other compensation for services subject to the Medicare tax are added up to the penny.
In 2010 total wages and salaries came to $6,009,831,055,912.11.
That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.
While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.
The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each.
At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.
What these figures tell us is that there was a reason voters responded in the fall of 2010 to the Republican promise that if given control of Congress they would focus on one thing: jobs.
But while Republicans were swept into the majority in the House of Representatives, that promise has been ignored.
Not only has no jobs bill been enacted since January, but the House will not even bring up for a vote the jobs bill sponsored by President Obama. His bill is far from perfect, but where is the promised Republican legislation to get people back to work?
Instead of jobs, the focus on Capitol Hill is on tax cuts for corporations with untaxed profits held offshore, on continuing the temporary Bush administration tax cuts — especially for those making $1 million or more – and on cutting federal spending, which mean destroying more jobs in the short run.
At the same time, nonfinancial companies are sitting on more than $2 trillion of cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation.
All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, which will not and cannot happen until more people have jobs and wages rise, creating increased demand for goods and services.
More of the same approach we have had for most of the last three decades and all of the last ten years is not going to increase demand, create more jobs or enable overall prosperity. In the long run, continuing current policies will make even the richest among us less well off than they would be in a robust economy with government policies that foster job creation and the capital investment that grows from increased demand.
On top of this are the societal problems caused by something the United States has never experienced before, except during the Depression — chronic, long-term unemployment.
Having millions who want work go years without a single day on a payroll is more than just a waste of talent and time. It also can change social attitudes about work and not for the better.
The data show why protests like Occupy Wall Street have so quickly gained momentum around the country, as people who cannot find work try to focus the federal government on creating jobs and dealing with the banking sector that many demonstrators blame for the lack of jobs.
Will official Washington look at the numbers and change course? Or do voters need to change their elected representatives if they want to put America back on a path to widespread prosperity?
(Editing by Kevin Drawbaugh)
COMMENT
See all comments (76) | Add comment
Capitalism is not dead-only a fool/communist would make this claim! People need incentives to work, take risks/innovate or they’ll just pick the lowest fruit/take the path of least resistance and the rest will get stuck with the bill and resent it-ask Europe and see all of history! Capitalism is far from perfect and is broken bad, but it’s still the best model on planet earth!
Posted by DrJJJJ | Report as abusive
Tax repatriation
By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.
The practice of favoring big corporations seems likely to take a costly leap forward soon, if Congress passes an $80 billion tax holiday for a handful of U.S. multinational corporations with untaxed profits overseas.
Sponsors of legislation to grant the holiday, which is gaining support in Congress, say it would encourage these companies to repatriate their profits, giving an infusion of cash to the sluggish U.S. economy that will create jobs.
But this ignores the negative impact on the losers: the other 99 percent of corporations who are not eligible for such a deal. Then there are the legions of workers likely to be pink-slipped, and taxpayers generally, who will have to make up the shortfall with more taxes and fewer services.
There are smarter ways to deal with the $1.4 trillion of U.S. profits sitting offshore and avoiding the U.S. corporate income tax. We’ll get to those solutions. But first, here are some facts on how the system works.
Companies license the rights to pharmaceuticals, software and other intellectual property to offshore subsidiaries, or they engage in cost-sharing arrangements with these offshore units.
The subsidiaries then charge the U.S. parent royalties and other fees, which the parent can count as tax-deductible expenses in the United States. And the subsidiaries take their profits in entities known as “tax nothings,” so-called because they are invisible to the U.S. Internal Revenue Service. So long as the profits are indefinitely reinvested offshore, no tax is due. The problem arises when the companies want to bring the profits back to the United States. That is where a tax holiday comes in.
PFIZER TOP OF LIST IN ’04
When Congress passed a similar tax holiday in 2004, the biggest beneficiary was drug manufacturing giant Pfizer Inc , according to a report to Congress by the IRS in June 2008. Pfizer brought back $37 billion and saved $11 billion in taxes.
Since then, the company has piled up another $42.5 billion in untaxed profits overseas, its disclosure statement at the end of last year showed.
Pfizer is among several companies lobbying Congress for another holiday for untaxed offshore profits. It and other firms want an 85 percent tax rate discount. Under the bill before Congress — offered by senators John McCain, a Republican, and Kay Hagan, a Democrat — the discount would be 75 percent.
Are our politicians unaware that the biggest businesses, and the wealthiest business owners, already bear lighter tax burdens than those who make less?
Business owners who make more than $5 million from all sources pay lower median and average tax rates than those who make as little as $350,000, a new study by the Congressional Research Service shows.
Congress listens most to those who lobby and make campaign donations, so the other 99 percent of corporations and business owners, like the 99 percent of taxpayers, tend to get the burden, not the benefit, of tax favors.
BRONZE PLATES
Nearly 2,500 years ago, the Romans stopped the rich and powerful from twisting the law for their own benefit by publishing the Twelve Tables, bronze plates that set forth a host of laws. It had taken the illiterate Roman plebeians, the ancient 99 percent, two centuries of demonstrations to get the laws in writing.
Today’s 99 percent can read, but tax law is so difficult to decipher that it may as well be written in Latin.
And, as the tax holiday bill shows, the ancient problem of the rich twisting the law for their own benefit endures.
I cannot fathom any legitimate reason to reward companies for using tax havens to delay the payment of taxes.
Doing so would be unfair to every purely domestic U.S. company, which cannot take advantage of this proposed act of favoritism, and to every individual taxpayer.
Then there’s the issue of jobs. In 2004, Congress gave 843 companies an 85 percent tax break on untaxed profits parked offshore. Republican Sen. John Ensign said that law, called the American Jobs Creation Act, would create 660,000 jobs.
Instead, many companies destroyed jobs. Pfizer shed 48,000 workers between the end of 2003 and the end of 2009, its annual reports show.
Asked to comment, Pfizer said it could not quantify the effect of the 2004 law, not least because of its acquisition of Pharmacia, the maker of arthritis drug Celebrex, the year before. “Given the number of significant events occurring during this period, including changes to the healthcare industry landscape, Pfizer’s acquisition of Pharmacia, and the economic downturn, it is not possible to say with any certainty the number of jobs created or lost,” Pfizer said in a statement.
Overall, the Institute for Policy Studies, a liberal think tank, estimated that 600,000 jobs were destroyed by the 2004 law. Other studies show more than 100,000 jobs lost.
Democratic Senator Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, released a report last week saying there is “no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore.”
OFFSHORE TAX PENALTY?
There is a smarter approach, one that would help with the United States‘ economic and fiscal woes:
Congress should impose a 50 percent tax on untaxed offshore profits earned in 2010 and earlier, unless they are repatriated by Dec. 31. Companies that repatriate would pay the standard 35 percent corporate income tax rate. If companies do nothing, which is unlikely, the measure would raise about $700 billion, slashing the deficit this fiscal year by 63 percent.
Second, Congress should require that, to escape the 50 percent tax, any repatriated profits be immediately paid out as dividends — on top of any existing dividends paid in 2011. Not all dividends would be taxed immediately, because many shares are held in pension funds and endowments. But the flow of cash would help the economy because, after all, the tax holiday sponsors say a flood of cash from overseas is just what the economy needs.
The author is a Reuters columnist. The opinions expressed are his own.
The practice of favoring big corporations seems likely to take a costly leap forward soon, if Congress passes an $80 billion tax holiday for a handful of U.S. multinational corporations with untaxed profits overseas.
Sponsors of legislation to grant the holiday, which is gaining support in Congress, say it would encourage these companies to repatriate their profits, giving an infusion of cash to the sluggish U.S. economy that will create jobs.
But this ignores the negative impact on the losers: the other 99 percent of corporations who are not eligible for such a deal. Then there are the legions of workers likely to be pink-slipped, and taxpayers generally, who will have to make up the shortfall with more taxes and fewer services.
There are smarter ways to deal with the $1.4 trillion of U.S. profits sitting offshore and avoiding the U.S. corporate income tax. We’ll get to those solutions. But first, here are some facts on how the system works.
Companies license the rights to pharmaceuticals, software and other intellectual property to offshore subsidiaries, or they engage in cost-sharing arrangements with these offshore units.
The subsidiaries then charge the U.S. parent royalties and other fees, which the parent can count as tax-deductible expenses in the United States. And the subsidiaries take their profits in entities known as “tax nothings,” so-called because they are invisible to the U.S. Internal Revenue Service. So long as the profits are indefinitely reinvested offshore, no tax is due. The problem arises when the companies want to bring the profits back to the United States. That is where a tax holiday comes in.
PFIZER TOP OF LIST IN ’04
When Congress passed a similar tax holiday in 2004, the biggest beneficiary was drug manufacturing giant Pfizer Inc , according to a report to Congress by the IRS in June 2008. Pfizer brought back $37 billion and saved $11 billion in taxes.
Since then, the company has piled up another $42.5 billion in untaxed profits overseas, its disclosure statement at the end of last year showed.
Pfizer is among several companies lobbying Congress for another holiday for untaxed offshore profits. It and other firms want an 85 percent tax rate discount. Under the bill before Congress — offered by senators John McCain, a Republican, and Kay Hagan, a Democrat — the discount would be 75 percent.
Are our politicians unaware that the biggest businesses, and the wealthiest business owners, already bear lighter tax burdens than those who make less?
Business owners who make more than $5 million from all sources pay lower median and average tax rates than those who make as little as $350,000, a new study by the Congressional Research Service shows.
Congress listens most to those who lobby and make campaign donations, so the other 99 percent of corporations and business owners, like the 99 percent of taxpayers, tend to get the burden, not the benefit, of tax favors.
BRONZE PLATES
Nearly 2,500 years ago, the Romans stopped the rich and powerful from twisting the law for their own benefit by publishing the Twelve Tables, bronze plates that set forth a host of laws. It had taken the illiterate Roman plebeians, the ancient 99 percent, two centuries of demonstrations to get the laws in writing.
Today’s 99 percent can read, but tax law is so difficult to decipher that it may as well be written in Latin.
And, as the tax holiday bill shows, the ancient problem of the rich twisting the law for their own benefit endures.
I cannot fathom any legitimate reason to reward companies for using tax havens to delay the payment of taxes.
Doing so would be unfair to every purely domestic U.S. company, which cannot take advantage of this proposed act of favoritism, and to every individual taxpayer.
Then there’s the issue of jobs. In 2004, Congress gave 843 companies an 85 percent tax break on untaxed profits parked offshore. Republican Sen. John Ensign said that law, called the American Jobs Creation Act, would create 660,000 jobs.
Instead, many companies destroyed jobs. Pfizer shed 48,000 workers between the end of 2003 and the end of 2009, its annual reports show.
Asked to comment, Pfizer said it could not quantify the effect of the 2004 law, not least because of its acquisition of Pharmacia, the maker of arthritis drug Celebrex, the year before. “Given the number of significant events occurring during this period, including changes to the healthcare industry landscape, Pfizer’s acquisition of Pharmacia, and the economic downturn, it is not possible to say with any certainty the number of jobs created or lost,” Pfizer said in a statement.
Overall, the Institute for Policy Studies, a liberal think tank, estimated that 600,000 jobs were destroyed by the 2004 law. Other studies show more than 100,000 jobs lost.
Democratic Senator Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, released a report last week saying there is “no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore.”
OFFSHORE TAX PENALTY?
There is a smarter approach, one that would help with the United States‘ economic and fiscal woes:
Congress should impose a 50 percent tax on untaxed offshore profits earned in 2010 and earlier, unless they are repatriated by Dec. 31. Companies that repatriate would pay the standard 35 percent corporate income tax rate. If companies do nothing, which is unlikely, the measure would raise about $700 billion, slashing the deficit this fiscal year by 63 percent.
Second, Congress should require that, to escape the 50 percent tax, any repatriated profits be immediately paid out as dividends — on top of any existing dividends paid in 2011. Not all dividends would be taxed immediately, because many shares are held in pension funds and endowments. But the flow of cash would help the economy because, after all, the tax holiday sponsors say a flood of cash from overseas is just what the economy needs.
COMMENT
Ugh! As soon as someone mentions offshore assets, people get hysterical and come up with ludicrous proposals to force corporations to bring the money home and subject profits that were already subject to foreign tax, to a separate batch of dividend taxes. Ridiculous moves like this will only encourage corporations to redomicile elsewhere. Even though offshore tax havens are notoriously high cost places to conduct actual business, if policymakers push hard enough, it might just become economical to move whole corporate headquarters abroad.
The whole discussion assumes that all international corporate tax planning involves shifting profits to a mailbox beside a sandy beach in a low-rate tax haven. While I don’t deny that some of that does happen (and should be audited heavily), a lot of international corporate tax planning revolves around more mundane concerns, like how to fund a business’s international operations.
As a general principle, tax should only be paid on income once, in the jurisdiction in which it is earned when it is earned. America subjects income that was earned abroad, regardless of whether it was active business income, or passive investment income, to full taxation when the corporation seeks to repatriate it. Double tax is the real injustice, and the reason why corporations continue to defer repatriation.
At the very least, America should allow corporations to claim credits for previously paid foreign tax against the repatriation taxes. Better still would be to allow profit legitimately earned through active business operations to return tax free.
The whole discussion assumes that all international corporate tax planning involves shifting profits to a mailbox beside a sandy beach in a low-rate tax haven. While I don’t deny that some of that does happen (and should be audited heavily), a lot of international corporate tax planning revolves around more mundane concerns, like how to fund a business’s international operations.
As a general principle, tax should only be paid on income once, in the jurisdiction in which it is earned when it is earned. America subjects income that was earned abroad, regardless of whether it was active business income, or passive investment income, to full taxation when the corporation seeks to repatriate it. Double tax is the real injustice, and the reason why corporations continue to defer repatriation.
At the very least, America should allow corporations to claim credits for previously paid foreign tax against the repatriation taxes. Better still would be to allow profit legitimately earned through active business operations to return tax free.
Posted by pheebel_wimpe | Report as abusive
Pipeline profiteering
By David Cay Johnston
The opinions expressed are his own.
Last year a fourth of the nation’s oil pipelines earned excessive profits, at up to seven times the rates allowed these regulated monopolies, according to an explosive analysis prepared by a former general counsel for the U.S. Federal Energy Regulatory Commission.
R. Gordon Gooch, the former counsel, alleges in his Oct. 3 study, for instance, that Sunoco’s Mid-Valley Pipeline, which carries crude oil from Texas to Michigan, earned a 55 percent return on assets. That is seven times its authorized profit margin, based on a calculation derived from an accounting report the company filed with FERC.
Three other regulated monopoly pipelines earned more than 40 percent on their assets, while another three earned more than 30 percent, an examination of their FERC filings by Reuters shows.
To put that level of profitability into context, overall nonfinancial businesses earned a 6.7 percent after-tax profit on their assets last year, the latest Bureau of Economic Affairs report shows.
In a competitive market, profits are unlimited except for the discipline of competition. Because there is no market to discipline monopolies, Congress created FERC, which sets prices, known as rates, for pipelines and some other energy monopolies.
FERC is supposed to balance the interests of customers and owners, making sure customers are charged only “just and reasonable” rates and that owners earn “just and reasonable” profits on top of recovering actual costs.
‘JUST AND REASONABLE’
The test of whether that standard is met is revealed each year on a document, filed to FERC under oath, known as Page 700. Line 9 shows how much it cost a pipeline to provide service, including a generous allowance for taxes and its profit. Line 10 shows actual revenues.
The two lines ideally should match, except for minor timing differences. When they do, it indicates the “just and reasonable” standard has been met. If Line 10 is larger, it shows extra profits.
Last year, 47 of the nation’s 175 regulated monopoly oil pipelines reported significantly larger figures on Line 10 than Line 9, as Gooch details in his analysis.
Gooch submitted his findings as part of a FERC rulemaking procedure. He was FERC general counsel from 1969 to 1972. Then he enjoyed a long career as a litigator in pipeline rate cases on behalf of oil companies, known as shippers, who pay pipeline companies to transport their liquids, crude and refined.
Having covered these issues for four decades, I think Gooch’s position here is solid as can be.
The rulemaking at issue would affect how costs are calculated on annual Form 6 reports, of which Page 700 is the most significant part.
“If this rulemaking is adopted as is,” Gooch wrote, “there will be no effect on the unlawful revenues, no risk to the public utilities at all. In fact, their ability to collect unlawful excess profits with impunity may be enhanced.”
FERC spokesperson Mary O’Driscoll said that since Gooch’s analysis was filed in a rulemaking proceeding, the commission will respond in the proceeding. She said, “The commission is not going to speak outside of the proceeding.”
None of the five FERC commissioners responded to my telephone calls to their offices. Only Sunoco Logistics, controlling owner of Mid-Valley Pipeline, returned my calls.
‘APPROVED BY FERC’
The key defense to the excess profits charge is shown in what Sunoco Logistics told me. Spokesman Joe McGinn said its rates “are approved by FERC and follow all FERC rules and guidelines.”
And that is the scandal. Not just that companies are earning excess profits, but that FERC seems to look the other way and enable this.
Gooch argues that the rulemaking proceeding he commented on in his analysis would institutionalize excess rates and make it difficult for a court to stop oil pipeline owners from collecting more profit than is lawful.
Retired now, Gooch has become a full-time reformer trying to stop what he sees as rules designed to destroy the “just and reasonable” tenet of utility regulation.
The issues here are not academic. Unless controlled, monopolies can cause massive economic damage. Excess profits amount to a tax on the public for private gain.
Utilities have been promoting the theory of deregulation because they know it lets them, as monopolists, escape the rigors of both regulation and competition.
Consumers bear the burden of these excess profits every time they pump gasoline or fly in a jetliner.
Accounting reports show that oil pipeline profiteering has gone on for years under administrations of both parties.
FERC is a small federal agency whose decisions exert a broad impact on the economy, yet it gets little news coverage. Commissioners and key staff come from, and go back to, the energy industries they regulate.
FERC’s budget is financed not with taxes, but fees paid by the energy industries.
On the “just and reasonable” standard, a controlling decision by the Court of Appeals for the District of Columbia in 1984 instructed FERC that “not even a little unlawfulness is to be tolerated.”
Yet in 2005 FERC granted the SFPP pipeline a rate hike nine times greater than its increased costs, Gooch wrote.
THE OCTOPUS
The SFPP pipeline is a corporate descendant of the railroad monopolies that caused California so much economic damage a little more than a century ago that they were known as The Octopus.
Despite the easy-to-spot evidence of profits that are far in excess of authorized rates, earlier this year the commissioners gave all 175 pipelines the freedom to raise rates by 6.8 percent per year compounded for the next five years.
Sunoco’s Mid-Valley Pipeline was entitled to a profit of $3.9 million in 2010, but comparing the two lines shows an actual profit seven times that large, more than $27 million.
The latest annual pipeline rate hike was approved in a way that makes consumer challenges virtually impossible.
A general rate case would open every pipeline expense, including taxes and profits, to scrutiny. The commissioners avoided that by granting an indexed rate increase to all pipelines with no proof of higher costs required.
This latest index rate increase will generate $3.4 billion more in excess profits over the next five years, Gooch calculated.
Gooch said he filed his analysis because he believes that if the excess profits were brought to the commission’s attention they would have to stop the profiteering.
He said FERC has failed to “redress years of toleration of unlawful conduct by some oil pipelines.”
By filing his report, he said, “it does not seem likely that any commissioner, past or present, would turn a blind eye to unlawful excess profits of some public utilities if the results of the annual report filings had been called to their attention.”
Here are a few of the questions Gooch’s report raises:
What is the point of filing accounting reports, especially under oath, if their contents are ignored?
Why would a government agency help monopolies whose rates it sets earn more than just and reasonable profit margins?
Why have President Obama (and before him Presidents George W. Bush and Bill Clinton) appointed commissioners closely allied with the energy industry instead of consumer advocates?
Why has Congress not investigated FERC?
There are many more questions. This column will be pursuing answers about how FERC not only ignores, but actively helps, monopoly pipelines gouge the public. (Editing by Kevin Drawbaugh)
This column first appeared on Thomson Reuters News & Insight.
The opinions expressed are his own.
Last year a fourth of the nation’s oil pipelines earned excessive profits, at up to seven times the rates allowed these regulated monopolies, according to an explosive analysis prepared by a former general counsel for the U.S. Federal Energy Regulatory Commission.
R. Gordon Gooch, the former counsel, alleges in his Oct. 3 study, for instance, that Sunoco’s Mid-Valley Pipeline, which carries crude oil from Texas to Michigan, earned a 55 percent return on assets. That is seven times its authorized profit margin, based on a calculation derived from an accounting report the company filed with FERC.
Three other regulated monopoly pipelines earned more than 40 percent on their assets, while another three earned more than 30 percent, an examination of their FERC filings by Reuters shows.
To put that level of profitability into context, overall nonfinancial businesses earned a 6.7 percent after-tax profit on their assets last year, the latest Bureau of Economic Affairs report shows.
In a competitive market, profits are unlimited except for the discipline of competition. Because there is no market to discipline monopolies, Congress created FERC, which sets prices, known as rates, for pipelines and some other energy monopolies.
FERC is supposed to balance the interests of customers and owners, making sure customers are charged only “just and reasonable” rates and that owners earn “just and reasonable” profits on top of recovering actual costs.
‘JUST AND REASONABLE’
The test of whether that standard is met is revealed each year on a document, filed to FERC under oath, known as Page 700. Line 9 shows how much it cost a pipeline to provide service, including a generous allowance for taxes and its profit. Line 10 shows actual revenues.
The two lines ideally should match, except for minor timing differences. When they do, it indicates the “just and reasonable” standard has been met. If Line 10 is larger, it shows extra profits.
Last year, 47 of the nation’s 175 regulated monopoly oil pipelines reported significantly larger figures on Line 10 than Line 9, as Gooch details in his analysis.
Gooch submitted his findings as part of a FERC rulemaking procedure. He was FERC general counsel from 1969 to 1972. Then he enjoyed a long career as a litigator in pipeline rate cases on behalf of oil companies, known as shippers, who pay pipeline companies to transport their liquids, crude and refined.
Having covered these issues for four decades, I think Gooch’s position here is solid as can be.
The rulemaking at issue would affect how costs are calculated on annual Form 6 reports, of which Page 700 is the most significant part.
“If this rulemaking is adopted as is,” Gooch wrote, “there will be no effect on the unlawful revenues, no risk to the public utilities at all. In fact, their ability to collect unlawful excess profits with impunity may be enhanced.”
FERC spokesperson Mary O’Driscoll said that since Gooch’s analysis was filed in a rulemaking proceeding, the commission will respond in the proceeding. She said, “The commission is not going to speak outside of the proceeding.”
None of the five FERC commissioners responded to my telephone calls to their offices. Only Sunoco Logistics, controlling owner of Mid-Valley Pipeline, returned my calls.
‘APPROVED BY FERC’
The key defense to the excess profits charge is shown in what Sunoco Logistics told me. Spokesman Joe McGinn said its rates “are approved by FERC and follow all FERC rules and guidelines.”
And that is the scandal. Not just that companies are earning excess profits, but that FERC seems to look the other way and enable this.
Gooch argues that the rulemaking proceeding he commented on in his analysis would institutionalize excess rates and make it difficult for a court to stop oil pipeline owners from collecting more profit than is lawful.
Retired now, Gooch has become a full-time reformer trying to stop what he sees as rules designed to destroy the “just and reasonable” tenet of utility regulation.
The issues here are not academic. Unless controlled, monopolies can cause massive economic damage. Excess profits amount to a tax on the public for private gain.
Utilities have been promoting the theory of deregulation because they know it lets them, as monopolists, escape the rigors of both regulation and competition.
Consumers bear the burden of these excess profits every time they pump gasoline or fly in a jetliner.
Accounting reports show that oil pipeline profiteering has gone on for years under administrations of both parties.
FERC is a small federal agency whose decisions exert a broad impact on the economy, yet it gets little news coverage. Commissioners and key staff come from, and go back to, the energy industries they regulate.
FERC’s budget is financed not with taxes, but fees paid by the energy industries.
On the “just and reasonable” standard, a controlling decision by the Court of Appeals for the District of Columbia in 1984 instructed FERC that “not even a little unlawfulness is to be tolerated.”
Yet in 2005 FERC granted the SFPP pipeline a rate hike nine times greater than its increased costs, Gooch wrote.
THE OCTOPUS
The SFPP pipeline is a corporate descendant of the railroad monopolies that caused California so much economic damage a little more than a century ago that they were known as The Octopus.
Despite the easy-to-spot evidence of profits that are far in excess of authorized rates, earlier this year the commissioners gave all 175 pipelines the freedom to raise rates by 6.8 percent per year compounded for the next five years.
Sunoco’s Mid-Valley Pipeline was entitled to a profit of $3.9 million in 2010, but comparing the two lines shows an actual profit seven times that large, more than $27 million.
The latest annual pipeline rate hike was approved in a way that makes consumer challenges virtually impossible.
A general rate case would open every pipeline expense, including taxes and profits, to scrutiny. The commissioners avoided that by granting an indexed rate increase to all pipelines with no proof of higher costs required.
This latest index rate increase will generate $3.4 billion more in excess profits over the next five years, Gooch calculated.
Gooch said he filed his analysis because he believes that if the excess profits were brought to the commission’s attention they would have to stop the profiteering.
He said FERC has failed to “redress years of toleration of unlawful conduct by some oil pipelines.”
By filing his report, he said, “it does not seem likely that any commissioner, past or present, would turn a blind eye to unlawful excess profits of some public utilities if the results of the annual report filings had been called to their attention.”
Here are a few of the questions Gooch’s report raises:
What is the point of filing accounting reports, especially under oath, if their contents are ignored?
Why would a government agency help monopolies whose rates it sets earn more than just and reasonable profit margins?
Why have President Obama (and before him Presidents George W. Bush and Bill Clinton) appointed commissioners closely allied with the energy industry instead of consumer advocates?
Why has Congress not investigated FERC?
There are many more questions. This column will be pursuing answers about how FERC not only ignores, but actively helps, monopoly pipelines gouge the public. (Editing by Kevin Drawbaugh)
This column first appeared on Thomson Reuters News & Insight.
