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.

Sue Mara
Enron Corp.
Tel: (415) 782-7802
Fax:(415) 782-7854
----- Forwarded by Susan J Mara/NA/Enron on 04/04/2001 09:40 AM -----

	"Steven Kelly" <steven@iepa.com>
	04/04/2001 08:55 AM
		 
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		 Subject: FW: Proposed Windfall Profit Tax

FYI.  Preliminary analysis of State Windfall Profit Tax.  This will be
discussed during the cc scheduled for 9:00 a.m. today, Wed.

 -----Original Message-----
From:    C. Stephen Davis [mailto:csdlaw@pacbell.net]
Sent:   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.


Very Truly Yours, C. Stephen Davis