SOURCE:  Parish & Company

@Copyright 

Portland, Oregon, October 17, 2005 -- Warren Buffett and Berkshire Hathaway's Plan to Dupe Intel, Oregon's Largest Electric Utility Customer, Via an Ingenious Tax Scheme

In 2005 the Oregon Legislature passed and Governor signed a new law, Senate Bill 408, prohibiting utilities from billing utility customers for federal and state taxes that are never remitted to the appropriate government taxing authorities.  Remarkably, more than $100 million was being collected annually in federal and state taxes that was never remitted due to the parent company's ability to offset these taxes with losses in other subsidiaries.  

This cash flow from non-payment of federal and state taxes could indeed add more than 25 percent to the annual return, well in excess of the maximum allowed by Oregon law for monopoly based regulated electric utilities.   Intel, whose electric bill increased more than $10 million in the last year alone, has been the biggest loser due to its reliance on an ineffective industry lobbying group,  the Industrial Customers of Northwest Utilities (ICNU).  Although Intel is technically a customer of PGE rather than PacifiCorp,  Buffett's scheme will likely be identically applied to whomever owns PGE, Oregon's largest electric utility.

The genius of Buffett's tax scheme has two-parts, the first being related to tax deductions and the second tax credits.  It is the second part that Intel clearly does not yet understand, that is the tax credits that are completely independent of taxes calculated based upon net income and collected from ratepayers.  Note that tax credits are accounted for on the "balance sheet" and are never reflected on the "income statement. " Consider the following example:

Example:

Power sales                        100

Expenses                              50

Income before taxes             50

Taxes at 30 percent             15  

Net Income                         35

Note again that Part II, the tax credits, do not appear anywhere on the income statement for accounting purposes.  This is because such tax credits are not a revenue or expense but rather a balance sheet transaction.  Senate Bill 408 clearly indicates that both the taxes computed and charged to ratepayers based upon income and expenses and relevant "tax credits" should be considered in determining the gap between taxed billed and those actually paid. 

Buffett Strategy Regarding Part I: This includes continuing the practice of charging ratepayers for federal and state taxes that are never remitted by attempting to overturn the new Oregon law in either the courts or legislature.  Berkshire Hathaway's capacity to pocket this cash flow from not remitting taxes collected was an important consideration in its proposed acquisition of PacifiCorp, Oregon's second largest utility.  See attached Forbest article regarding another Berkshire Hathaway company, McLane, in which Buffett is quoted as claiming he can earn a 13 percent return on investment when McLane's profit margin is only one percent.

Buffett Strategy Regarding Part II: The second more significant aspect involves tax credits.   Buffett's subsidiary Mid America is currently trying to argue that the new Oregon law prohibiting billing ratepayers for taxes never remitted to state and federal governments does not apply to tax credits or total tax benefits but rather simply the taxes calculated based upon income and expenses.  To any tax professional, this argument is simply ludicrous. 

The likely specific structure of Buffett's scheme is as follows:

Bill Parish is an independent investment adviser based in Portland.

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