Cities desperate for additional revenues used to find relief by passing utility taxes. But in an age of deregulation, those revenues are being lost because of falling rates and the difficulty of keeping tabs with all the new players in the electric and telecommunications arenas.

“Every city has lost some money,” said Don Maynor, a Bay Area attorney who represents several L.A. County cities in their joint efforts with local utility companies to collect taxes from service providers. “They are all losing probably about 5 percent of their total utility-tax revenues.”

The problem threatens to worsen as deregulation takes hold in the electricity market in 2002 and new technologies divert revenues away from cable television companies.

“Cities are only now starting to come to grips with this issue,” said Larry Kosmont, an L.A.-based consultant who analyzes municipal business taxes. “They really haven’t figured out how they are going to deal with this. As these industries become more and more segmented, unitary utility taxes don’t fit.”

Kosmont said that utility taxes typically comprise between 5 percent and 20 percent of a city’s overall revenue stream.

The problem is most acute right now in the telecommunications market, where prices have fallen and telecom providers have proliferated. Whereas 20 years ago there were two or three local providers in the state and a single long-distance company, today there are an estimated 600 legitimate providers in California, along with the occasional fly-by-night operator.

With so many providers, prices have fallen for phone service, Maynor said.

“The cost of phone services has come down, which is good,” he said. “But lower bills translate into lower revenues for cities.”

That’s because utility taxes are usually a percentage of the total bill for telephone, electricity or natural gas service. If the consumer’s bill goes down, so does the city’s tax bill.

Electric rates also have come down for most of L.A. County, outside of the city of Los Angeles itself, where the Department of Water and Power is at least temporarily exempt from deregulation.

Last January, for example, small businesses and residents received an automatic rate cut as mandated by the state’s electric utility deregulation law. (While the cut was set at 10 percent, recent studies indicate that rates have fallen only about 3 percent to 4 percent as additional charges offset some of the cut.)

In some cases, Maynor said, cities he represents have seen drops of more than 20 percent in electric utility tax revenues. (Maynor refused to disclose which cities in L.A. County he represents.)

The biggest impact is not expected to hit until 2002, when the market becomes fully deregulated and extra charges imposed by the three investor-owned utilities to recoup investments in long-term energy contracts and nuclear power plants expire.

For cities, the revenue drops are not just due to lower bills. It also reflects how difficult it is to collect the taxes.

Before deregulation, cities would turn to the two local phone companies GTE California and Pacific Bell (now a unit of Houston-based SBC Communications Inc.) the state’s three investor-owned electric utilities Edison International, Pacific Gas & Electric and San Diego Gas & Electric (now Sempra Energy Corp.) and the local gas company.

But now, there are hundreds of independent providers. Many collect utility taxes from their own customers and pay the taxes to the cities in which they operate. Others contract with the traditional utility companies to collect the taxes on their behalf. The utility companies then turn the money over to these independent service providers, which are then responsible for paying the taxes to the cities.

“It was so much easier when we had two companies on the telecommunications side,” said Jim Hickey, audit sections chief for the L.A. City Clerk’s Office. “We now have to collect from more people. It is much more involved.”

In one example of how the lines have become blurred, Hickey’s department is engaged in a dispute with a telecom provider over a $14 million tax bill. The city says the provider should pay the bill. But the provider, whose identity has not been released, contends that the money is owed by resellers using its lines.

More such disputes can be expected in the electricity market as deregulation hits full stride in 2002, Kosmont said.

“Cities are going to have to update their codes to spell out exactly who should be paying what. Otherwise, a lot of these people could simply slip through the cracks,” he said.

While some providers may dispute the taxes, others are simply ignoring them, Hickey said.

“Proportionately, the number that are complying far exceeds those who aren’t, but it still is a problem,” he said.

Hickey, whose office is responsible for tracking down companies that don’t pay their taxes, is not sure exactly how much money the city is losing. One indication, though, came from a recent amnesty program the city held for telecommunications companies. The program generated $4.2 million in revenues, which Hickey suspects is just the tip of the iceberg.

“This puts us at a competitive disadvantage if we are incurring the expenses of collecting the money on behalf of another carrier who then gets the money and holds onto it instead of paying the taxes it owes to the local jurisdiction,” said Pacific Bell spokesman Steve Getzug.

Hickey said the city has put out a request for proposals to the private sector to see if private companies can better track utility tax collections from telecom companies.

So far, only one company has responded. Hickey said there is no set timetable for a contract to be drawn up.