Roth: What Determines Electricity Prices?

Electricity prices generally reflect the costs to build, finance, maintain, manage, and operate power plants and the complex system of power transmission and distribution lines called the grid.

Electricity prices change constantly – literally every five minutes. A multitude of factors affect prices, some slightly, some dramatically. Some factors have a short-term effect. Others are long lasting.

Weather conditions, natural disasters, and consumer demand influence electricity prices every day. Legislation, regulatory changes, generation efficiency, and electricity grid and infrastructure costs affect prices on a long-term basis.

Major weather events like Rita and Katrina in the 2005 hurricane season produced destructive storms, causing major price volatility.

When an earthquake and tsunami hit Japan in 2011, a nuclear meltdown occurred at Fukushima Daiichi nuclear power station. This resulted in the U.S. Nuclear Regulatory Commission’s review of the ability of domestic nuclear reactors to withstand natural disasters. Subsequently, several nuclear facilities were taken off-line, and some new nuclear projects were abandoned at a substantial economic loss to facility owners and local communities.

Disasters are felt on a political and governmental level, too. Democrats and Republicans often disagree about re­sponses to disasters, such as the BP oil spill in the Gulf of Mexico. This causes delay and additional costs to consumers. A bipartisan approach is needed to implement a national energy plan.

Trillions of dollars must be invested nationally in the next few decades to upgrade the current infrastructure to a modernized, fully interactive smart grid. As utilities are required to rebuild transmission systems to ensure reliable delivery of electricity to homes and businesses, consumers will see delivery costs rise to cover these expenditures.

Commodity investors and speculators have had a large influence on electricity pricing.

While federal stimulus funds have been issued to some utilities for upgrades, most utilities will increase delivery tariff rates to cover costs.

The environmental consequences of coal mining, gas drilling, and power plant emissions affect electricity prices. In February 2012, the Nuclear Regula­tory Commission approved two new nuclear power reactors for the first time since the partial meltdown at Penn­syl­vania’s Three Mile Island plant in 1979.

Green or renewable generation, including solar, wind, and hydro, continues to grow slowly. The U.S. Environmental Protection Agency has cracked down on air pollution, imposing strict limits on environmental emissions from coal-burning plants, which generate most of our nation’s electricity.

Lower electricity prices also have slowed implementation of renewable generation. The costs of installing a green system remain high compared to traditional electricity.

The 2011-2012 winter season was exceptionally mild. Demand decreased for electricity to heat homes and businesses. Lower demand pushed prices down.

When winter weather causes an increase in heating demand, electricity prices increase. During peak summer times, the grid system can become overwhelmed by consumer demand. This causes electricity prices to climb and be volatile.

Electricity prices are affected most by the amount of consumer usage, and the time of day and season that electrons are consumed. Electricity prices are highest during times of peak demand in the late afternoon, and lowest overnight when demand drops.

Prices vary by locality due to the availability of power plants and fuels, local fuel costs, and pricing regulation and structures. Oklahoma consumers, with production fuel sources like natural gas and wind in abundance, have benefited from those factors.

Roth: How Natural Gas is Priced

Natural gas prices are no longer based just on its use for heating. With about 25 percent of the United States’ electricity coming from plants burning natural gas, it has become a larger part of our nation’s energy use. Although not yet used widely, some predict that it is also destined to be a large part of our transportation energy in the future.

Even with more uses, natural gas prices are historically low. Compared on an energy-equivalent basis, natural gas is cheap relative to other energy sources like heating oil and gasoline.

Today, huge new supplies of gas are coming on-line, thanks to horizontal drilling and hydraulic fracturing, which are tapping huge resources and lowering prices.

Since the beginning of the 2008 financial crisis, the stock values of gas production companies and gas pipeline companies have fallen. The path of future natural gas prices will influence the cost of electricity, especially in the Northeast.

Still the major use of natural gas is for heating, and supply and demand are mismatched for that purpose. Demand is highest in winter, typically exceeding supply during the heating months in the Northeast and Midwest. In the summer months, demand is lower than supply, making it cheaper in the winter and more expensive in the summer.

The unpredictable demand for gas means that gas has to be stored – often waiting until the price is right to sell.

Natural gas must be moved from its source to where it can be used or stored, requiring numerous pipelines. The U.S. has more than 300,000 miles of pipeline, yet it doesn’t go everywhere. Building and maintaining underground gas pipelines is expensive, and the companies that own them charge gas producers for usage.

Extreme weather can also affect gas prices. The very warm 2011-2012 winter in the Northeast led to lower demand for gas to heat homes, leaving record-high storage inventories and lower prices.

With more gas-fired electricity generators, summer weather that is hotter than expected can lead to more gas demand from air conditioners and depleted inventories for the winter and higher prices. A hot summer followed by a cold winter can produce a price spike. More volatile weather means more volatile gas prices.

The number of new wells being drilled and those in active production fluctuate. Some producers face pressure to sell gas even at prices they don’t like to make debt service payments on the money they borrowed to drill the wells.

The U.S. also imports gas from Canada and Mexico via international pipelines or shipped in special tankers, called liquefied natural gas, or LNG.

Trading and speculation of natural gas futures, derivatives, and investment funds also can affect the price of gas.

All the variables in supply and demand – including unpredictable weather, resistance to fracturing, and energy consumers adjusting their behavior to benefit from lower natural gas prices – make it complicated and difficult to predict future gas prices. But people are doing it every day, winning and losing, and so it goes.

Courts Eye Employer “Look Policies” for Civil Rights Violations

By Catherine Campbell

“Look Policies” – policies intended to promote the company brand by recruiting and requiring employees that fit specific cultural or physical characteristics or restricting clothing accessories – are currently a hot topic at the EEOC. The agency and others have, in recent years, challenged companies that institute such policies on civil rights grounds. Though not generally considered outright illegal, employers may apply “Look Policies” in a way that violates applicants’ and employees’ civil rights.

Looks-conscious, clothing retailer Abercrombie & Fitch has had several high profile problems with its look policy. For instance, in 2005, Abercrombie agreed to a six-year consent decree and paid $40 million dollars to a class of minority – including African Americans, Latinos and women – job applicants and employees for its alleged failure to hire, promote, and retain minorities because they did not fit Abercrombie’s “All-American look.”

Several years later, Abercrombie again sparked EEOC interest when it refused to hire several Muslim women who wore hijabs for religious reasons. In one case, a California federal district court determined that Abercrombie violated Title VII of the Civil Rights Act of 1964 by refusing to hire a Muslim job applicant because she wore a hijab. EEOC v. Abercrombie & Fitch Stores, Inc., Case No. 10-cv-03911-EJD (N.D. Cal. Sept. 3, 2013). When the court agreed that Abercrombie had failed to accommodate the applicant’s sincerely-held religious beliefs, Abercrombie, in September 2013, ultimately agreed to settle.

In another case, however, the Tenth Circuit reversed a jury verdict for a female, Muslim job applicant who was not hired because she wore a hijab. EEOC v. Abercrombie & Fitch Stores, Inc., No. 11-5110 (10th Cir. Oct. 1, 2013). The court agreed that while Abercrombie was required to accommodate a job applicant’s (or employee’s) sincerely-held religious beliefs, because the applicant never informed Abercrombie prior to its hiring decision that she needed an accommodation due to her religious beliefs, applicant could not establish a prima facie discrimination claim. According to the court, a plaintiff must act for religious, not cultural, reasons and his or her religious beliefs must place him or her in the position of “choos[ing] between their religious convictions and their job.” Slip Op. at 25.

Important for employers, at least in the Tenth Circuit, an employer cannot be liable for failure to accommodate a religious belief unless the applicant or employee explicitly tells the employer of the conflict and seeks an accommodation. Id. at 31. That is, an employer has no duty to glean from the circumstances that an accommodation may be necessary and begin a dialog. The dissent argued that the majority rule was too inflexible, because under the facts of the case, it allowed Abercrombie to escape censure. Although Abercrombie obviously knew that the applicant wore a head scarf, it never told her that wearing a hijab conflicted with its look policy, and the applicant was not aware that the hijab conflicted with the look policy. Dissent at 2. The dissent advocated for a “common sense exception to the usual rule” when an employer “has knowledge of a credible potential conflict.” Id. at 10, 1.

Of course, some corporate look policies do not raise issues. For example, a policy that requires certain clothing for safety reasons – say one that bans loose-fitting clothing worn around machinery – is generally permissible. On the other hand, an employer cannot restrict an employee’s protected rights merely because his or her co-workers are uncomfortable with a particular item of clothing. And, what about a policy that prohibits staff from wearing jewelry, but an applicant must wear a medical alert bracelet? Applying the policy could result in American’s with Disabilities Act liability. A savvy employer may well determine that a conservative approach is a better one. Although delving into a job applicant’s or employee’s religious beliefs or other protected characteristics is verboten according to the EEOC, the common sense approach advocated by the Tenth Circuit dissent may be advisable.

And what is an acceptable accommodation? A case filed against Walt Disney Corporation in 2012 may help answer that question. Imane Boudlal, a Muslim woman began working as a hostess at Storyteller’s Café, a Disney-owned facility. After working two years, Ms. Boudlal requested permission to wear hijab at work due to her religious beliefs. Disney denied the request as a violation of its “look policy,” but offered to either reassign her to a position which did not require interaction with the public or require her to wear a hat to cover the hijab. Ms. Boudlal refused the offered accommodations claiming that Disney was impermissibly attempting to stifle her “Muslim-ness”. The case is currently in litigation.

Roth: How are gas prices determined?

According to AAA, since January, retail gas prices have dropped at the fastest rate in nearly a year.

Currently, the national average price for a gallon of regular gas is $3.35. In parts of Oklahoma City, it is $2.87. AAA said the national average could drop another 25 to 30 cents per gallon by year’s end.

What really drives gas prices? The general rule, according to the Energy Information Administration, is that about two-thirds of the cost of gas at the pump is determined by crude oil cost. The remainder includes retail costs, federal and state taxes, refining costs, profits, distribution and marketing.

To turn crude into gasoline and sell it at the pump, oil must be refined, shipped and loaded into trucks for delivery to stations, where it is purchased for public resale. Long shipping routes, more refining, and remote station locations contribute to higher prices.

In 2004 the average price for crude oil was $37 per barrel. Crude was 47 percent of the price of regular gasoline. Today, crude is $111 per barrel and is two-thirds of the price we pay.

Worldwide demand has increased dramatically, particularly in China, India and Brazil – three countries with a combined population of 2.7 billion.

In summer 2010, gas prices were about $2.80. An unstable supply caused prices to rise when revolutions swept the Middle East. During Libya’s civil war its oil production fell more than 50 percent.

U.S. crude for December delivery fell 94 cents per barrel to $96.86, its lowest settlement since July 1. Brent crude, often considered a broader indicator of global oil prices, lost $2.17, ending the day at $107.80 per barrel, its lowest settlement price since Aug. 8.

The result is a buildup in oil supply in the U.S. Meanwhile, demand for gasoline remains flat, partially a reflection of the stagnant economy.

Analysts said the downtrend in retail gasoline prices will continue with reduced demand, increased U.S. production of oil and increased refining capacity.

U.S. refiners have an ample supply of domestic and Canadian crude, allowing them to make more gasoline. The U.S. met 87 percent of its own energy needs in the first six months of 2013, the highest rate since 1986.

The result is a buildup in oil supply in the U.S. Meanwhile, demand for gasoline remains flat, partially a reflection of the stagnant economy.

New technology makes a difference. Some suggest that fracking can do for oil and gasoline prices what it has been doing for natural gas prices. Vehicles now get considerably better gas mileage.

Inflation and taxes account for the biggest relative increases in the price of gasoline. The nationwide average tax on gasoline is 49.5 cents per gallon, up 0.1 cpg since July 2013. The federal tax on gasoline is 18.4 cpg. The average state gasoline excise tax is 21.4, up 0.5 cpg from July 2013.

It is expected that per individual there will be less fuel consumption, but more people will be consuming worldwide. These changes will affect pump prices.

Nationally, retail prices have fallen 25 cents since the end of August, as the 2013 Atlantic hurricane season was looking like the first in almost two decades without a major storm disrupting Gulf Coast production.

The common belief is that the price of gasoline is solely determined by the supply and demand of crude. Those are the major factors, but other components will continue to influence pricing.

Roth: Governor’s Energy Conference a Success

Gov. Mary Fallin’s third-annual energy conference successfully exhibited Oklahoma’s key role in the nation’s current energy renaissance. More than 500 guests attended the conference at Tulsa’s Cox Business Center and I witnessed firsthand the well-represented industries and people from across the energy spectrum.

Speakers at the conference included industry leaders such as C. Michael Ming, general manager at the new Oil & Gas Technology Center GE Global Research building in Oklahoma City; Michael Skelly, president of Clean Line Energy Partners; Michael Teague, Oklahoma secretary of energy and environment; Gary Demasi, Google director of operations for data center location strategy and energy; and Merl Lindstrom, vice president of technology at Phillips 66.

The conference also included two panel discussions. The first panel discussion included the presidents of Oklahoma State University and Oklahoma City University, Burns Hargis and Robert Henry respectively, and covered the topic of educating a new generation of energy leaders. The second panel discussion featured several of Tulsa’s energy leaders, including Mayor Dewey Bartlett’s welcome.

Demasi talked about Google’s important partnership with Oklahoma. Google has invested $700 million in its data center in Pryor – one of only nine Google data centers in the world. The company’s partnership with Oklahoma has led to $369 million in economic activity, and Google has contracted for 390 megawatts of wind energy in the region. Google recently acquired a former Gatorade manufacturing facility in Pryor. The tech giant shared its plans to continue expanding its renewable-energy portfolio and continue its important partnership with Oklahoma.

The keynote speaker at the conference was North Dakota Gov. Jack Dalrymple. Dalrymple spoke about North Dakota’s role in the domestic energy renaissance, particularly the oil-rich Bakken boom. He noted that despite the current energy boom, even more progress can be achieved by industry-leading states like North Dakota and Oklahoma, which have demonstrated regulatory approaches that find a healthy balance between energy production and the environment. He also noted the significant benefits the industries’ production means to their economy and their state budget.

Fallin spoke at the conference, advocating for continued investment in the Oklahoma energy industry. Fallin suggested that Oklahoma’s energy plan can provide a national blueprint for growth and reminded us that the state’s energy plan supports a broad range of energy initiatives, including hydraulic fracturing for natural gas production, energy efficiencies where possible, compressed natural gas vehicles, and development of solar and wind power. Fallin said Oklahoma energy companies have played an important role in making the United States more energy-independent, calling Oklahoma the best place in the world for energy investments.

The conference showcased just how important Oklahoma’s role is in the current energy renaissance. While Oklahoma has long been a leader in oil and natural gas production, the conference also demonstrated that Oklahoma is increasingly becoming an industry leader in wind energy development. Fallin’s all-of-the-above energy approach enables Oklahoma to reap the benefits of industry giants like Continental Resources, Oneok and Google, which will continue to bring tremendous economic benefits to our state. Fallin’s energy conference demonstrated that Oklahoma is on the right track and will continue to be on the cutting edge of the U.S. energy industry. The job was well-done, again.

Roth: U.S. Leads Europe in Natural Gas Production

European Union lawmakers recently voted to force energy companies to carry out in-depth environmental audits before they initiate hydraulic fracturing to recover natural gas, oil and liquids from shale rock.

The result is a setback for the shale gas industry in Europe, where many citizens are more concerned about the environmental effects than the benefits from energy production. It leaves Europe far behind the United States in developing recovery and production techniques.

The U.S. has widely embraced shale gas production, leading to a fall in domestic gas prices and making it possible to achieve energy independence in oil and gas by 2035, according to the International Energy Agency. It’s transforming our economy.

The 27-nation European Union has been slower to explore the possibilities. Policymakers from the EU are positioned to decide by the end of the year whether strict regulation is required.

Opponents of shale gas exploration in Europe say existing environmental law is inadequate for the potential risks of hydraulic fracturing (fracking). France has already banned the technique and others are considering following this move.

Pro-shale gas advocates insist that shale gas provides lower energy costs, can curb greenhouse emissions and could provide a more indigenous source of energy.

According to a recent report by investment bank Credit Suisse, after a decade or more of shale development in the U.S., the country is still in the early innings of growth. There are tens of billions more dollars expected for infrastructure and development. The renaissance in industrial development and manufacturing will continue to benefit.

This isn’t the case for the U.K. and the majority of the Europe Union, which largely relies on Russia for its gas supply. Not surprisingly, Russia has raised a lot of purported concerns about hydraulic fracturing. This is obviously designed to help maintain Russia’s dominance over Europe’s gas supply.

Despite a less positive outlook for Europe’s shale exploration, there could be additional opportunities for oil and gas producers, as well as oil service subsectors, in countries such as Argentina and China.

The Credit Suisse reported that U.S. crude’s effect on global oil prices is still muted. Increased U.S. production has coincided with global supply interruptions and Middle East/North African instability. The report added that a significantly weaker oil price is not an imminent prospect.

Natural gas is being substituted for other fuels, particularly coal, in electricity generation, resulting in lower greenhouse gas emissions from utilities. The use of natural gas in the transportation sector is currently negligible but is projected to increase in the U.S. with investments in refueling infrastructure and natural gas vehicle technologies. Petrochemical and other manufacturing industries have responded to lower natural gas prices by investing in domestically located manufacturing projects.

According to “The Shale Revolution II” report, strong drilling activity and continued technological progress should lead to significant oil production growth in key regions such as the Permian Basin, the Eagle Ford, Bakken and Niobrara Wattenberg shale fields, in west Texas, south Texas, North Dakota/Montana and Colorado, respectively.

The good news for Oklahoma, and America, is that while we are safely maximizing our domestic energy and transitioning our economy toward lower-carbon fuel sources, other parts of the world will lag behind and lose their competitiveness.

That’s good for America and American jobs.

Gavel to Gavel: Halloween Laws

Halloween is often perceived as the day when all laws of space and time are suspended. This ancient belief dating back some 2,000 years ago remains strong. Our steadfast judicial system even bends the rules a little when it comes to Halloween madness.

Ask the Louisiana woman who was unable to recover for damages after she broke her leg running away from Jason and his chainsaw. The court held the haunted house had no duty to protect her.

Louisiana’s not alone. Oklahoma prohibits a person from wearing a mask, hood, or covering that would conceal their identity for the purpose of intimidation or harassment – unless you are at a masquerade party or performing a Halloween prank. Similar laws can be found in numerous other states, including Louisiana, Virginia, Georgia, West Virginia, Michigan, Florida and South Carolina.

But the law doesn’t always let things slide on Halloween. An Arkansas court, citing numerous other jurisdictions as support, held that a state, in exercising its police power, may constitutionally ban all fortune-telling. It’s rumored that North Carolina passed a local ordinance in the 1970s banning the distribution of Halloween candy containing poisonous chemicals, razor blades, or shards of broken glass.

Oh, and a friendly piece of advice: Make sure to go out of your way to smile and wave at your neighbor, or you may end up seeing a personalized homemade tombstone like this, which was the focus of a Florida lawsuit for emotional distress: “At 48, she had no mate, no date, it’s no debate, she looks 88, she met her fate, in a crate, now we celebrate!”

If you’re beginning to panic because you believe it’s too late to make nice with the neighbors, have no fear. An Illinois court found that a policeman’s removal of this homemade tombstone didn’t violate the owner’s First or Fourth Amendment rights: “Old Man Crimp was a gimp who couldn’t hear. Sliced his wife from ear to ear, she died … he was fried. Now they’re together again side by side!”

One last piece of advice for Halloween lovers: If you’re lucky enough to attend jury duty on this magical holiday, don’t forget your favorite costume! A Massachusetts judge recently allowed jurors to wear costumes to court on Halloween.

Roth: Environmentalism is a Christian ideal

I have often been struck by the divide between the environmental community and everyone else. It seems we so often try to separate everyone into distinguishable categories: left or right. Then we cusp these debates with religion, economics, and a distaste for that Obama guy, and we forget that indeed our faith first calls us to be stewards of this place we call home. It is not a conservative issue vs. a liberal issue, or a Republicans vs. Democrats. Nor is it a Christian vs. non-Christian issue.

Indeed, according to Psalms 24:1: “The earth is the Lord’s and the fullness thereof.” In fact, the Bible depicts that God made a covenant with the earth and all of the species within it. Consider Genesis 9:12-13, where it read that “God said to Noah and to his sons with him: ‘I now establish my covenant with you and your descendants after you and with every living creature that was with you – the birds, the livestock, and all the wild animals, all those that come out of the ark with you – every living creature on earth.”

So, in fact, we all are called to be good stewards of the earth – and I love it when I see so-called Cool Congregations, an effort for greater sustainability from participating congregations, like my own home church Mayflower Congregational UCC. This higher calling is working to make a difference, preserving our world and promoting environmental stewardship, church to church.

Consider the fact that the National Council of Churches, which is comprised of Protestant and Orthodox denominations, has been working to lobby for national and international action on climate change.

Consider the fact that an organization called Christians Caring for Creation is actually suing the U.S. Fish and Wildlife Services for failing to protect endangered species.

The Evangelical Environmental network is comprised of evangelical churches that believe that the body of Christ should be an example of what God’s people can do in the world to solve some of the great challenges of our time.

Our politics might divide us. Our disagreements about tax policies and the Second Amendment might make your blood boil. But, as a nation, and indeed the world, we are working to do something that no one has ever done before. That is, live in a world, where by mid-century 9 billion people will be its inhabitants. If that doesn’t sound crowded, or likely to stress our ecosystems, I would encourage you to move three more people into your home today and see how that goes. Change is coming. It’s going to require action.

This means we will have to do more with the food, land, water and other limited resources that we have. We will need to be smarter about the energies we produce and consume and probably tackle issues of parity and disparity across the globe. We need to do more with what God gave us, all of us. We must do so while working to avoid the most dangerous consequences of climate change, population growth and the ongoing, tragic destruction of our natural environment.

In the words of my favorite Scripture, Micah 6:8, which asks all of us: “What does the Lord require of you?”

The answers: prayer and action.

Roth: Georgia Tea Party Teams Up with Sierra Club

While tea party-backed members of Congress and the Republican Party might be at odds over health care, the federal budget, the debt ceiling and a whole host of other things, crazier things have happened.

In Georgia, members of the Tea Party Patriots and the Sierra Club are joining forces to promote renewable energy. I’ve always thought green tea was healthy.

The Tea Party Patriots group in Georgia is suggesting that conservation is in fact a conservative principle. So, they have joined forces with the Sierra Club and formed the Green Tea Coalition.

The Tea Party Patriots’ position is that consumers of power ought to have more choices in the electricity marketplace. And, more importantly, they ought to be able to place solar panels on their own homes and get access to cleaner electricity more affordably. In addition to being good stewards of the environment, according to the Tea Party Patriots, this is a fundamentally conservative ideal.

In other words, allowing energy to compete on a level playing field, according to the Tea Party Patriots, is a fundamental cornerstone of liberty. And so, what some narrow thinkers may call an unholy alliance has been born – one where conservation, promoting renewable energy and conservative energy principles are actually just good old-fashioned American principles. Seems like common green sense to me.

There is no mistaking that in the free market, where forms of energy are allowed to compete, more and more renewable sources of power are beginning to have a competitive advantage. Today, in Oklahoma, wind power is at its most competitive price opportunity thanks to the visionary leadership of Oklahoma’s industry leaders and some good public policy nudges from leaders like Gov. Mary Fallin and former Gov. Brad Henry and Secretary of Energy Mike Ming.

Additionally, cleaner-burning, affordable natural gas has begun to displace coal in power generation over the past decade. Since 2005, coal use in the power sector has declined 25 percent, while natural gas has increased by 62 percent. This reality has been responsible for some of the cleanest air Americans have enjoyed in a decade. Not to mention, it has helped encourage and spur innovation and competitiveness in the renewable marketplace, as natural gas’ power flexibility is a partner to wind energy, while slow, cumbersome coal plants are not.

Today’s reality is that common-sense energy use and policies that look to the market for the most cost-effective and environmentally sound solution are not ideals or platforms that belong to any one political party or any one side’s viewpoint. Instead, it makes as much sense for all of us, as a good old cup of green tea.

Legal Alert: New EEOC and OCRE Rules for Oklahoma

By Lauren Symcox Voth

The Equal Employment Opportunity Commission (“EEOC”) isn’t the only game in town. The Oklahoma Office of Civil Rights Enforcement (“OCRE”), a division of the Oklahoma Attorney General’s Office has been investigating complaints of discrimination for over a year now. Formerly known as the Oklahoma Human Rights Commission (“OHRC”), the OCRE was created through the Oklahoma Anti-Discrimination Act in July 2012 to investigate and enforce state anti-discrimination laws relating to employment, housing and public accommodations. Before July 1, 2012, generally employers had to have at least 15 employees to fall under federal anti-discrimination laws; and employees claiming employment discrimination could file a charge of discrimination in employment with the EEOC or the OHRC and the charge was considered dually filed. Post July 1, Oklahoma employers with 1 or more employees are covered by the Oklahoma Anti-Discrimination Act, charges are no longer dually filed, and the agencies’ enforcement and investigations are separate.

Keys to the EEOC and OCRE in Oklahoma:

  1. The OCRE enforces and investigates employment discrimination claims under the Oklahoma Anti-Discrimination Act including, race, color, religion, sex, national origin, disability, and age.
  2. The EEOC investigates and enforces Federal statutes related to employment discrimination including race, color, religion, sex (including pregnancy), national origin, disability, age, and genetics.
  3. The Oklahoma Anti-Discrimination Act covers all employers with one or more employees.
  4. Most Federal anti-discrimination statutes cover employers with 15 or more employees, the Age Discrimination in Employment Act covers employers with 20 or more employees, and the Equal Pay Act covers virtually all employers.
  5. No dual filing. An employee must file with both agencies to preserve their state and federal claims.
  6. Individuals have 180 days to file a charge of discrimination with the OCRE.
  7. Individuals have 300 days to file a charge of discrimination with the EEOC.
  8. Employers must file separate responses to charges filed with the EEOC and OCRE – but make sure the responses are consistent! Employers are responsible for participating in the investigation process for both the EEOC and OCRE.
  9. The EEOC and OCRE have agreed to share information in related investigations.

If you have questions about the EEOC, OCRE, a charge of discrimination, or if you are a covered employer, consult an attorney.

The “Bring Your Own Device” Boon Comes at the Expense of Security. How Can You Protect Your Business?

By Cody Cooper

Bring your own device policies in the workplace aren’t novel. Companies have experimented and implemented policies requiring employees to use their own personal phones, computers and tablets in the scope of their employment rather than the employer providing these devices. There are certainly benefits to companies that offer the flexibility of “bringing your own device.” Companies can reduce or avoid large hardware costs. Employees enjoy the freedom to choose and use the technologies they already love compared to juggling a Blackberry for work and an iPhone for friends and family. Additionally, by using a personal device, employees tend to be “connected” and available more than with an employer-provided device.

Now, while you may think, “you mean I can require to employees to bring their own electronic devices and never have to worry about the costs and resources for maintaining or upgrading those devices? SIGN ME UP!” Not so fast. While there are certainly benefits to BYOD policies, there are also potential pitfalls.

Who owns the information on the phone?

Particularly where a company’s value is primarily driven from the information it creates and maintains, BYOD policies can prove dangerous. Oklahoma law protects information that is considered to be “trade secret,” being information that derives independent value and where there are reasonable efforts to keep it secret. Examples are customer lists or business research (think geological surveys showing potential oil reserves). Although Oklahoma law protects this sort of information from theft, enforcing an employer’s rights can prove time-consuming and costly and sometimes even unsuccessful. While an employer could confiscate and completely erase a company-owned phone in the event an employee is fired, the same may present potential legal issues if it is the employee’s personal phone and contains their personal information.

You can’t fire me, I quit!

By allowing employees to bring their own device and then use that device for work, employers are now placing potentially incredibly sensitive information in the hands of its employees. As any employer knows, employees are sometimes prone to change their mind and seek employment elsewhere or need to be let go for whatever reason. This presents an incredible risk depending on the employer’s line of business and the employee’s role. Particularly where sensitive email information is frequently shared or contacts are vital (i.e. sales centric businesses) the potential for data misappropriation is high.

There are now a number of programs for cellphones, tablets and personal computers (laptops or desktops) that create what is essentially a biodome of employer information residing within a secure environment on the user’s computer, while restricting the user from copying information or other potential acts of abuse. This could be the saving grace for companies that are particularly sensitive to data loss.

Increasing the e-discovery pie

E-discovery is growing at an exponential rate and as employers rely more and more on computers and computer systems, it will continue to do so. In a lawsuit, parties are generally entitled to discovery any information that is relevant to the suit. Having employees use personal devices will require employers to collect, preserve and review the information on the devices for relevant information in the event of a lawsuit. This further broadens the scope of discoverable information and increases the costs of these efforts for the employer.

The effects of BYOD are still being realized

These are just two of the major concerns of BYOD policies, but there are more. Privacy rights of an employee can obviously come into play with the use of personal devices at work as well as acceptable use and non-use of the devices both at work and away. Even with the potential downsides, BYOD policies can be an excellent tool for business looking to shed the cost and burden of maintaining personal devices for their employees. It is important to consult with an attorney in drafting an effective BYOD policy to ensure that the individual needs of your business are taken into consideration along with the ever-changing laws. First look introspectively to determine how much you value your information and ask what the cost of releasing some of the control of that information is worth to you. Then, if you think the potential risks are outweighed by the benefits, say goodbye to all those BlackBerrys you’ll never buy again!

Bringing Crowdfunding to Corporate America – Securities and Exchange Commission Weighs Regulations.

By Joshua Edwards

Over the last few years a number of crowdfunding websites have popped up providing individuals and small businesses, in other countries, the opportunity to raise money for new projects or ventures in exchange for equity interests in the venture. But what exactly is crowdfunding? The idea is to use the internet and social media to take advantage of easy access to potential investors or donors, allowing an individual or startup to raise capital through small amounts of investments or donations from a large number of individuals.

Because of existing restrictions in U.S. securities laws, however, current crowdfunding campaigns in the U.S. primarily involve contributions by interested individuals, often in exchange for a perk or reward, but do not result in the donor or “backer” receiving any kind of ownership interest in the business.

Equity or investment crowdfunding, which would allow start-ups and entrepreneurs to sell shares or membership interests in their companies to small unaccredited investors as a means of raising capital, is stuck in a kind of regulatory holding pattern. On April 5, 2012, President Obama signed the JOBS Act into law creating an exemption to the securities registration requirements that permits the sale of securities via crowdfunding, pending the issuance of regulations by the Securities and Exchange Commission. While the JOBS Act technically required the SEC to issue the regulations no later than January 1, 2013, the SEC has yet to propose rules and it appears doubtful that any will be issued and effective before the end of the year.

While we await the SEC’s issuance of regulations implementing the crowdfunding exemption, the JOBS Act does lay out some of the basics:

  • The aggregate amount of securities sold by the issuer may not exceed $1 million in any 12-month period.
  • Additionally, the aggregate amount sold to any single investor by an issuer during the 12-month period preceding the date of the investment may not exceed:
    • The greater of $2,000 or 5% of the annual income or net worth of such investor, if either the annual income or the net worth of the investor is less than $100,000; or
    • 10% of annual income or net worth of such investor, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.
  • Transactions must be made through a “funding portal” or a registered broker. Several additional requirements will apply to companies raising money under the crowdfunding exemption, which requirements will be more fully developed in the SEC rules. Funding portals will also be subject to additional regulations to be implemented by the SEC.
  • Securities sold under the crowdfunding exemption may not be sold again or transferred by the investor for one year unless the securities are being resold back to the issuer, sold to an accredited investor, sold as part of an offering registered with the SEC, transferred to a family member of the investor, or transfered in connection with the death or divorce of the investor.

Unlike the donation or reward-based crowdfunding currently being seen on sites like Kickstarter and Indiegogo, equity crowdfunding will give startups the ability to trade an equity interest in the company in exchange for an investment from an individual investor, and will allow the individual investor to obtain a percentage of ownership in the startup. Such equity crowdfunding has the potential to expand the pool of investors and capital available to startups beyond the traditional avenues currently in place, thus fostering increased entrepreneurial activity. However, we’ll have to continue to wait on the SEC to see if regulatory restrictions will allow equity crowdfunding to get off the ground in the U.S.

 

Roth: Military Utilizes Renewable Energy

The Department of Defense has for a long time recognized the power of renewable energy.

In fact, our military has invested heavily in renewable energy, not just because it makes economic sense, but because it makes national security sense.

Energy security indeed is national security. As a result, the military has led the charge in the United States and the world by finding ways to reduce its fuel consumption and invest heavily in technologies that increase fuel economies for our ships, planes and tanks.

Renewable technologies have even been deployed on the battlefield. The U.S. Army has provided its troops with solar battery packs that help them provide power at campsites and remote locations at a fraction of the cost of other dirty mobile generation. But perhaps most interestingly, these portable solar panels are lighter than other mobile power sources, giving the military the flexibility and agility that is needed on the battlefield. It is a lot easier to pack up a foldable solar panel than it is to load up a heavy diesel generator.

And this past week, the U.S. Army announced that 17 companies will be eligible to receive orders for wind energy, under an umbrella contract that is valued at $7 billion. The Pentagon announced that companies like Dominion Energy, Acciona and Duke Energy are eligible for the projects. Many of the companies on the list have wind development projects in Oklahoma.

Oklahoma is the home to four bases: Altus Air Force Base, Tinker AFB, Vance AFB and Fort Still. Obviously, these strategic military assets are also large consumers of power and play vibrant roles not only in protecting our country, but also in providing tremendous economic value to our communities and state. Importantly, all of these bases have also been phenomenal stewards and reputable members of the cities and towns where they are located. And now, the U.S. Army is again demonstrating its commitment to clean power.

This major announcement by the U.S. Army is a perfect example of two of Oklahoma’s greatest resources coming together to change the energy game. Indeed, the price environment and economic attributes of wind energy have never been better.

Amiss all of the bitter partisan bickering about how to reduce government spending, it seems our military has once again led the way – by looking to the market and taking advantage of renewable technology. It is compelling that the greatest military in the world has come to recognize the benefits of wind power. Perhaps there is a little something our policymakers can learn from the military. Always bet on America – American-made energy.

Roth: The Export Shale Revolution?

This week, the U.S. Department of Energy approved its first-ever liquefied natural gas export license for the exportation in the Marcellus Shale. In the northeastern part of the United States in and around New York and Pennsylvania, the Marcellus Shale has an overwhelming abundance of oversupply and is in desperate need of a viable market. Now, this American commodity has found a marketplace: the globe.

It was not too long ago that the natural gas market in the United States, and indeed, policymakers, were suggesting that we need LNG import terminals. Interestingly enough, of the 39 import terminals proposed and approved in 2006, only 11 have actually been completed, according to the Federal Energy Regulatory Commission. Naturally, the reason is no stranger to us in Oklahoma: the shale gas revolution.

The shale gas revolution fundamentally changed the outlook for the U.S. gas market from one of virtual extinction to one of abundant supply. The abundance of supply also means lower prices, which has helped make changes in the transportation market with the emergence of compressed natural gas as a fuel. Additionally, both the Energy Information Administration and the Environmental Protection Agency attributed the increased use of natural gas as a key contributor to the reduction of harmful emissions such as nitrogen oxides, or NOx; sulphur dioxide, or SO2; and carbon dioxide, or CO2.

But, the role of natural gas has been primarily a domestic commodity. Could that be changing? Because of the abundance of natural gas, many economists are suggesting that major export projects, like the LNG terminal approved this week, will be an important element in creating stable demand in the marketplace. Such projects will also help provide a sustained, long-term U.S. natural gas market.

Plus, there might be significant geopolitical advantages to greater exports of this American-made commodity. For example, for decades, many countries in Europe have been gripped by their over-reliance on Russia as their sole supplier of gas. After all, Russia is the world’s largest producer of conventional gas. But, as former Secretary of State Hillary Clinton remarked on this very topic, “there’s a lot more natural gas in the global market looking for a home.” So, from a national and foreign policy perspective, the exporting of natural gas comes with some advantages.

Here in Oklahoma, we remain a leader in this industry. In fact, in many ways, Oklahoma is a global player – and not just because we are producers. We are technological innovators who have helped design pipelines, production enhancements, and critical tools that have helped make this Oklahoman and American commodity a global one.

Roth: One Man’s Trash is Another Man’s Treasure

Oklahoma innovators are at it again. Evolution Renewable Energy Inc. is developing technologies that turn trash into electricity, bringing new life to the phrase, “take out the trash!”

Evolution Chief Financial Officer Tony Wall recently told NewsOK.com that the process his company is developing is one of the most significant developments of the 21st century.

The way the process works is to greatly speed up the decomposition time of trash. In fact, it’s estimated that this technology will be able to decompose trash in a matter of seconds. That’s great news for our landfills, which are built to contain waste and trash for upward of a thousand years. The technology is sustained thermo kinetic accelerated radiation technology, or STAR TEK.

Scientists of many stripes have been working on creative innovations for our trash for some time. Conventional forms of producing electricity are all about capturing the energy from a fuel source. Whether that is natural gas or wind, the aim is to capture the energy that is created from that process. The same process applies here, only the fuel source is trash and the decomposition process does create energy. The technology being developed by Evolution Renewable Energy is designed to both enhance and capture that energy.

This is good news, because large expanses of land are being consumed by mounting heaps of garbage and this waste simply lies there creating tons of pollution and wasting land resources. Additionally, toxic wastes are perpetually being released into the air, lakes, rivers and seas and causing irreversible damage to ecosystems.

Local governments often struggle with how to manage waste, especially in a strict environmental regulatory environment. This Oklahoma innovation would not only allow us to clean up our landfills, it would also literally allow local governments in Oklahoma and across the country to reduce costs they spend on managing waste while simultaneously developing a commodity that can help repower itself.

The technology being developed by Evolution Renewable Energy will be able to convert about 98 percent of the waste that it uses as a fuel source into a power source. Imagine, if 98 percent of the waste you generate in your household were suddenly turned into energy. This could be a game changer and an Oklahoma innovation worth investing in. I’m thankful that innovators are seeking ways to turn trash into treasure!

Roth: LNG New Alternative for Offshore Vessels

As discussed in last week’s column, tighter air emission regulations and increasing petroleum costs have prompted ship owners and operators to search for an alternative fuel.

The combination of environmental compliance requirements and decreasing price are making LNG (liquefied natural gas) an attractive option.

International shipping is a major source of sulfur, nitrogen oxide and carbon dioxide emissions. Replacing conventional shipping fuel with liquefied natural gas would greatly reduce the environmental impact of shipping.

The international shipping industry now accounts for about 4 percent of annual global emissions of sulfur, 7 percent of emissions of nitrogen oxide and less than 3 percent of carbon emissions.

Over 90 percent of world trade is carried by the global shipping industry and that means emissions from shipping total over a billion tons a year.

The seaboards off both the East and West coasts of the United States and Canada, as well as most of northern Europe, are Emission Control Areas as adopted in amendments to Annex VI of the International Convention for the Prevention of Pollution from Ships.

Operators are recognizing LNG as a fuel source for ferries and offshore vessels because they can return to the same terminal for fuel. Shell’s bunkering (refueling) strategy for LNG-powered ships recognizes the new expanding market.

Today, the sulfur content in marine fuel must be at most 1 percent. By 2015, marine fuels should contain at most 0.1-percent sulfur.

Preventing pollution was one of the original aims of the International Maritime Organization when it was set up in 1948. The IMO estimates that ships cause about 2.7 percent of total man-made emissions. Under a convention brought into force this year, ships will have to introduce fuel-economy measures with the aim of reducing their emissions by 20 percent by 2020 and 50 percent by 2050.

The IMO is also pressing on with planned new rules on cleaning up ships’ ballast water. These may come into effect this year, once enough national governments have signed up for them.

The major drawback to the use of LNG as a marine fuel remains the lack of infrastructure. There are relatively few places in the world where a marine vessel powered by LNG can conveniently refuel (bunker).

It will take time and require significant investments to increase the percentage of ports that can provide vessels with LNG. Today, an increasing number of seagoing vessels are being built to operate on LNG, either exclusively or as part of a dual-fuel arrangement. But this good idea and emerging trend are worthy of the investments and efforts.

As was discussed last week, Harvey Gulf International Marine recently announced plans to build and operate the first LNG marine fueling facility in the United States at its vessel facility in Port Fourchon, La. The announcement was the latest in a whirlwind of similar plans that have accelerated LNG-fueled ships from a novelty to a growing market. This good idea has set sail and is picking up good wind at its back.

The Supreme Court’s Decision on DOMA. An Uncertain Future for Oklahoma Employers.

Catherine L. Campbell is a director at Phillips Murrah and a member of the Firm’s Labor & Employment practice group. She represents corporations of all sizes in employment-related matters as well as law enforcement agencies in civil rights actions.


The United States Supreme Court’s recent ruling in United States v. Windsor declared the Defense of Marriage Act (“DOMA”) unconstitutional.  Windsor mandates federal recognition of same-sex marriages from the twelve states and the District of Columbia that sanction them.  While Windsor directly affects thousands of state-sanctioned same-sex spouses in other states, the ruling likely has little immediate impact in Oklahoma.  However, employers should be aware of Windsor’s future implications.

The Family Medical Leave Act (FMLA) allows an employee to take up to 12 weeks of leave to, among other things, care for a seriously ill spouse.  FMLA regulations state that “spouse” means “a husband or wife” as the state of residence defines it.  29 C.F.R. § 825.122(b).  However, the Department of Labor (DOL) has taken a more restrictive view interpreting the FMLA to include the DOMA definition of “spouse” (a person of the opposite sex).

Under the DOL view, even where same-sex marriage was valid, a same-sex spouse was not a spouse for FMLA purposes.  Windsor changes that.  Now an employer must look to the law of the state of residence to determine whether a particular person is a spouse.   But, because the definition of spouse depends on the state of residence at the time the determination is made, when a same-sex couple moves from a state that recognizes their marriage to one that does not, the couple loses the protections of the FMLA.

Undecided by Windsor is whether a state that has not legalized same-sex marriage must recognize a marriage from a state that has.  Oklahoma statutorily forbids recognition of same-sex marriages performed in other states.  Okla. Stat. tit. 43, § 3.1.  However, the Tenth Circuit Court of Appeals has held that an Oklahoma statute preventing recognition of valid adoptions by same-sex couples in other states is unconstitutional under the Full Faith and Credit Clause.  Finstuen v. Crutcher, 496 F.3d 1139 (10th Cir. 2007).  Applying this analysis, § 3.1 would likely prove unconstitutional.

If Oklahoma eventually must recognize the validity of same-sex marriages performed elsewhere, a same-sex couple would be entitled to the protections of various laws including the FMLA.

 

 

 

NewsOK Q&A: Economic downturn can be boon for people planning their estates

From NewsOK / by Don Mecoy
Published: April 15, 2009
Click to see full story – Economic downturn can be boon for people planning their estates

Click to see Elizabeth K. Brown’s attorney profile

Elizabeth K. Brown’s practice is focused at a strategic level on serving her clients as outside counsel where she assists privately held companies in managing the many legal issues that arise in running a business.

Q: Can you explain how the current economic turmoil could be a good thing for some people who are planning their estates?

A: Depressed asset values coupled with historically low interest rates have created a window of opportunity to add significant value to family wealth transfer planning. From stock portfolios to real estate to family business interests, no asset has emerged unscathed. While no one jumps for joy over declining assets, there is a silver lining. I’m seeing a nice planning opportunity, especially for clients with family oil and gas businesses, for implementing certain estate planning techniques now, while the value of those assets is so depressed. The impact of rock-bottom IRS interest rates and lower asset values is that clients have the ability to transfer more of their assets to family members and minimize the taxes that can eat away at an estate’s value.

Q: Are there matters on the horizon that could make it important to act quickly?

A: Unfortunately, yes. In January, a bill was introduced to Congress that would eliminate the ability to take certain discounts from the value of family business interests that are transferred to children and other family members. Historically, these valuation discounts have been very important factors in planning to minimize the estate and gift tax consequences of these transfers. If the estate tax law changes as proposed, these important discounting techniques could be eliminated. While we can’t be certain that Congress ultimately will eliminate these discounts, Phillips Murrah is alerting clients to the possibility that this narrow window may soon close, and we are encouraging them to make these transfers immediately, before further action is taken by Congress.

Q: Do you have any other tips that might be valuable for someone who is considering how to distribute an estate?

A: Take the time to plan now for the event of your death or disability; that plan could be the greatest gift you ever make. And two very timely tips, involving specific estate planning techniques, have become my mantra these days: Consider transfers to Grantor Retained Income or Annuity Trusts (GRATs). Consider sales to Intentionally Defective Grantor Trusts (IDGTs). Both techniques require use of the historically low IRS interest rates, maximizing the value that can pass to family members, tax free.

Executive Q&A with Tom Wolfe: Balancing justice, business savvy

Tom Wolfe is a trial attorney and commercial litigator whose practice is focused on complex business cases including product liability, oil and gas, mass tort and class action defense. Tom is also the president and managing partner at Phillips Murrah.

By Don Mecoy • Published: July 27, 2008

Oklahoma City has several large law firms, and they compete for clients and prestige.

Tom Wolfe, president and general partner of the city’s third-largest firm, Phillips Murrah, has been at the helm of the business since 2002.

Read more

Limited liability companies and family business

Originally published in The Journal Record on Aug. 26, 1999.
Click to see Elizabeth K. Brown’s attorney profile


 

Elizabeth K. Brown’s practice is focused at a strategic level on serving her clients as outside counsel where she assists privately held companies in managing the many legal issues that arise in running a business.

Elizabeth K. Brown’s practice is focused at a strategic level on serving her clients as outside counsel where she assists privately held companies in managing the many legal issues that arise in running a business.

Have you noticed that many new businesses are being formed as limited liability companies instead of corporations or partnerships?

Have you wondered what the reason is for the change?

Have you wondered whether you should explore the possibility of using a limited liability company in your family business?

In recent years, the use of the family LLC has become increasingly popular in the business world as the entity of choice, surpassing the corporation and the partnership.

The reasons for its popularity include that it provides asset protection to the owners of the LLC, has income tax advantages over the corporate form of business and is a convenient vehicle for effectuating a succession plan including giving assets to family members.

Until 1992, there was no such thing as a limited liability company in Oklahoma. Other states had experimented with the concept of creating a business entity that combined the best features of a corporation and a partnership.

In 1992, the Oklahoma Legislature decided to create this new type of business entity and enacted a statute governing its existence and characteristics. Since that time, thousands of new Oklahoma LLC’s have been formed.

The reason for the limited liability company boom is the advantages that the LLC provides over both corporations and partnerships.

Like a corporation, the LLC has the corporate characteristic of providing a liability shield to the owners of the business. Generally, as with a corporation, the creditors of a limited liability company cannot reach the assets of its owners.

For example, if the LLC operates a retail business and a customer slips and falls in the store, the customer may be able to recover from the assets of the LLC, but should not be able to recover from the assets of the LLC owners.

Like a partnership, the LLC provides asset protection to the business itself from the claims of a creditor of the owner of the LLC. While a creditor of a shareholder of a corporation can obtain a judgment against the owner and levy on the stock of the corporation, a creditor of an owner of an LLC can only obtain a charging order against the owner’s interest in the LLC. A charging order only entitles the creditor to receive the owner’s share of distributions from the LLC when made and does not entitle the creditor to become an owner of the LLC or to any voting rights in the LLC.

This asset protection aspect can be quite advantageous to the business owner when the business owner has creditor problems of his own.

For example, if the LLC owner has an outstanding judgment against him personally for $25,000, his judgment creditor would not be able to take his ownership interest in the LLC to satisfy the judgment. Instead, all the creditor would be entitled to receive is the distributions that are made from the LLC to the owner.

Since oftentimes no distributions are made to owners of closely held businesses and instead the profits are reinvested in the business, a creditor of an LLC owner may not be able to collect on any part of his judgment against the LLC interest.

Another advantage of the LLC is that it generally is a flow-through entity for income tax purposes since it is taxed as a partnership.

Many family-owned businesses historically have been operated through a C corporation, which is a separate taxable entity. The problem with the C corporation is that dividend distributions are not deductible by the corporation, so there is the possibility the corporate earnings could be taxed twice before they reach the owner’s hands, once at the corporate level and again at the shareholder level when dividends are paid. As a flow-through entity for income tax purposes, the LLC reports its income on a separate income tax return but pays no income tax. Instead, each owner of the LLC reports his or her prorata share of the income from the LLC on their separate individual income tax returns. The result of partnership taxation is that the income from the LLC is only taxed once.

An important concern for a family business owner is planning for the transition in ownership and management of the family business to the younger generation and the effect of estate taxes on the assets of the business owner. LLCs can help out here, too.

The LLC structure can facilitate the shift in control from the business owner to the child or children who have been groomed to take over the family business when the time arises.

Many family businesses face a cash crisis on the death of the survivor of the business owner and spouse as a result of the estate tax imposed.

With proper planning, the combined estate of a husband and wife are exempt from estate tax up to a value of $1.3 million in 1999. For family businesses that have a value in excess of $1.3 million, business owners need to consider other estate planning techniques to reduce the value of their taxable estates.

One such technique is making annual gifts to children of a portion of their ownership interest in the family business. By making gifts of interests in the family limited liability company, the business owner can substantially reduce the size of his estate and still retain control over the family business.

A big concern of many business owners is that they may lose control over their family business if they give away ownership interests in it. Using a family limited liability company for making gifts can alleviate many of those concerns.

One method for retaining control by the family business owner is by having him or her hold the position of manager of the limited liability company. As the manager, the owner of the limited liability company has authority to control the operations of the business. By a contract called the operating agreement, the business owner can be assured that he will remain as manager for as long as he desires.

Another method for the business owner to maintain control over the family business is by giving away ownership interests that do not have voting rights. By retaining his or her voting rights, the business owner can maintain control over the business but still reduce the value of the estate by gifting the non-voting interests.

With LLCs, more value can be transferred to family members at a reduced gift tax cost by making gifts of an ownership interest in a limited liability company as opposed to gifts of individual assets.

This is because a minority interest in a closely held business is typically not worth as much as the prorata part of the value of the underlying assets of the business. For example, if the business itself is worth $100,000 and the business owner gives a child a 10 percent interest in the business, the gift is worth something less than $10,000.

In determining the value of the gift, the test is what a willing buyer would pay a willing seller for the minority interest. It is well recognized that a buyer will not purchase the minority interest in the limited liability company for an amount equal to the prorata part of the underlying assets of the business — $10,000 in this example. The reason a buyer would pay less than $10,000 for the interest in the limited liability company is that there is no ready market for the minority interest in the family business — discount for lack of marketability — and the minority interest owner cannot control the business — discount for minority interest.

A buyer may substantially discount the amount he would pay for the limited liability company interest because of these factors. Assuming a discount of 30 percent, the buyer would be willing to pay only $7,000 for a 10 percent interest in a limited liability company having assets worth $100,000.

These valuation techniques can be utilized with limited liability companies to provide a bigger benefit to the business owner from certain gift tax exclusions available under the tax law.

One such exclusion, the annual exclusion, allows the business owner to annually give up to $10,000 — $20,000 for the business owner and his spouse — to any one or more individuals without any gift tax consequences. If the business owner wan
ts to reduce the value of his estate by making annual exclusion gifts to his children, he could for example give a child a $10,000 interest in the family limited liability company with no gift tax consequences. A $10,000 gift in the family limited liability company may equal a 13 percent interest in the LLC worth $100,000.

By giving away an interest in the family limited liability company, the business owner can transfer assets which in his hands would be worth about $13,000 for a gift tax cost of only $10,000. Over time, the business owner can transfer a substantial amount of the family business to family members at a reduced gift tax cost and still remain in control of the business.

As you can see, utilizing a family limited liability company in the succession and asset protection plan for the family business can result in tremendous advantages to the business owner and family. The key to designing and implementing a plan that fits your family business is working with your lawyer, accountant and financial planner. Your team of advisers can evaluate your personal situation, recommend a plan that is right for you and your family and then see that the legal documents necessary to effectuate the plan are put in place. Limited liability companies may not be right for every family business, but with the advantages they hold, don’t you think it is worth exploring the possibilities?