Taxing issues arise from deregulation

Although competition is in its infancy in the electric utility industry, power companies have convinced tax assessors across the country that their generating plants have lost value. If and when competition works the way it is supposed to, residential utility consumers may see lower rates, but communities that have hosted large, expensive utility plants will take it on the chin in their property tax bills.

Much of today’s debate centers on how utilities should be compensated for investments that become “stranded” under a competitive system. However, the cities, counties and states whose tax bases are being clobbered are getting less air time.

Perhaps the most notorious case has been in the Shoreham-Wading River School District, the town of Brookhaven and Suffolk County, N.Y., where Long Island Lighting Company successfully argued that it had been over-charged $1.1 billion in property taxes for the never-operational Shoreham nuclear power plant.

Not much better off are Haddam, Conn., taxpayers. Host to Northeast Utility’s Connecticut Yankee plant, the town has wiped out its surplus by writing the company a $4.6 million check in January. The utility company figures the town will owe it roughly $10 million total in back taxes and has successfully argued that the plant should be reduced from $840 million to $235 million fair-market value.

Good schools and low property taxes were once a drawing point for young families in Ogle County, Ill., where Commonwealth Edison’s Byron nuclear plant is located. But two school districts, two park districts, a college, the local historical museum and the county will soon see sharply lower tax revenues. Because an appellate court found the state was correct in lowering assessments on the plant to one-third their former levels, the utility’s annual tax bill could drop by $27 million.

Several towns in New Hampshire could also suffer tax losses when the state deregulates power in 1998. Newington, for example, has agreed to reduce the value of a Public Service of New Hampshire oil-fired plant by 50 percent. And towns like Monroe, where about 70 percent of tax revenues come from electric properties, also have reason for concern.

In Ohio, Cleveland Electric Illuminating is protesting the tax assessment on the Perry plant in Lake County, contending that the plant is only worth $61 million. The county has the plant on the books for $375.5 million, but the company is paying taxes based on the lower amount.

State taxes will be affected, too. Since local property taxes are the chief support for schools, states have traditionally paid far less than they would have if plants were valued lower. Indeed, high energy-consumption states like New Jersey have balanced their budgets and those of municipalities with utility gross receipts taxes.

As some communities face tax rebates and vastly lowered tax revenues on the reduced value of plants and equipment, local officials in the affected communities should vigorously analyze the cost to taxpayers (and local budgets) of plant devaluation. Officials can then bring the results of this analysis to the attention of regulators and lawmakers considering “stranded investment” in the transition to a competitive system. Communities with significant amounts of utility assets should be prepared for some budget wrestling.

For customers, inaction by local officials could lead to a double whammy: After paying for above-market costs under the regulated system, customers may continue to pay charges to compensate utilities for stranded investments under the competitive system; and, if a utility plant has been devalued, they may also be paying higher taxes to help make up the difference.