California Decision May Lead to Future Tax Break for Energy Firms

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San Jose Mercury News

Even as they announce record profits, energy companies from Texas, North Carolina and other states could see a windfall of another kind for years to come: a property tax break potentially worth millions, courtesy of California’s elected tax collectors.

In a decision that went largely unnoticed by consumer groups, the media and many political leaders, the state Board of Equalization voted 18 months ago to change the way property taxes on power plants are computed.

After heavy lobbying from power companies including Duke Energy, AES and Reliant, the board voted 5-0 in September 1999 to overrule its own staff’s recommendation and hand over authority to assess the value of electricity generating plants to California’s counties.

Under California’s landmark Proposition 13 — passed by voters in 1978 to hold down property taxes — counties cannot raise assessments by more than 2 percent a year over the purchase price.

Had the board kept control, Proposition 13 would not have applied: the plants could have been assessed at their full market value every year.

The result, critics say, is that power companies have avoided millions of dollars in taxes even though their plants have shot up in value over the past two years as wholesale electricity prices have risen tenfold.

“This was a huge, huge mistake,” said Lenny Goldberg, director of the California Tax Reform Association. Goldberg argues that the state constitution gives the board explicit authority over taxes on a number of industries, including power plants.

“The generators who are gouging us for electricity also are not paying their fair share of local property taxes,” he said. “It turns out that owning a power plant is a license to print money, but the market values under Proposition 13 can’t reflect that.”

Goldberg’s labor-backed group estimates the property tax losses to schools, counties and cities as “easily in the tens of millions.”

No public agency has calculated the amount, however.

Goldberg and other consumer groups say they will ask the board to reverse itself on the decision, known formally as Property Tax Rule 905. Failing that, they will go to the state Legislature, he said.

The five members of the Board of Equalization, an obscure but powerful agency that helps set state tax rules, are elected to four-year terms. They say they didn’t know in 1999 that electricity prices would shoot up.

“Nobody had a crystal ball,” said Richard Chivaro, chief counsel for Kathleen Connell, who as state controller sits on the board.

“She could only vote with the facts presented to her,” he said. “The board members went with the best alternative. I suppose if it came back to the board she would take another look at it.”

The power companies, which dispute Goldberg’s reading of the constitution, say they only want fairness.

“You can’t treat us any different than Cisco or the guy who owns the corner drug store,” said Tom Williams, a spokesman for Duke Energy, based in North Carolina.

Williams said he cannot speculate how much the three plants his company bought for $ 501 million in 1997 — Moss Landing, Morro Bay and Oakland — are worth.

In the past, however, to combat talk about the state seizing the plants, Williams and other power company spokesmen have said the plants have dramatically appreciated in value.

“The market value for our plants is very expensive — very expensive,” Williams told the Associated Press on March 27.

California’s 1996 experiment with electricity deregulation threw a curve ball to the state’s tax officials.

The rules required Pacific Gas & Electric Co. and Southern California Edison to sell some of their power plants to encourage competition. Sensing huge profits to be made, private companies bought 22 power plants in 1997 and 1998, paying $ 3.2 billion.

Historically, the state Board of Equalization has overseen property taxes on regulated utilities such as railroads, telephone companies and utilities. After deregulation, the board’s staff recommended in 1998 the board keep that authority for power plants.

Along with power companies, cities with power plants also lobbied for the rule change. Under local assessments, these cities receive the bulk of property tax revenues.

“Everybody wanted this at the time,” said board member Johan Klehs, who was chairman in 1999.

There was no substantial opposition before the Sept. 1, 1999, vote. In fact, there were debates between the board’s staff members and outside attorneys about whether the state constitution allows the board to assess power plants that are deregulated. The board’s handbook continues to assert it has that authority.

The California Assessors Association supported giving the assessment of power plants to counties. According to Bruce Dear, head of the association at the time, the group reasoned that under deregulation, the plants were no longer state entities and should be taxed locally.

“Just like we do the ABC manufacturing company down the street,” Dear said.

For now, Dear and others argue, the big power companies aren’t getting a better deal by being taxed locally. Under the state, the power plants depreciated year after year. Local valuations are likely to be higher, given recent purchase prices.

In Los Angeles County, AES Corp. of Virginia is appealing assessments on two power plants, arguing the plants are worth $ 485 million less than what the county says.

San Luis Obispo County, too, is “in discussions” with Duke Energy over the value of the Morro Plant, according to Dick Frank, the county assessor. Duke says it paid $ 110 million for the plant, while the county estimates it’s worth $ 170 million.

“I am deeply concerned about this,” Frank said, who said the value of the plant is 30 to 40 percent higher than what he’s able to assess it at under Proposition 13.

Richard Wheatley, spokesman for Texas-based Reliant Resources, questions whether its five plants have gained value. “Running power plants is a situation like running an old car,” he said, adding that most of the plants were “pretty old and rickety.”

For consumer groups, however, the issue is clear cut.

“It’s a tax loophole for energy companies,” said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights, based in Santa Monica. “It’s obscene to think that taxpayers are giving them special tax breaks.”

Consumer Watchdog
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