The brief summary below highlights responses by stakeholders and other interested parties to a series of questions covering the topics addressed by this task force:
The purpose of this summary is to identify areas of agreement and disagreement among the respondents on key issues before this task force. The respondents include:
The parties' written responses have been posted to the SJR-91 Joint Subcommittee's web site, and are available under the link for this task force. The matrix summarizing their positions is posted to the same location.
Brief Summary of the Current Taxation Scheme for Public Utilities
Under current law, the investor-owned electric utilities and the electric cooperatives and electric energy customers pay a variety of taxes to the Commonwealth and localities. Taxes paid directly by the utilities are "recaptured" from customers through the utility's regulated rates. Revenue received by the Commonwealth directly from utilities is collected on a gross receipts basis. In 1996, the State Corporation Commission received approximately 90.2 million dollars in gross receipts taxes (§ 58.1-2626). Utilities currently benefit from the Virginia Coal Employment and Production Incentive Tax Credit (§ 58.1-2626.1) which provides a credit against the state gross receipts tax for the purchase of Virginia coal, a credit of approximately 18.1 million dollars in 1996. Electric utilities also paid approximately 5.4 million dollars in 1996 as a result of the special regulatory revenue tax (§ 58.1-2660). This tax is levied for the specific purpose of raising funds to be expended by the SCC in making independent appraisals and valuations of the property of the utilities.
Localities also receive a large amount of revenue from electric utilities. These sources include local gross receipts taxes, consumer utility taxes, and revenues from property taxes. Local gross receipts (§ 58.1-3731) are imposed on the utility's gross receipts and can vary from locality to locality, although most localities impose this tax at a rate of 0.5% of the gross receipts of the utility derived from within that locality. The consumer utility tax (§ 58.1-3814) is imposed on the customer's monthly gross charge and the amount may vary from locality to locality. Many counties and cities have been granted an exemption to the statutory limits currently in the Code of Virginia. The current law distinguishes between residential and other customers in establishing the rate limits.
Property taxes paid by electric utilities also represent a significant source of revenue for localities. Under current law, the State Corporation Commission assesses the property of public utilities. The assessment includes the value of both the real estate and equipment located at the facility. The certified assessment is forwarded to the locality in which the facility is located, and the real estate tax rate is applied to the total assessed value of the facility. Independent power producers, on the other hand, have their property and equipment assessed by the locality. The land is taxed at the real estate rate, and the equipment is taxed separately at a "machinery and tools" rate. There are also differences in the depreciation method used by the SCC and the methods utilized by the localities.
The 1997 Taxation Task Force formed pursuant to SJR 259, comprised of representative stakeholders and chaired by Senator John Watkins, formulated draft legislation designed to (i) retain the current level of revenue for the Commonwealth and localities, and (ii) maintain the current apportionment of tax burden among residential, commercial, and industrial users.
Relying extensively on the Department of Taxation for technical assistance, the task force developed such a taxation scheme. Embodied in SB 619 and SB 620 is a taxation scheme that imposes a corporate net income tax on profits derived from generation. A "declining block" consumption tax, which also serves as a collection vehicle for the special regulatory revenue tax and the local gross receipts tax, is used to make up the resulting revenue shortfall. SB 619 and SB 620 were introduced during the 1998 session of the General Assembly and, at the request of Senator Watkins, carried over for further study during the interim.
Should the current taxation methodology for electric utilities remain in effect if there is restructuring resulting in retail competition?
The SCC, Consumer Counsel, Virginia Power, AEP, Allegheny, and the co-ops all agree that retail competition will require changes in the current tax scheme.
MEPAV suggested that restructuring will require some modification
of the state and local tax code, but that a modified gross receipts
tax could be collected at the transmission provider level from
municipal electric systems. MEPAV also suggested
that urged the task force to address the
tax issues associated with out-of-state gas purchases be addressed
as a matter of fairness.
VML and VACO filed a joint response to the staff questionnaire. VML and VACO indicated that the current tax scheme should remain in effect, but that the local consumer utility tax and the local gross receipts tax may need to be based on a kWh consumption basis rather than on a gross receipts basis.
Virtually all respondents agree that a corporate income tax is
an appropriate replacement mechanism for the state gross receipts
tax. There is disagreement concerning whether or not to apply
this income tax to all business income or only to apply the tax
to that income that is derived from generation. The SCC, Consumer
Counsel, AEP, the co-ops and MEPAV
would all impose a corporate income tax on the total business
income. Virginia Power, AEP,
and Allegheny would impose this corporate income tax only
on the income derived from generation.
Electric cooperatives also currently pay the gross receipts tax
and the special regulatory revenue tax. However, unlike the investor-owned
utilities, the co-ops pay no federal income tax because they are
non-profit entities owned by their customers. AEP and
MEPAV would impose a modified gross receipts tax
on the co-ops, an approach also contained in SB 620. The co-ops
stated that continuing to subject an electric coop to a minimum
GRT would cause an unfair tax burden and inequitable tax treatment,
since a coop's power transactions in a competitive environment
may result in significant gross receipts, but may generate little
or no margin ("profit"). Co-ops are now exempt from
federal corporate income tax only if they meet specific requirements
and have no profits. The co-ops are willing to pay a corporate
net income tax on federal taxable income, which translates to
taxable profits. The SCC stated that the co-ops should
pay a corporate income tax if they are liable under current statutes.
Municipal electric utilities and their customers are not
currently subject to any some but not all
of the taxes mentioned in this report. The local consumer utility
tax is collected from municipal utility customers in the same
way that this tax is collected from the customers of investor-owned
utilities and the cooperatives. However Moreover,
municipal purchases of electricity from in-state providers
does includes the embedded cost of the gross
receipts and special regulatory revenue tax. VML stated
that electricity purchases , either inside or outside the state,
should be subject to the state's taxation at a level comparable
to the current state gross receipts tax. VML also believes that
municipal electric systems should continue to have the authority
to set their own rates and to be governed by local governing bodies,
not a state governing or a state regulatory board.
The SCC also noted that wholesale power transactions should be subject to the corporate net income tax, as well as the special regulatory revenue tax.
All stakeholders who responded support the concept of implementing
a consumption tax based on kWh usage to make up the substantial
revenue shortfall that occurs when moving from a gross receipts
tax to a corporate net income tax. The SCC, Virginia Power,
AEP, and Allegheny Power all endorsed the "declining
block" method that serves to maintain the current tax apportionment
among user categories (residential, commercial, and industrial).
Consumer Counsel stated that any consumption tax should
equitably allocate the tax burden among customer classes and prevent
further shifting of the tax burden to smaller customers. MEPAV
noted that a consumption tax will substantially increase the tax
burden on the customers of a municipal electric utility, and that
a state gross receipts tax levied on the wholesale purchase
of the municipal utility would may be more
revenue neutral. MEPAV and VML believe there should not
be direct taxation of municipal electric customers. MEPAV stated
that if a consumption tax is enacted, the measure should allow
the municipal electric utility the option of providing the revenue
through their transmission and/or purchase power contracts.
Virginia Power, AEP, Allegheny Power, the co-ops, and VML/VACO
all agreed that the consumption tax should serve as a replacement
method for the revenue currently received from the state gross
receipts tax, local gross receipts taxes and the special revenue
regulatory tax. The co-ops would allow localities the option
of adjusting the minimum consumption tax rates to ensure no loss
of revenue. The SCC proposes limiting any consumption tax
to the state tax portion only. MEPAV agrees that it
may be appropriate to collect the with including
local gross receipts taxes in the consumption tax, but objects
to including the special revenue regulatory tax, stating that
it is inappropriate for the municipal electric systems to pay
for the regulatory functions of the SCC which do not benefit
them because their purchases are regulated entirely by the FERC.
MEPAV and VML/VACO also suggest that any consumption tax should
be "unbundled" so that the tax rate for each component
included in the consumption tax can be properly identified and
remitted to the locality and the Commonwealth.
Who should bear the responsibility for administering any new tax programs designed to replace the current tax scheme? MEPAV, VML, and Allegheny Power favor oversight by the Department of Taxation. VACO prefers that the SCC oversee this function. The co-ops propose delegating the corporate income tax portion to the Department of Taxation, with the SCC assigned responsibility for any consumption tax and oversight in determining the allocation between generation and nongeneration business segments. The SCC believes that if the taxation scheme is limited only to general fund taxes, the Department of Taxation should administer the program. However, if the "declining block" consumption tax as contained in SB 619 is implemented, the SCC should administer the program. Virginia Power indicated no preference as to whether the SCC or the Department of Taxation administers the program, but did encourage the planning of an effort to educate consumers.
The onset of retail competition could have significant impact on the property tax revenues localities receive from electric utilities.. A decline in the price of electricity could cause a drop in property tax assessments, which would be especially painful to localities who have generation facilities physically located within their jurisdictional boundaries. The SCC would protect and preserve the current revenues received from real property taxes imposed on generation facilities by providing that the General Assembly mandate central assessment of the property by the SCC. AEP feels that any changes in facility value are speculative at this time, and that the SCC should have central assessment authority over all generating facilities within Virginia.
Virginia Power, VML/VACO and MEPAV would give localities the authority to assess and adjust the property tax rates on generation facilities. VACO/VML feels that if localities are charged with assessing generating facilities, the state should provide guidelines and assistance, and that the SCC should continue to assess distribution and transmission lines. The co-ops suggest allowing localities to make up any loss in property tax revenue by increasing the consumption tax. The co-ops also believe that all property owned by electric generators should be subject to uniform central assessment.
Virginia Power and AEP state that fair market principles in accordance with the Virginia Constitution (Article X, § 2) must be the assessment method used when determining the value of property owned by suppliers of electricity. AEP would require the SCC to continually review the depreciation factors to assure accuracy in the assessments. The co-ops proposal would be to assess at "book value", as defined by generally accepted accounting principles, while Allegheny Power would tax all generation property similarly, using a uniform and consistent assessment method. The SCC's proposed assessment method on real property would be original cost less depreciation. The SCC also notes that deregulation may require other appraisal techniques. VML/VACO proposes defining a uniform method of assessing generation facilities in the Code of Virginia, provided that a mechanism for allowing a separate rate classification of this type of property is provided also. VML/VACO also felt that localities must have the flexibility to adjust their tax rates in the event the assessment method adopted results in a reduction in revenue.
While Allegheny Power states that ideally a governmental entity imposing a tax should have the duty of collection, all respondents do agree that the local distribution company should serve as the collector of the consumer utility tax. Virginia Power, AEP, VML/VACO and MEPAV would protect the revenue from this source by basing the tax on a kWh consumption rather than price. Allegheny Power and the co-ops would incorporate the consumer utility tax into any consumption tax. The co-ops and VML/VACO also propose allowing localities to adjust the rates charged to ensure revenue neutrality.