SJR 259

Joint Subcommittee Studying Electric Utility Restructuring

March 25, 1997, Richmond

The joint subcommittee began its second year of studying electric utility restructuring. The meeting featured a staff summary of the joint subcommittee's 1996 activities and an update on restructuring activities currently underway at the Virginia State Corporation Commission. Additionally, presentations on state and local taxation of public utilities served to launch the joint subcommittee's special task force looking at the potential impact of restructuring on tax revenues. The joint subcommittee also received testimony from heating, ventilation and air conditioning (HVAC) companies, who renewed their request for joint subcommittee assistance in examining the potential competitive impact of public utility entry into the HVAC market.

1996 Activities

The General Assembly's study of electric utility restructuring began in 1996 under the auspices of SJR 118. The study was undertaken to determine whether deregulating the retail electricity market is appropriate and in the public interest. Retail deregulation in its simplest form encompasses customer choice of electric service providers at the retail level. Large industrial electricity customers and others favoring a deregulated market told the joint subcommittee that conventional electricity delivery through franchised service territories is expensive and inefficient. The subcommittee focused its 1996 meetings on gathering information about this issue and establishing a forum for restructuring stakeholders such as investor-owned utilities, municipal power suppliers, independent power producers, and electricity customers.

Retail choice advocates say that all electricity customers—business, residential and industrial—are best served by an open market that includes the traditional players (such as investor-owned utilities and electric cooperatives) plus a cadre of new entrants that include independent power producers and power marketers. However, Virginia's electric cooperatives and at least one investor-owned utility emphasized that Virginia's electric service is presently reliable and moderately priced. What is not broken, they said, does not require repair.

Nevertheless, at last count at least 40 states have retail competition under legislative consideration, and a handful of states, including New Hampshire, Pennsylvania and California, have enacted retail competition legislation establishing pilot and other experimental programs permitting retail customer choice. In New Hampshire, for example, full retail choice in all customer classes is as close as 1998, while in Pennsylvania, retail choice will be fully phased in by the year 2001. The key question before the joint subcommittee is whether Virginia should join these states in laying the statutory groundwork for business, residential and industrial customer choice in a deregulated retail electricity market.

Restructuring Activity at the SCC

The Virginia State Corporation Commission (SCC) has been examining the potential for electric industry restructuring in Virginia for the past two years. In November 1996, the SCC released a series of orders directing state-regulated electric utilities to furnish detailed information designed to help the SCC and its public utilities staff analyze the potential for retail competition in Virginia. In its July 1996 report to the SCC's commissioners, the SCC staff recommended a go-slow approach to restructuring, suggesting that (i) the SCC monitor retail pilot programs in other states; (ii) regulated electric utilities furnish detailed pricing information, segmenting the costs of generation, transmission and distribution; and (iii) a thorough industry-wide cost of service study be undertaken. The SCC orders implemented these staff recommendations.

The SCC's general counsel told the joint subcommittee that the SCC staff has responded to the SCC orders and to the joint subcommittee's request for a restructuring model (to be presented to the SCC by November 7) by forming a series of work groups to assist the SCC in examining restructuring models, cost/benefits, stranded costs, reliability and environmental concerns. SCC staff has been directed to file with the commission in 1997 a series of restructuring-related reports, including a report on retail competition experiments in other states that is to be filed by September 1. These groups will continue to meet throughout the year, and the SCC has agreed to keep the joint subcommittee apprised of their activities.

Impact on State and Local Tax Revenues

An emerging issue in the restructuring debate is the potential impact of retail competition on state and local tax revenues. Reports from other states—particularly those with restructuring legislation on the books—suggest that state and local officials are recognizing the potential impact of restructuring on state tax revenues. States and localities typically tax electric utilities' revenue streams and their property and equipment. A substantially deregulated retail market could result in significant tax revenue reductions if (i) the "gross receipts" method of taxing electric utilities were eliminated, and (ii) electric utilities' installations and operating centers were idled because of competition and their property assessments (for local tax purposes) reduced accordingly.

The SCC's director of public service taxation told the joint subcommittee that Virginia's electric utilities are assessed a gross receipts tax of approximately two percent, levied and collected by the SCC. This statutory tax produced approximately $93 million for the Commonwealth's general fund in the 1996 tax year (based on gross receipts of about $5 billion). Electric utilities are also taxed up to .2 percent on their gross revenues to fund SCC regulatory oversight of their activities. During the 1996 tax year, Virginia's 22 SCC-regulated electric companies paid approximately $5.3 million into the regulatory fund.

The SCC also assesses electric utilities' property for local tax purposes and furnishes these assessments to localities, which then apply the local rates. With the exception of automobiles and trucks, electric utilities' property is taxed at the real estate rate, a rate lower than other rates, including the machinery and tools or personal property tax rates. For the 1996 tax year, the total assessed value of all electric utility property within Virginia was over $14 billion. A Virginia Municipal League (VML) representative estimated that in fiscal year 1995, electric utilities paid approximately $205 million in property taxes to localities across the Commonwealth. VML also estimates that electric utilities may have paid as much as $27 million in local license taxes in 1996 and an additional $1.3 million in personal property taxes on their vehicles.

Public utility property tax payments are significant sources of local tax revenues to many Virginia localities. Spread over Virginia's population of 6.5 million, public utilities' $205 million property tax payments amount to payments of $34 per person in the Commonwealth. However, in Bath County, where public utilities pay nearly $7.5 million annually in property taxes (accounting for over 80 percent of the county's annual tax revenue), the per capita figure is $1,576 per county resident; Surry County, with public utility tax revenues of $8.1 million, has a similar per capita figure of $1,259. Thus, localities with significant electric utility installations have an important stake in the restructuring debate. If restructuring idles electrical power generation facilities, for example, their likely reassessment at substantially lower values could have a substantial negative impact on local tax revenues.

Task Force on State and Local Taxation

The joint subcommittee approved a tentative issue agenda for a 12-member task force examining restructuring's potential impact on state and local tax revenues. The task force held its organizational meeting following the task force's meeting, discussing many of the issues raised before the joint subcommittee. Task force members include representatives from the Department of Taxation, the SCC, the Office of the Attorney General, the VML, the Virginia Chamber of Commerce, the Virginia Association of Counties, investor-owned utilities, electric cooperatives, and independent power producers.

Task force members will examine Virginia's current electric utility tax structure and similar tax structures in other states (both with and without retail competition in place) to help the joint subcommittee assess the tax component of a retail market. As part of this review, the task force will look at (i) the federal tax-exempt status of electric cooperatives, (ii) the tax-exempt status of municipal power suppliers, (iv) the potential effects of unbundling generation from transmission and distribution on the tax assessments of electric utility property, (iv) taxation of interstate power sales in a restructured market, and (vi) the impact of electric utility tax structure modifications on citizens of the Commonwealth.

Public Utility Entry into the HVAC Market

Representatives of heating, ventilation and air conditioning (HVAC) companies appeared before the joint subcommittee, renewing their concerns about the anticipated entry of Virginia Power and Washington Gaslight Company into the heating and cooling equipment service contract and warranty repair market. The Air Conditioning Contractors of America (ACCA) and other HVAC industry representatives believe these utilities' market power, coupled with direct access to a sizable customer base (generated by its regulated activities), poses an anticompetitive threat to HVAC companies. At the request of the joint subcommittee, the parties in interest agreed to meet during the spring and summer to determine whether some compromise could be reached on this issue and to report their progress at the joint subcommittee's August 12 meeting.

1997 Work Plan

The joint subcommittee's 1997 work will be focused on (i) examining legislative models emerging from other states and from federal restructuring legislation, (ii) analyzing restructuring's potential impact on state and local tax revenues, and (iii) preparing to receive and review the SCC's draft of a restructuring working model, which may include experiments and pilot programs.

The joint subcommittee established a tentative schedule for three future meetings. A work session to examine restructuring models and legislation from other states and the federal government is scheduled for June. The local and state taxation task force is scheduled to present its findings to the joint subcommittee in August. A November meeting will be convened to receive the SCC's restructuring model.

Finally, the joint subcommittee learned that a Congressional subcommittee, slated to convene field hearings on electric utility restructuring in several U.S. cities during the month of April, had scheduled one of these hearings in Richmond on April 18. Joint subcommittee members requested Senator Reasor to appear at the Richmond field hearing and to advise the Congressional subcommittee's members of Virginia's legislative study on this issue.