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Death by Taxes: Gas Utilities Face a Crippling Disadvantage in Energy Marketing

Fortnightly Magazine - August 1995

Genuine competition - with greater efficiency and bona fide service improvements - is not unwelcome at most utilities. But spurious competition, with inconsistencies among players in the rules of the game, is a cause of frustration for utilities and customers alike.

Regulation in the natural gas industry is evolving rapidly. And on the electric side, the current flurry of activity is likely to draw on recent gas industry experience and move even faster. Whether you call it deregulation or re-regulation, the trend is obvious. However, state and local tax

authorities may be unaccumstomed to the pace of regulatory change, or unfamiliar with the many inconsistencies that exist between existing tax policies and utility re-regulation intitiatives.

Among the many inconsistencies in public utility taxation policy, of chief concern are those taxes that can be labeled loosely as "sales taxes." Utility sales taxes are levied at the state, county, and city levels, and come in many forms: gross receipts taxes, sales taxes, franchise fees, regulatory fees, energy taxes, business and operating taxes, and various tax surcharges. Let's narrow the focus to three particular classes: 1) "external" taxes levied directly on utility revenues, such as a typical sales tax; 2) "internal" taxes embedded within rate design, such as a gross receipts tax; and 3) direct assessments based upon revenues and allocated on the basis of revenues in the rate design. Many utility customers are unaware of most of these taxes and how they are incorporated into the bills they pay. Not so with unregulated energy marketers. They are acutely aware of the many taxes associated with utility bills.

In most areas of the country these tax inconsistencies generate most of the "profits" earned by unregulated energy marketers. These tax "loopholes" underlie a significant part of the competitive disadvantage currently suffered by most natural gas local distribution companies (LDCs). If left untouched, they may also play havoc with the competitive parameters of the electric utility industry.

My firm recently surveyed utilities, public service commissions, and state tax departments throughout the country to gauge the magnitude of the problem currently facing LDCs and soon to threaten electric utilities. We sought to uncover all the taxes that could be associated with the commodity component of gas sales service and might be missing from the net cost of service realized by commercial and industrial customers that receive gas

transportation service from the LDC.

Figure 1 displays the effective net tax rates for gas service at the state level, and the maximum range of effective net tax rates at the combined county and city level. Tax rates for electric service can differ slightly from those for gas service, but in general they are of a similar magnitude.

Wide disparities in "effective" sales tax rates are apparent among the states. They range from almost zero in New Hampshire to over 22 percent in Prince George's County, MD. "Effective" takes into account the frequency of multiple taxes - that is, where taxes from one authority are actually levied upon taxes from another - as well as the rate design considerations mentioned earlier.