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Evaluating Power Plant Property Taxes Under Deregulation

Fortnightly Magazine - March 1 1998

SO2 limitations under the Clean Air Act.

While some costs of these future environmental requirements may today be too uncertain to be recognized as significant value-diminishers, the effect on plant value can occur almost overnight. Once legislation or regulations are imminent, fair market value is affected because investors look to the future. By the time a compliance date arrives, it may be too late to obtain all of the possible tax savings.

Updating the Present:

Incorporating Future Changes in Plant Valuation

Depending upon state law, state assessors value property either at the "unit" level or locally on a location-by-location basis. In a unit assessment, all utility property (em generation, distribution and transmission (em is valued as a whole and then its value is allocated to the taxing jurisdiction. In a local assessment, each piece of property, which could be transmission wires, poles and substations, or a single generating plant, is valued by a local assessor in a town, city or county.

The actual valuation (em whether by income, cost or comparable sales (em can best be understood assuming a local assessment of each piece of property.

INCOME APPROACH. This method assumes that property is worth the present value of the income stream it can generate. Under traditional regulation, utilities project future income based upon rate of return on rate base, discounted by the market cost of capital. If market cost of capital approximates the allowed (and assumed achieved) rate of return, the income indicator will approximate the rate base.

Under deregulation, however, an appraiser must estimate prospective income a utility's generating plant is expected to earn based on a reasonable projection of electricity market prices and how they will affect the plant's dispatch. Operating costs, such as fuel prices, also are projected and discounted to present value. To make these projections, an appraiser can commission studies from energy and economic forecasting firms specifically for the plant at issue or use reports from the Energy Information Administration or the Gas Research Institute, which provide a more global perspective.

Moreover, the utility probably can use price projections it has used to conduct studies of stranded cost recovery. These studies typically provide the portion of net book cost the utility likely would not recover, and by extension, what an investor likely would not purchase. If the assessment is based on net book value, such studies will prove useful to benchmark property values. Depending upon the quality of the study, it may be combined with competent appraisal evidence and used to prove a value reduction in court.

A truncated projection is also possible with an income based on a rate base multiplied by permitted rate of return for several years, converting to a market-price income projection for those portions of the load that will be sold in competitive markets. If the plant is already producing primarily for a wholesale market, arguably competitive prices should be projected from today forward.

State law would have to be examined, however, to determine if using an income stream based on rate base or including stranded cost recovery allowances would improperly