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Evaluating Power Plant Property Taxes Under Deregulation

Fortnightly Magazine - March 1 1998

well, but that advantage likely disappears if one considers nuclear fuel disposal costs.

Similarly, compare all other fixed and variable operating costs per kilowatt of capacity, reducing (or increasing) the value of the appraised plant, depending upon whether the replacement facility shows a cost advantage or disadvantage. All future yearly cost estimates must be discounted to present value to reflect the total cost comparison as of the appraisal date.

Finally, an additional deduction in value may be appropriate for economic or external obsolescence. The appraiser must determine if the projections of the market price of electricity would allow the purchaser to recover all costs. If there is excess capacity in the market, so that competing plants in the market area of the appraised subject are likely to sell electricity priced at marginal cost (i.e., electricity priced so low it does not recover capital costs), it is likely the replacement facility also could not recover its capital costs. These unrecovered costs warrant a deduction. In the long run, however, the market price of electricity should be high enough to allow recovery of both capital and operating costs of the most efficient operating units as marginal plants exit the market.

COMPARABLE SALES. The third method, the sales comparison approach to value, considers actual market sales prices of comparable properties. Most often used for residential real estate, the comparable sales approach may have limits in the case of electric generating plants. In a fully regulated environment, those few power plant sales that would occur would likely send the plant to another utility; absent any strategic purposes peculiar to a particular buyer, there would be no reason to pay more than rate base.

Under deregulation, however, the appraiser should investigate market sales of power plants comparable to the appraised plant. In fact, with disaggregation and competition, such sales are occurring more frequently. But such sales are likely to include the prices for power purchase agreements, stranded cost recovery rights, other intangible contract rights, indemnification for various liabilities such as nuclear fuel disposal costs, other environmental liabilities, and other assets or costs not directly related to the tangible or taxable property. Rather, it is quite possible that the value of just the taxable tangible assets can be determined reliably only by the cost or income methods. %n6%n

UNIT-VALUE CONSIDERATIONS. For the utilities in the approximately 36 states that have their property valued by the unit method, the above techniques are also applicable.

The unit should be broken into those components that are likely to remain rate-base regulated such as transmission and distribution, with those assets being valued through traditional unit value techniques. Next, the assets that are likely not to be subject to rate base regulation will have to be identified, most likely the generating assets. A determination will have to be made about when they will be severed from the unit, or at least, no longer be allowed to earn an income based on rate base times a permitted rate of return. After that date, the above local valuation techniques will have to be applied.