(November 2009)Regulators are in the unenviable position of determining an allowance for ROE that’s fair to consumers and investors in a volatile economy. The cases that stand out this year...
The Coming Conflict
Predicting discord in power plant property tax assessments.
for example, also falls into this category with its heavy reliance on natural gas-fired combined cycle and combustion turbine units.
Tendency for Conflict
By combining the above analyses, it’s possible to identify states where property tax disputes are more likely to materialize based on the anticipated responses by taxpayers and tax collectors. Taxing authorities and generators can be separated into three categories reflecting their relative tendencies toward conflict. 8 Although these disputes ultimately will be governed by specific generators and local fiscal conditions, their aggregation to a state level allows the identification of those regions where generators and taxing authorities are most likely heading toward conflict (see Figure 4) .
States with a low tendency for conflict likely will raise taxes in an effort to balance future budgets. However, the average generator within these states won’t face steep declines in value and some might even see positive changes, so plant owners might be relatively more accepting of increased tax bills and in less of a position to appeal assessments. With tax assessment activity held at the status quo , these states would have the least tendency for conflict.
The higher tendency for conflict in the medium category reflects the greater likelihood (or incentive) to appeal tax assessments. The average generator in these states can expect significantly lower gross margins and asset values. However, these states also face relatively less severe fiscal conditions ( i.e., budget gaps are less than 5 percent) and, therefore, would be more willing than states with larger deficits to reach an agreement and settle property tax disputes without protracted negotiation or litigation.
States with the highest tendency for conflict reflect the perfect storm of tax assessment disputes—falling generator values and severe budget deficits. The average generator in these states can expect steep declines—from expectations of several years ago—in gross margins, which would translate to lower asset values and a spike in appeals to lower assessments. Already under severe fiscal stress, taxing authorities in these states likely will respond more aggressively to requests for reductions—and therefore conditions in these states lead to relatively more conflict.
So where does all of this lead? Conflict, after all, is one of the inevitabilities of the business world. Obtaining a successful outcome in an endeavor marked by conflict requires preparation. Prevailing means convincing the other side, whether through persuasive force in a negotiation or through a preponderance of the evidence in litigation. In either case, tax assessors and taxpayers in the states identified as having a high tendency for conflict might want to start marshalling the forces now. For many power plants, the economic reality is clear, and the parties who are best able to articulate that reality will in many cases control the outcome.
1. State Budget Update: March 2006, National Conference of State Legislators.
2. State Budget Update: July 2009, National Conference of State Legislators.
3. Alaska and Hawaii are excluded from the analysis due to their unique geographical characteristics.
4. 2006 Annual Energy Outlook , Energy Information Administration, U.S. Department of Energy, DOE/EIA-0383(2007).
5. Energy Market and