Utilities and regulators are stuck in a rut, treating rate-base assets in a traditional way and depreciating their value according to a straight-line calculation. But alternative accounting...
Tax Burdens and Barriers
Where tax rates are too high, grid investments suffer.
The U.S. transmission and distribution (T&D) system is undergoing a once-in-a-generation revitalization that has generally been welcomed by electric utilities and consumers alike. These significant investments will certainly place upward pressure on rates, and this pressure is increasing the scrutiny stakeholders are giving to every element of a utility’s cost-of-service (COS).
This renewed scrutiny is appropriate because every dollar of a utility’s COS represents an economic resource that can potentially fund investments. For example, some electric utilities are rethinking and challenging their depreciation policies to ensure an adequate cash flow to support modernization investment. 1 Similarly, the taxes and fees that utilities pay—which industry-wide average about 55 percent of the typical utility’s depreciation expense, but in some high-tax jurisdictions are larger than their depreciation expense—are also topics of increasing interest because they represent real costs consumers pay in rates and thus are a formidable competitor for consumer funds that could otherwise support a utility’s investment program.
Consequently, the analysis and management of a utility’s non-income taxes and fees are essential elements of any comprehensive T&D modernization strategy and plan. This is especially true for those utilities that operate in jurisdictions that have hostile, high-tax jurisdictions that present a genuine barrier to significant T&D modernization investment.
Utility Tax Burden
The non-income-related tax and fee burden that utilities (and ultimately consumers, through rates) pay can be measured in a variety of ways. These costs are reported systematically under FERC accounting in the “Taxes—Other than Income” account. This account includes various fees, but it’s predominantly composed of ad valorem taxes ( i.e., “according to value” or property taxes), gross receipts taxes, or in some states both.
Tax-related topics sometimes seem arcane to all but dedicated tax professionals; however, it’s often useful begin to understand them by assessing their total impact on customers. The industry-wide level of non-income tax payments, expressed as a percentage of average residential rates, for U.S. electric utilities has been declining over the past 20 years ( see Figure 1 ). Consumers nationwide spend approximately 30 percent less in relative terms in utility taxes than they did 20 years ago. Today, the typical customer sees about 4 percent of their average per-kilowatt-hour rates go to property taxes and other fees, down from about 6 percent in the early 1990s. This easing of the relative tax burden has been an industry-wide and long-run phenomena.
A logical question falls naturally from Figure 1—is this decline in the tax burden relative to average per-kWh rates due to increased electricity rates, or have absolute tax rates genuinely changed and, thus, the industry’s real tax burden been reduced? The industry’s absolute level of tax payments on a per-kWh basis has risen slightly for this same 20-year period (see Figure 2) . Viewed on a per-kWh basis, taxes have been relatively stable industry-wide across the U.S.,