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.
are conspicuous for their historic and consistently high tax burdens (see Figure 4) .
Even within many states there are notable variations in relative tax burdens among specific utilities, due to local tax rates and practices. For example, a deeper review of the Ohio and New York jurisdictions illustrates that the tax burdens of specific operating utilities vary significantly when expressed as a percentage of net plant (See Figure 5) .
Interestingly, Ohio’s very high tax challenge is notably a northern-Ohio problem, although all of its utilities face a generally higher-than-average tax burden. Similarly, the generally high levels of taxation in New York state are most extreme in the metropolitan New York City area. These urban consumers pay an inordinate level of taxes for their utility systems in part as a result of a four-classification system of asset taxation that has special rules for utility property applicable only for New York City and Nassau County; the balance of the state has a two-classification (homestead or non-homestead) system. 3
Many of these variations in taxes also result inadvertently from the varying valuation methodologies used by different jurisdictions. In 40 U.S. states the practical method for asset valuation is a historic cost-based approach, using the original cost, less depreciation; a small number of jurisdictions—including New York—use a “replacement cost new less depreciation” (RCNLD) approach, which generally results in much higher assessments.
Local Taxation and Smart Grid
The tax and fee burden that customers pay in their utility’s cost of service is a significant expenditure that for many IOUs is similar in size and occasionally even greater than their depreciation expense. In an era of rising energy costs and utility rates generally, there’s a practical upper limit to customer’s willingness and ability to tolerate rate increases. Rather than being seen as a pass-through cost to customers, these taxes and fees quite literally and appropriately are increasingly seen to compete with the utility’s spending on T&D revitalization in consumer rates.
Like the industry restructuring initiatives of several years ago, today’s smart grid and T&D vitalization plans offer a unique window of opportunity for utilities in high-tax jurisdictions to constructively challenge the tax and fee methodologies that govern their systems. Methodologies matter: for example, utilities that operate in jurisdictions that rely predominately on gross receipts taxes face little inherent tax penalty for increased reinvestment in their system; alternatively, jurisdictions that rely predominantly on ad valorem taxes—and especially those that focus on RCNLD methods—face significant tax increases that will come with constructive reinvestment. Moreover, the total tax and fee burden also matters. Overall tax and fee levels represent a real barrier to significant smart grid investment in high tax jurisdictions.
Thus, smart grid and T&D system revitalization initiatives might prove more successful with companion efforts to assess and manage the overall tax and fee burden that customers face. Especially in high-tax jurisdictions, utility leaders have the challenge and the opportunity to educate their stakeholders on the practical implications of these taxing matters as part of their efforts to implement a 21st century electric system.