Where tax rates are too high, grid investments suffer.
James M. Seibert is the managing partner of Chicago Energy Associates LLC, a management consulting firm serving clients in the global energy and utilities industries. Email him at: firstname.lastname@example.org
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.