11-13-2002 Council Agenda - Laserfiche WebLink

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1 As the electric market is opened to interstate competition, the federal government must preserve the application of Minnesota's state and local sales taxes to the sale of 3 electricity, regardless of the place of origin. 4 5 Stranded Cost Recovery 6 7 Issue: Regulated utilities have traditionally made operating decisions based on needs of 8 consumers within their service territories. Many decisions, therefore, have been based more on 9 need than on economics. In the transition from a regulated to a restructured competitive 10 environment, electric generators' investments in fixed assets and other obligations may or may 11 not remain as economically viable. Estimates of these "stranded costs" vary greatly, with some 12 indicating no stranded costs or possibly even negative stranded costs resulting from increased 13 prices after deregulation in Minnesota. 14 15 Response: If regulatory actions have contributed to investment by existing regulated 16 utilities that are not economically viable in a competitive market, and if restructuring 17 occurs, the League supports transition mechanisms that will allow utilities to collect 18 revenues for those particular stranded costs. HIowever, these charges must be carefully 19 monitored to ensure that only eligible and verifiable costs are covered and that over - 20 collections do not occur. Taxpayers and ratepayers should not be expected to cover the cost 21 of investments that were made for business reasons, apart from the requirement to serve 22 under the regulated system. If negative stranded costs for the regulated utility as a whole can be established, and 25 are solely the result of transition to a restructured environment, these regulated utilities 26 should be required to contribute some limited percentage of established amounts to offset 27 tax breaks given to these utilities as a result of restructuring. 28 29 Property Tax 30 31 Issue: Part of the discussion regarding possible deregulation of the electric power 32 industry has centered on electric utility taxation. Proponents of restructuring assert that if 33 effective free market competition is to replace governmental regulation, state tax policy must be 34 changed. The main. focus of the investor owned utilities (IOUs) so far has been removal of the 35 attached machinery or personal property tax. Utilities subject to the tax argue it places them at a 36 competitive disadvantage to non- Minnesota companies, rural electric cooperatives (co -ops), and 37 municipals. However, accurate comparisons of tax burden are difficult, as other states use 38 completely different taxing systems. Municipals make substantial payments -in -lieu of taxes. 39 Additionally, co -ops and municipals do pay direct taxes on some of their property and indirectly 40 when they purchase wholesale power from sources that are taxed, such as IOUs. 41 42 Utility personal property can be a significant portion of the local tax base in all cities. 43 Most obviously affected are cities that have power plants; however, transmission and distribution d4 equipment account for over half of the personal property taxes paid by the IOUs and exist in nearly every city. Replacing the revenue that would be lost to cities, counties, school districts, 46 and other local taxing jurisdictions is a stated goal of the IOUs; however, the mechanics and 47 funding sources of such a replacement revenue would be difficul.t to develop and administer and 41