ELECTRIC UTILITIES - RESTRUCTURING; ELECTRIC UTILITIES; PROPERTY TAX;

UTILITIES-ELECTRIC-RESTRUCTURING;

You asked for a description of the property tax provision in PA 98-28, the law that restructured the electric industry to permit competition. You also wanted to know (1) when the provision went into effect, (2) which municipalities it affects, (3) its cost to ratepayers, and (4) how much the affected municipalities would have lost in revenue if it had not been adopted.

SUMMARY

The provision (CGS § 12-94d) partially compensates the municipalities that host power plants for the property tax revenue lost as a direct result of PA 98-28. The provision went into effect in 2001. In practice it only affects Waterford, the host of the Millstone nuclear power plants. The provision has cost Connecticut Light & Power (CL&P) ratepayers approximately $ 55 million over the past three years. The provision will continue in effect, at declining levels, over the next seven years. If the provision had not been adopted (1) other Waterford taxpayers would have had had to pay somewhat less than $ 22 million per year more in taxes, (2) the town budget would have had to have been cut by this amount, or (3) there would have had to have been a combination of increased taxes and budget cuts.

PROPERTY TAX PROVISION OF PA 98-28

PA 98-28 effectively required CL&P and United Illuminating to auction off their power plants. When the act was being developed, its sponsors anticipated that several plants might be sold for substantially less than their book value, which historically was the basis of their property tax assessment. (A plant’s book value is its construction cost, less depreciation, plus any additions from the time of construction. ) It was anticipated that the new owners would successfully argue that the sales price, rather than book value, should serve as the basis of the assessment, as this would more accurately reflect the plants’ market value. (By law, assessments generally must be based on a property’s market value. ) This could significantly reduce property tax revenues in the affected municipalities.

The provision entitles affected municipalities to a reimbursement of their lost property tax revenue, funded by the systems benefit charge on electric bills. This charge pays for a number of social policy costs associated with the electric industry, with separate charges for each utility. Under the provision, as amended by PA 01-125, the reimbursement is 100% of the revenue loss in the first year, declining by 10% per year over the next nine years. Any gain in property tax revenue from new generating plants in the municipality is subtracted from the reimbursement.

The provision went into effect in 2001. While PA 98-28’s sponsors anticipated that it might apply to several municipalities, it ultimately only affected Waterford, the host of the Millstone nuclear power plants. The Millstone plants were sold for $ 1. 2 billion, compared to a book value of $ 3. 2 billion. The utilities were able to sell their fossil fuel and hydropower plants for more than their book value, and their host municipalities thus did not suffer a loss of property tax revenue as a result of PA 98-28. The town of Haddam did suffer a substantial loss of property tax revenue with the shutdown of the Connecticut Yankee nuclear power plant. But the decision to shut this plant was not directly related to PA 98-28 and Haddam was ineligible for the reimbursement.

CL&P ratepayers have paid approximately $ 55 million over the past three years under this provision, $ 21. 8 million in 2001, $ 19. 4 million in 2002, and $ 14 million in 2003. (Since none of the municipalities in United Illuminating’s service territory lost property tax revenue due to PA 98-28, the provision had no effect on the utility’s systems benefits charge. ) The reimbursement will continue, at declining level, for the next seven years.

If the provision had not been adopted, (1) other Waterford taxpayers would have had had to pay approximately $ 22 million per year more in taxes in 2001, (2) the town budget would have had to have been cut by this amount, or (3) there would have had to have been a combination of increased taxes and budget cuts. The impact in subsequent years has been and will continue to be affected by the plants’ depreciation and by the growth of Waterford’s grand list, both of which decrease the impact of the provision on the town. As the plants depreciate, the amount of tax revenue they would have produced in the absence of PA 98-28 declines. Similarly, growth in the grand list decreases the amount of tax revenue needed from the plants in order to support a given level of town expenditures.

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