Efforts are underway at the federal and state levels to introduce competition in the electric utility industry through restructuring to meet market and consumer pressures for lower cost electricity. The variety of restructuring proposals will have significant impacts on state and local government revenues, as well as on the status of outstanding and future tax-exempt debt and stranded costs associated with the financing of public power utilities. Underlying concerns about the sovereignty of state and local governments in this environment have also risen.
Investor owned electric utilities contribute to state and local government revenues in several ways, including (1) property taxes, (2) gross receipt taxes, (3) income and franchise taxes, and (4) sales and use taxes. Publicly owned electric utilities may pay certain property, franchise and sales and use taxes and may make payments in lieu of taxes to state and local governments.
Most restructuring proposals include the separation of the three main elements of the industry - generation, transmission and distribution. Competition would lead to a less income predictability for electric suppliers and affect the value of their property. In addition, customers would be able to purchase electricity from out-of-state marketers, which would affect states' tax bases.
State and local governments also have concerns regarding the tax-exempt status of debt used to finance public power facilities. Publicly owned facilities are generally financed using tax-exempt debt because they are nonprofit governmental organizations. Proposals already discussed range from those placing severe restrictions on the use of tax-exempt debt, both outstanding and future, for public power facilities, and taxing revenues of public power utilities, to those offering a range of options to publicly owned utilities making the transition to a competitive marketplace, while grandfathering outstanding debt from private use limits but placing some limitation on its use for new facilities. The recovery of stranded costs - noneconomic investments in generation facilities that would not otherwise be recovered under a competitive system - also present challenges to state and local governments.
Finally, issues regarding the sovereignty of state and local governments underlie each of the above. Many states have already enacted their own restructuring laws. In addition, state and local governments have traditionally been the regulators of the electric utility industry; have traditionally enacted and administered franchises and taxes relating to utilities; have the right to use tax-exempt debt to finance infrastructure facilities that they own, control and operate and have the authority to control the use of public rights-of-way.
The Government Finance Officers Association (GFOA) supports the following principles with regard to federal restructuring of the electric utility industry:
- Congress and the Administration must work with state and local governments in efforts to restructure the electric utility industry. Federal action must not preempt state and local government authority. Congress must respect state actions already taken in furtherance of electric utility deregulation.
- Because of the severe impact restructuring will have on state and local government revenues, state and local governments must retain their authority regarding zoning, services areas, the issuance of franchises, the determination of the appropriate kind and level of taxation, if any, to be imposed on electric utilities, and management of their rights-of-way and appropriate compensation for their use.
- Federal legislation must preserve the tax-exempt status of outstanding debt issued for publicly owned electric facilities, and provide publicly owned utilities with continued exemption from federal income tax.
- States should continue to have the clear authority to determine costs that are stranded or made unrecoverable by retail competition and to provide for recovery of those costs, if at all, as the state deems it necessary or appropriate.
- Publication date: May 1999