The Effects of Electricity Market Deregulation on Local Property Tax Assessments & Fiscal Stability
Kinnard, William N., Jr., Beron, Gail L., Real Estate Issues
INTRODUCTION: BACKGROUND TO THE ANALYSIS
Federal Energy Policy Act of 1992
The 1992 Comprehensive National Energy Policy Act mandated restructuring the regulated electric utility industry in the United States to a competitive pricing environment. While it also encouraged energy efficiency, and the expanded use of renewable energy sources, the Act's primary thrust was to require competition (most especially competitive pricing) in the electricity generation segment of the electric utility industry. This meant competitive pricing of wholesale electricity at the generating plant "gate." The traditional vertical integration of the generation-production, transmission and distribution functions within the electric utility industry was effectively dismantled. Wholesale price competition was to be achieved through ownership-operation of generating facilities by non-regulated, non-utility owner-operators.
The transmission function, on the other hand, was required to remain under regulation by both the Federal Energy Regulatory Commission (FERC) and state regulatory commissions. Subsequent to the passage of the Act, FERC has mandated equal access to the transmission network, for all generating facilities, and at the same fees. The distribution function also remains with existing regulated local utility companies, who must deliver electricity to customers of all power suppliers within their former franchise areas at the same fees and with equal access.
From the base of the initial requirements and specifications of the Act, individual states were encouraged to pass their own restructuring legislation. In the absence of any such state legislation, federal standards and requirements were to go into effect by 2002.
Since 1997, several major states have passed legislation that both created a timetable for the development of a competitive pricing system for electricity and mandated choice of electricity providers for non-residential and residential customers alike. Approximately a dozen states in New England, the Middle Atlantic Region, and the Upper Mid-West (plus California) have such programs in place or in process. In most instances, non-residential ("commercial") customers were given the option to choose electricity providers or sources before such choice was offered to residential consumers.
Nearly all the state legislative programs require divestiture of generating facilities by regulated investor-owned utilities (IOUs), or at least "encourage" it. Municipal utility companies, other governmentally-operated utilities, and electric cooperatives are generally exempt from this divestiture requirement. Shifting ownership and operation of generating plants to non-regulated firms means that a market-price basis for local assessment and taxation of power stations must replace the existing system of relying primarily on net book value. The market evidence from the first two years of divestiture to non-IOUs indicates changes in plant values that will likely have strong impacts on both the local revenues and fiscal policies.
EMERGENCE OF A MARKET FOR GENERATING PLANTS
Because of the mandate or "encouragement" of divestiture in state "deregulation" laws, a reasonably active market for generating plants has developed since late 1997. The first sales were in California, which set the pattern for most of the other transactions that have occurred subsequently. Divestiture of generating plants is accomplished through public auction, most commonly with sealed bids. After bids are submitted and reviewed, there is usually direct negotiation between the seller and the short list of "acceptable" bidders.
Figure 1 presents summary information about sales volumes and prices through October 1999. The 55 reported sales transactions included over 200 generating plants. Multiple-plant transactions are not uncommon. At the same time, it is unusual for one purchaser to acquire the entire generating plant capacity of an IOU. …