Governor Pataki to revamp utility tax.

Faced with the wrath of an angered business and real estate community, Governor George Pataki is expected to discuss revamping a wide variety of utility taxes during his budget speech on January 27th.

"In the next couple of days, as part of the Governor's budget proposal on January 27th, he plans to deal with a broad range of utility tax issues, so there is no need for concern," said State Taxation and Finance spokesperson Chris McKenna, who declined to provide details, saying they would not be available until the budget is released.

"The whole utility industry and all the utility customers are anxious to see the package," said Richard Mulieri, a Con Edison spokesperson. "Any time tax reductions are a possibility, it's a great thing."

The Governor's proposals will be made to move utility deregulation forward, rather than to hobble it as a result of the sudden reimplementation of a tax on the transportation of electricity by a state taxation official.

Since June 1998, this tax has not been paid by customers purchasing 1,000 megawatts of power each day through energy services companies (ESCOs) under Phase I of the state's energy deregulation program.

The program was proposed by Con Edison to help the state comply with a Federal deregulation law without legislation, such as that imposed in 22 other states on their utilities. Customers received some token incentives for buying electricity from these ESCOs, and did not have to pay the taxes on the transportation of the electricity provided by Con Ed, even though the utilities remaining customers had to do so.

But a recent letter by a state taxation official, reversing his own January 1997 opinion and reimposing the taxes, had the real estate and business community fuming.

Peter L. DiCapua, an Atco executive who also heads the industry's Owners Committee on Electric Rates and helped organize the Electrical Power Procurement Alliance (EPPA), a buying group comprised of eight real estate organizations, said they were surprised by the new legal opinion.

"We've had direct communications and [the governor] was ready to move forward and lead the nation in deregulation," said DiCapua.

While Con Edison and state business groups have complained about the high tax rate - more than 25 cents of every dollar currently goes to taxes - the tax on the delivery of power is not one they have been complaining about, since it was being phased-out as part of the 4.5-year deregulation plan proposed by Con Edison that should reduce overall electrical costs by 10 percent.

There are estimates, real estate groups say, that the reimposition of the taxes, which would have been reduced further starting in April, will have the effect of a five to six percent increase in costs.

Jay Raphelson, managing director Insignia/ESG, called the tax "a gift."

"Anyone participating in the program knew it would go away," Raphelson said, "but we figured we had a year to a year and a half before it did. The impact of the tax reversal would cause us to go back to Con Edison, because when you add the tax back in, our bills would go up 1 to 2 percent."

The benefit of not paying the taxes on transportation grew out of a legal ruling made in January of 1997, when the counsel to the State's Department of Taxation and Finance issued an opinion on a scenario proposed by Arthur Andersen, which sources say was described on behalf of their client, Orange & Rockland Utilities.

Counsel was asked to rule whether the transportation of electricity by a utility on behalf of a customer who purchased it from a third party supplier was taxable, if the utility acted as the billing agent.

At that time, Deputy Commissioner and Counsel Steven U. Teitelbaum looked to a similar 1986 New York City Energy Office opinion on the "contract carriage" of gas based on the same New York Tax Law Section 1105(b), to decide that the transportation of electricity for a third party was not taxable, regardless of whether the utility was the billing agent.

The 1997 opinion became one linchpin of the utilities' scheme to deregulate the provision of electrical service and open the supply of electricity to competition from private energy companies, as they were so ordered by the Public Service Commission.

Con Edison and other electricity companies around the state jumped on board and began to spin off their own ESCOs to compete with other suppliers, eventually leaving the regulated and streamlined utility with the job of merely transporting the power.

The taxes imposed in each community on the sale of electricity became the "shopping credit" savings for the small customers, and helped buying groups cut deals with the ESCOs to better the discounts and services.

According to Teitlebaum's 1997 opinion, so long as the transportation charge was billed separately, there could be no imposition of sales tax.

This tax savings, plus a small credit granted by Con Edison, created an incentive for large and small consumers to join the pilot program to purchase power through the new energy companies. These ESCOs also received a small monetary incentive from the utility for each customer they signed up.

Despite an increase in the allotted power for Phase I, the program was oversubscribed. Initially, this was to encompass only 500 megawatts, but because of the interest, Con Edison increased the allotment, first to 650 megawatts and then to 1,000 megawatts. The program was still oversubscribed by more than another 550 megawatts, and those customers have been promised first dibs in Phase II, which will release another 1,000 megawatts.

While all the single-family residential applications were accepted into the first phase, over 1,700 customers, including 200 major Service Class 4 commercial and industrial users, were not.

Those customers that continued purchasing their power through the utilities also continued to pay the tax. There were grumbles from those companies not chosen by the Con Ed lottery, who did not receive the last seven months of tax savings and lost a competitive advantage.

Additionally, the City of New York has been concerned about its loss of revenue, as each municipality's taxes were also cut. Since the fall, officials from the City, which is facing severe budget shortfalls in the next few years, have been scrambling around Albany proselytizing inflated potential loss figures, and promoting several schemes that would keep various revenues in their coffers.

Several sources described receiving threats of delays or the deep-sixing of other measures desired by their groups should they oppose the City's typically esoteric maneuvers.

On January I, 1999, Teitlebaum wrote to the Arthur Andersen accountant who had asked for the initial legal opinion, and reversed his own January 1997 ruling by reinterpreting the very same phrase he had earlier quoted, and imposed the sales tax "prospectively" as of that date.

After an immediate outcry from the ESCOs and the 66,000 business and voting customers that had been promised savings under Phase I through March, the Governor's administration announced the re-imposition of the tax will be held off until the April 1, 1999 bills.

A gross receipts tax is also supposed to be reduced by 1 percent before the year 2000, and there is pressure to reduce that further. But with Phase II's sign-up already underway for the April 1st deregulation of the next 1,000 megawatts, the energy companies, businesses and real estate owners say they are aghast at the latest twist in the deregulation process.

As Governor Pataki began absorbing an immediate political and press pounding for "increasing taxes," his office called for calm last week, promising a budgetary solution for the taxes.

"The state miscalculated and was looking at $180 million of tax revenue lost, but that was calculated on the entire program being fully opened, and the entire electric load being produced by ESCOs," explained DiCapua of the EPPA. "There's only 1,000 megawatts in the program now and another 1,000 megawatts in the next phase."

Michael Printz, director of marketing and sales for the Rent Stabilization Association, who worked on developing the program with DiCapua and others, said "The EPPA is weighing its options and still negotiating with the ESCOs that are participating in this second phase and challenging them to realize additional savings. We continue to monitor this issue [of taxation] on a daily basis."

Con Ed's Mulieri said, "There is no question as to what we are going to do. We are going to keep promoting the program and be aggressive, and get the entire [next] 1,000 megawatts spoken for. It won't make it easier."

Mulieri said they supply 6,000 megawatts on a typical winter day, with peak loads in the summer coming to about 11,000 megawatts.

What is yet unclear is if the re-interpretation of the tax section's clause will cause the re-imposition or imposition of taxes on a variety of "receipts from every sale, other than sales for resale, of gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam service of whatever nature."

Raphelson said Insignia/ESG did not sign up any master metered buildings where they sub meter with Con Ed Solutions, the ESCO, because they worried they might be required to charge the taxes. Additionally, Raphelson said, "In a lot of leases, it says you have to buy your power from Con Edison. It wasn't worth the risk."