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New Sales Tax Could Kill Energy Choice in NY

New Sales Tax Could Kill Energy Choice in NY

A recent administrative action in New York that would subject the delivery of electricity, including power purchased from third-party suppliers, to the state's sales tax has the potential to undermine fledgling efforts to restructure the retail power market, say utilities and marketers.

On Jan. 1, counsel for New York's Department of Taxation and Finance effectively repealed a decades-old energy law exempting the delivery of electricity from the state's sales tax, said Craig Goodman, president of the National Energy Marketers Association (NEMA). New York State Electric and Gas (NYSEG) agreed that the state's action amounted to "overthrowing of prior precedent." The department's action is expected to result in a 7-8% tax for commercial customers and a 4% tax for residential customers, according to utilities and marketers. Industrial customers would be exempt.

NYSEG petitioned the finance department on Jan. 8 to clarify several aspects of its action. For one, the scope of the ruling - whether it applies to natural gas as well as to power - is fuzzy, says Shad Rafferty, senior vice president and CFO for the utility. "The question that we have is how can you make electricity taxable by itself. Electricity and gas are treated the same - either they both are [taxable] or they both aren't." The utility contends neither should be subject to sales tax.

NEMA's Goodman doesn't believe the department's action per se applies to delivery of natural gas, "but legally and technically it could, and it's a concern to some people" in the industry. "We're hoping that it will not be expanded to include the gas market." New York customers have not paid a sales tax on the transportation component of gas service since the mid-1980s, NYSEG noted.

There also was considerable confusion about the effective date of the tax. Both Goodman and Rafferty initially believed the tax took effect Jan. 1, but then heard "rumors" that it was delayed until April 1. "...I've not seen anything in writing to that effect," Rafferty noted. The New York Department of Taxation last week confirmed April 1 as the effective date.

Goodman called the energy tax a "real setback" to the advent of state-wide competition in New York's retail power market. He said it would be a "very regressive" levy, meaning that it would hurt lower income consumers most, and directly would affect those electricity consumers that elect to choose their service providers, "which is exactly the opposite of what you want to do when you're trying to start a restructured program in the state." It will cause marketers to flee the New York power market and will rob customers of promised savings, he believes.

"Previously people could switch their supplier from a local utility to say an energy service company, and they would avoid a sales tax on the delivery portion of the bill. Now, they're saying 'yes, you do have to pay for the delivery service and it doesn't matter where you buy it from,'" NYSEG's Rafferty told NGI.

"Part of the benefit of customers switching is the fact that they can avoid the sales tax on the transportation or delivery of electricity... Quite frankly, it's a large portion of the financial incentive for them to switch," he said. New York's action "hurts our retail-access program as well as other utilities in the state." NYSEG plans to offer choice to all of its power customers by Aug. 1, he noted.

States shouldn't change their energy tax programs until after they have fully implemented retail choice, said Goodman, an expert on energy tax law. "And then there should be a full restructuring of all the taxes so that [they're] fair and competitively neutral." Retail choice is still in the pilot stage for many New York utilities.

Not only will energy consumers suffer, but Goodman believes the state itself will be a big loser. "...[W]hen I did a quantitative analysis of these type of taxes, [I] found that the state lost more in revenues by imposing this kind of a tax than they did by allowing energy prices to decline." The lower revenues were largely owing to the decreased profitability of businesses located within the state and lower consumer spending, Goodman said.

NEMA isn't taking the tax lying down. "We have a three-front approach: we're appealing directly to the governor; we are appealing to the legislature; and we're looking into legal measures," he noted. "Technically, there shouldn't be a new tax on choice unless the legislature voted for it," which Goodman said it never did. NYSEG officials agreed, saying the New York Department of Taxation was attempting an end-run around the legislature.

NEMA was created specifically to work with federal and state regulators and legislators, and consumer groups to devise "fair and effective ways" to implement restructuring of both the natural gas and electricity markets. Some of its largest members include Columbia Energy, Dynegy Inc., Amerada Hess, ConEd Solutions, PSE&ampG Technologies and The Williams Cos.

Susan Parker

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