A recent administrative action in New York that would subjectthe delivery of electricity, including power purchased fromthird-party suppliers, to the state’s sales tax has the potentialto undermine fledgling efforts to restructure the retail powermarket, say utilities and marketers.

On Jan. 1, counsel for New York’s Department of Taxation andFinance effectively repealed a decades-old energy law exempting thedelivery of electricity from the state’s sales tax, said CraigGoodman, president of the National Energy Marketers Association(NEMA). New York State Electric and Gas (NYSEG) agreed that thestate’s action amounted to “overthrowing of prior precedent.” Thedepartment’s action is expected to result in a 7-8% tax forcommercial customers and a 4% tax for residential customers,according to utilities and marketers. Industrial customers would beexempt.

NYSEG petitioned the finance department on Jan. 8 to clarifyseveral 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 taxableby itself. Electricity and gas are treated the same – either theyboth are [taxable] or they both aren’t.” The utility contendsneither should be subject to sales tax.

NEMA’s Goodman doesn’t believe the department’s action per seapplies to delivery of natural gas, “but legally and technically itcould, and it’s a concern to some people” in the industry. “We’rehoping that it will not be expanded to include the gas market.” NewYork customers have not paid a sales tax on the transportationcomponent of gas service since the mid-1980s, NYSEG noted.

There also was considerable confusion about the effective dateof the tax. Both Goodman and Rafferty initially believed the taxtook effect Jan. 1, but then heard “rumors” that it was delayeduntil April 1. “…I’ve not seen anything in writing to thateffect,” Rafferty noted. The New York Department of Taxation lastweek confirmed April 1 as the effective date.

Goodman called the energy tax a “real setback” to the advent ofstate-wide competition in New York’s retail power market. He saidit would be a “very regressive” levy, meaning that it would hurtlower income consumers most, and directly would affect thoseelectricity consumers that elect to choose their service providers,”which is exactly the opposite of what you want to do when you’retrying to start a restructured program in the state.” It will causemarketers to flee the New York power market and will rob customersof promised savings, he believes.

“Previously people could switch their supplier from a localutility to say an energy service company, and they would avoid asales 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’tmatter where you buy it from,'” NYSEG’s Rafferty told NGI.

“Part of the benefit of customers switching is the fact thatthey can avoid the sales tax on the transportation or delivery ofelectricity… Quite frankly, it’s a large portion of the financialincentive for them to switch,” he said. New York’s action “hurtsour 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 afterthey have fully implemented retail choice, said Goodman, an experton energy tax law. “And then there should be a full restructuringof all the taxes so that [they’re] fair and competitively neutral.”Retail choice is still in the pilot stage for many New Yorkutilities.

Not only will energy consumers suffer, but Goodman believes thestate itself will be a big loser. “…[W]hen I did a quantitativeanalysis of these type of taxes, [I] found that the state lost morein revenues by imposing this kind of a tax than they did byallowing energy prices to decline.” The lower revenues were largelyowing to the decreased profitability of businesses located withinthe state and lower consumer spending, Goodman said.

NEMA isn’t taking the tax lying down. “We have a three-frontapproach: we’re appealing directly to the governor; we areappealing to the legislature; and we’re looking into legalmeasures,” he noted. “Technically, there shouldn’t be a new tax onchoice unless the legislature voted for it,” which Goodman said itnever did. NYSEG officials agreed, saying the New York Departmentof Taxation was attempting an end-run around the legislature.

NEMA was created specifically to work with federal and stateregulators and legislators, and consumer groups to devise “fair andeffective ways” to implement restructuring of both the natural gasand electricity markets. Some of its largest members includeColumbia Energy, Dynegy Inc., Amerada Hess, ConEd Solutions,PSE&ampG Technologies and The Williams Cos.

Susan Parker

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