RD330 - Report on the Impact of Electric Utility Regulation on the Tax Systems of the Commonwealth of Virginia


Executive Summary:
Following the passage of Senate Joint Resolution (SJR) 118 of 1996 the Virginia General Assembly began a study of electric utility industry restructuring. The study was commissioned to determine whether the restructuring of the retail electricity market was possible and in the public interest. Proponents of electric utility restructuring asserted that restructuring would allow electricity customers to purchase electricity from the providers of their choosing. In 1997 the Senate passed SJR 259 in order to continue the study of the feasibility of restructuring the retail electricity market. SJR 259 required the State Corporation Commission (SCC) to develop a restructuring plan to be presented to the joint subcommittee on electric utility industry restructuring. The SCC reported that a majority of states had either deregulated their electric utility industry or were in the process of considering such a move.

In 1998, the joint subcommittee developed legislation restructuring the electric utility industry to be introduced in the 1999 session of the General Assembly. The legislation was introduced as Senate Bill 1269. The bill contained a two-year phase in of generation customer choice for all electricity customers as well as a seven-year rate cap. Senate Bill 1269 was passed by both the Senate and House and signed into law by the Governor on March 25, 1999.

Following passage of SB 1269 a task force tracked the progress of the electric utility market and made yearly reports to the General Assembly. In 2003 the task force made its first report regarding the state of retail electric competition. The task force reported that there was no increase in retail competition in the electric utility industry. Of the more than 2 million customers who had the right to choose their own electric provider only 2,375 residential customers and 23 commercial customers were purchasing electricity from an alternate supplier.

During the 2003 Session of the Virginia General Assembly the task force also noted that the actual corporate income tax liability due from electric utility providers was significantly smaller than initially expected. In order to correct this revenue shortfall, a minimum tax for electric suppliers was added to the corporate income tax. The tax was set at 1.45% of gross receipts, less the state portion of the consumption tax.

By 2007 nearly all of Virginia’s 3.1 million electricity customers had the right to choose their supplier however; competition remained stagnant with very few of these customers actually using an alternate supplier.

The 2007 Session of the General Assembly enacted reregulation legislation (Chapters 888 and 933). The legislation re-established retail rate regulation for the majority of customers by January 1, 2009.

The electric utility industry restructuring legislation did not require that the system of taxation immediately revert to the gross receipts tax that was in place prior to deregulation. Instead, the legislation required the Department of Taxation to conduct an analysis of the potential implications on the system of taxation and the revenues generated. The absence of competition would permit a return to the gross receipts tax, but does not require it. The minimum tax on electric utilities, based on gross receipts, coupled with the consumption tax, is designed to approximate the revenue that the Commonwealth received under the former tax structure. Therefore, there is no need to incur the expense involved with a major change in the tax structure.

In the future, however, the current minimum tax rate and the consumption tax rates may need adjustment. Should competition develop the minimum tax may have the same detrimental impact on competition as the former tax structure. Because they are based on kilowatt-hours consumed, state and local revenue from the consumption taxes will not keep pace with inflation and may require periodic increases.

When electric utilities are included in a consolidated federal and Virginia income tax return, the losses of other affiliates may considerably reduce the tax liability of the group. Existing law prohibits the State Corporation Commission from considering the impact of consolidated filing on regulated rates. This could result in consumers reimbursing the electric utility for income taxes that may never be paid. The SCC should be given the authority to consider the impact of consolidated filing on regulated rates.