Wednesday, November 12, 2008

Close the Energy Sales Tax Loophole Favoring ESCOs

An Underused Budget Tool - Closing Tax Loopholes
The financial industry crisis is causing major budget distress for New York State because its income tax revenue is so reliant on financial industry jobs and bonuses, which are now in sharp decline. Federal aid is urgently needed by New York and other states to sustain and enhance jobs and investment in public infrastructure projects. Instead, the response of the Governor has been to propose state spending cuts for many essential education, health and services to the public, including advocacy for the poor. See PULP, Legal Aid, Homeless Advocacy Groups Targeted by Governor for $2.8 Million Cut. Such cuts would cause a reduction in essential public services and may further exacerbate the recession gripping the state.

A way to help bridge budget gaps without raising tax rates is to examine tax loopholes closely and to close those that have weak rationales or whose original purpose is no longer vital. While not a solution to the entire budget problem, which cries out for federal aid, closure of tax loopholes can be a part of a multi-pronged solution.

The Utility Tax Break for ESCO Customers
One tax loophole that readily comes to mind is the strange tax break received by electricity and natural gas customers when they buy electricity or gas from an ESCO. They continue to pay state sales tax on the electricity and natural gas provided by the ESCO. But they are excused from paying sales tax on the "delivery" service which provided by the traditional utility whether or not the customer takes ESCO service!

Say that again?

I pay sales tax on the whole utility bill - "delivery" service plus "commodity" service when I buy the "commodity" from the utility. When I switch to an ESCO for "commodity", I pay no tax on the utility-provided delivery service.

This is like waiving the state sales tax on new cars if the customer gets oil changes from JiffyLube instead of the car dealer.

For small customers, the tax avoidance saves maybe a couple of bucks a month. It serves as a way for high pressure ESCO touts to show consumers where they "will save money on their utility bill" as an inducement to locking them into contracts for very expensive service. See

For very large industrial and commercial customers, the ESCO can simply sell the same service the customer would get from the utility, a pass through of NYISO spot market prices, and split the tax savings, which might add up for these large customers. As stated in the website advertising of Energetix, (an ESCO owned by Rochester Gas & Electric):

Can I save on my taxes if I switch to Energetix?

Yes! With Energetix as your energy supplier, you are eligible for a sales tax discount. Specifically, state and local sales taxes do not apply to your delivery charges when you take supply service from an ESCO. Additionally, local municipal taxes are not applied to your supply charges. These tax benefits can often be one of the biggest benefits of ESCO supply service. (Emphasis added).

Why Tilt the Retail Energy Competition Playing Field with Tax Breaks?
According to a 2001 PSC Order, "The State has authorized a separate incentive to encourage development of a retail access market." The PSC has switching statistics which show significant kwh and therms are now provided by established competitive suppliers, and so now the tax break is causing a significant unjustified revenue loss. Here are the gas "migration" statistics; here are the electric migration statistics. If the rationale was to "jump-start" or "breathe life" into retail energy markets, the time has come to take off the jumper cables and life support. The PSC has more recently assessed the growth of ESCO markets and observed in an October 2008 order:
if barriers to entry and other obstacles to the growth of competitive markets have been successfully removed, those markets should develop without ratepayer subsidization. With the markets maturing, competitive providers should succeed or fail based on whether they offer energy supply products on terms that consumers find preferable to purchasing commodity from a regulated utility.
Now that the PSC is finally eliminating ratepayer subsidization of ESCOs, which is long overdue, it is now time for the Legislature to end unnecessary taxpayer subsidization of ESCOs and ESCO customers.

Poor Tax Policy
There is no valid tax policy basis to continue the delivery service tax break for customers who buy commodity separately from an ESCO. Levelizing the tax so that customers who switch do not get a tax break on utility delivery service would treat all taxpayers equally.

Poor Economics
The usual rationale given for introducing competition into utility service is to achieve greater economic efficiency. The existing system essentially creates a public tax subsidy of the service provided by "competitive" providers and may be supporting phony, subsidized retail energy competition that is not providing real benefits to customers or to society as a whole.

With the delivery service tax break, a less efficient ESCO can still win the customer by reselling the utility service for a little more, and offsetting his less efficient higher price with the tax break, which gives the customer slight net bill savings -- and a corresponding shift of tax revenue responsibility to others. From a total societal point of view, the cost of introducing such artificial "competition" is higher than without it. True competition on a level tax playing field would reward the ESCO that obtains lower cost energy. The existing system only rewards middlemen who merely arbitrage the tax savings with the customer.

Most ESCOs appear to be passive price takers of NYISO spot market influenced prices. We know of no case in the past decade where an ESCO has challenged at FERC an unreasonable wholesale price it paid. Indeed, many of the retail ESCOs are in the same utility holding company family as production and wholesale trading affiliates who have interests in achieving high prices, viz., Con Edison Solutions and Con Edison Energy. Elimination of the tax break for ESCOs might even work to realign ESCO interests with those of retail customers if, in order to win and keep the customer, the ESCOs actually had to find and provide lower priced energy. As stated by the PSC in its recent order:
Moreover, subsidization is inconsistent with competitive market operations as subsidies distort the functioning of competitive markets. Eliminating subsidies will leave a market where competitors can be judged on the merits of their offers and the quality of their products, without assistance from utilities or ratepayers.
The same rationale for ending PSC regulatory subsidies applies to tax subsidies.
End the ESCO Tax Breaks Now
During this period of financial crisis it is time for the Governor to propose an end to the irrational public tax subsidy of the PSC's retail energy competition scheme, which has already cost utility ratepayers more than $100 million over the past decade. See PSC Votes to Continue Retail Access Programs Promoting ESCO Service. This will bring in added revenue needed during the next few years to help balance state budgets. Down the road, it may be possible to reduce the tax rate -- while still bringing in more revenue than now, because of the equal coverage of all utility delivery service.

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