Thursday, March 19, 2009

Governor's Proposed 2% PSC “Assessment” on Utility Bills Favors Some Energy and Telecom Service Providers

Back in December, PULP reported on Governor David Paterson’s budget proposal to increase the Public Service Law section 18-a assessments on utilities from one-third of one percent of intrastate revenues to one percent. In addition, the Governor proposed a “temporary state energy and utility service conservation assessment” of an additional one percent through Fiscal Year 2011 - 2012. That is equivalent to a two percent tax, or six times the current assessment rate, for the next two years. Governor's Budget Raises Utility "Assessments," Hurting Low Income Customers, but Gives Break to Cable Telephone Service Providers. If the Governor is trying to get the utility industry’s attention, he has been successful. See Verizon's anti-assessment website campaign, Stop the NY Phone Tax.

The assessment increase would raise far more than the Public Service Commission actually requires for its operations, which have traditionally been funded by an assessment of up to 1/3 of 1% of in-state revenues of the utilities it regulates. The extra revenue from the proposed 2% "assessment" would be placed into the state’s general fund, and commingled with general tax revenue. The proposed six-fold increase in the PSC assessment would undoubtedly be passed through by the utilities to customers, and eventually would make its way onto electric, natural gas, and telephone customer bills. The utility will merely be a conduit for collecting the increased "assessment." It would be functionally indistinguishable from a gross receipts tax, and probably would be identified by utilities as a separate line item on their bills.

The original concept of the PSC assessment was to pass the cost of utility regulation back to users of the utility service, collected through the utility rate-setting process rather than through general state taxes. It was designed to ensure revenue for regulatory expenses is received from all utility customers, large and small, based on what they actually spend on utility service.

The problem is that the proposed increased "assessment" will not be evenly applied to providers of equivalent utility services. In recent years, the PSC has been in a deregulatory mode, allowing some newer utility service providers to escape its assessments and all or most state regulation. For example, the PSC has not exercised its power to regulate terms and conditions of wireless phone service, telephone service provided by cable companies, and has barely begun to supervise the alternative electric and gas companies, called “Energy Service Companies” (“ESCOs”) spawned by its energy deregulation efforts. The Governor’s proposal would assess ESCOs for the first time, which would help level the playing field for these competitors to the electric and natural gas utilities. We anticipate ESCOs will claim that they can't set regulated rates to recover the assessment like the utilities, but if they are really providing value to customers through lower rates than the traditional utility, an even 2% assessment would widen any gap between the price of their service and the utility's, and slightly help their competitive position.

The Governor’s proposal, however, ignores the largest local telephone company competitors – the cable television companies. That’s right – Time Warner Cable and Cablevision, the second and third largest local telephone service providers in the state would not have to pay any assessment! Such tax or "assessment" differentials are the wrong way to promote economic efficiency and competition, and actually can promote inefficiency. On this point, the utilities' criticism of the Governor's proposal has force. See Utilities Criticize Paterson Tax Proposal. Also, the added cost of the assessment will tend to encourage customers to switch to unassessed providers because their total bills for similarly priced services can be lower. If more customers switch to unassessed service providers, the state may not receive all of the projected revenue.

There is no reason not to assess all providers of telephone service. The FCC has recognized (in a Brief filed in the Eighth Circuit in April 2008) that requiring Voice over Internet Protocol providers, such as cable companies, to contribute to state universal service funds does not frustrate federal policy. Assessing cable companies for the PSC's regulatory assessments would not frustrate federal policy either. Verizon and all of the other local exchange carriers are also subject to the state’s gross receipts tax and Targeted Accessibility Fund (which supports Lifeline, E-911, and the relay service for the deaf) assessments which the cable telephony providers are not. How can competition flourish and bring all of its expected benefits – lower prices and innovation – if one provider is hobbled by a regulatory regime which completely ignores its largest competitors?

The solution is to level the playing field for taxes and "assessments." The state could raise as much or more than currently projected from the increased "assessment" – $651.6 million in revenue for the state, in addition to the Commission’s $83 million requirement for its expenses – by assessing all utility providers offering similar services at a rate substantially less than the proposed 2%. The time has come to treat all voice telephone service providers equally. This is not only the correct answer based on fairness, but it could actually reduce the proposed new "assessment" burden on incumbent providers – including their customers – and still increase the amount of money received by the state.

Taxes or "assessments" on utility services will be a larger percentage of the low income customer’s total income. They can be harmful to low income consumers living on fixed incomes such as social security, who even without the added burden of the proposed increased "assessment" often run out of money before their next check, and who now will have even fewer dollars to make ends meet.

On the other hand, a utility service tax or “assessment” is efficient to administer and is hard to escape. Thus, the proposed “assessment” also would be shouldered by business users of utility service who might otherwise escape state corporate income taxation through a myriad of loopholes. The Business Council is opposing the proposal, invoking the plight of residential customers facing higher bills. Business Council Says More Tax Relief Is Necessary in State Budget ("With New York's energy prices already 60 percent higher than the national average for residential customers, New Yorkers cannot afford any more energy taxes").

There are other ways to protect vulnerable residential customers without eliminating taxes or "assessments" on those who can afford it.

In these times when more revenue may be needed, and when more taxes or “assessments” on utility service are a possible revenue source, it is even more imperative for the PSC to protect low income residential customers through affordable telephone Lifeline and reduced rates for electricity and natural gas service. And, the burden upon customers of any new tax or increased "assessment" on utility service can be significantly reduced if the Legislature and the PSC spread it more equitably to all utility providers and in turn, to all users of utility service.

Lou Manuta

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