Tax issues could derail (or pave) plant construction

Kathleen Davis, Associate Editor

With the combination of spotty deregulation and national economic uncertainty looming, tax issues in the industry are less of a uniform American trend. In fact, issues dealing with the hindrance or assistance of power plant construction are becoming increasingly regional.

KPMG’s energy and natural resources practice recently updated EL&P on the latest tax issues on construction per region.

West

Phil Seabrease, senior manager of KPMG’s San Francisco office, put California on the lips of every player in the western region, even on details like tax issues.

“Obviously the crisis out here has sparked a lot of controversy about the urgency to build power plants,” Seabrease stated. “From a tax perspective, California lacks incentives for utilities to build, which is surprising to some.”

“There hasn’t been any incentive, even when it was regulated,” he added. “So, California is now ‘behind the eight ball’ in trying to frantically build generation to meet current demand.”

Seabrease also pointed out that while the binge of power plant construction is skyrocketing on paper, follow-through is the real issue.

“I know of at least three facilities that may not be built at all and are certainly on hold for six months to a year until all the litigation and the issues between California and FERC are settled,” he said.

The other two “big” states Seabrease touched on in the region (besides California) include Arizona and Washington. While Seabrease stated he wouldn’t put Washington in the same league as either Arizona or California, development in the state is on the rise. Without an income tax, Washington can have some interesting consequences if companies are not careful.

“You can be taxed two or three times on a similar transaction. So while there are some opportunities, the tax structure raises a lot of red flags,” Seabrease stated.

Labeling Arizona a hotbed for plant construction akin to California, Seabrease said that Arizona might offer a quicker building process for power plant construction due to less regulatory hurdles.

“And it’s close enough to California that you can ship power into the state, so a lot of companies are looking hard at Arizona,” he added.

Midwest

“There’s an awful lot of increased activity in the Midwest,” stated Sherri Gurcheik, Midwest leader for KPMG’s energy and natural resources group as the regional focus moved east. “Illinois, Ohio, Indiana and Michigan are the forerunners here.”

“In those four states alone we’ve projected over 60,000 MW of new peaking capacity will be constructed in the next two years.”

Gurcheik pointed to the states leading in deregulation as also leading in tax incentives to construct new power. Holding up Illinois’ new “Resource Development and Energy Security Act” as an example of encouraging legislation, Gurcheik stated that the new law contains tax incentives, credits and exemptions.

“I think that the drivers there are a reflection of what’s going on in California,” she said. “Illinois is a now a very favorable state for construction of peaking capacity, a very prominent state.”

Ohio, on the other hand, is trying to “even out the playing field” with taxes, according to Gurcheik. While some utilities may have had tax exemptions in the past, they will now be subjected to a franchise tax, which is a significantly higher tax rate than they are used to.

East

Glenn Todd, senior manager in the Pittsburgh office, summed up the overview stating that while regions have their idiosyncrasies, “a lot of the themes are really the same.”

New York has reconfigured some “pretty generous” incentives, abatements and credits, according to Todd.

“They’ve really expanded some of the benefits, which has applied to a lot of our companies developing in that area,” Todd stated. “And there’s a lot of activity slated in New York right now.”

Stating that a number of the issues are related directly to entities, Todd pointed out that one popular theme in his region centered on pilot programs, where a company would make payments in lieu of the company’s property tax payment-the idea being that the pilot payment would be less than what the property tax payment would be over a block of years.

“It’s a form of incentive that the state can use to generate activity,” Todd stated. “We’ve seen quite a bit of activity there-in a lot of the Northeast states especially.”

Overall it seems, whatever the region’s incentives, the devil is in the details.

“We’re advising our clients to be cautious and really look at the tax consequences of each state, just to make sure they are being treated fairly,” Gurcheik concluded.

More information about KPMG can be found at www.kpmg.com, or by contacting Jennifer Risi, at jrisi@webershandwick.com.

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