This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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April 1999

With deregulation of electricity service in California comes this question confronting the State Board of Equalization: How should the state assess electricity providers?

In the new deregulated market, generation of electricity becomes much more like the manufacture of any other product or service. There will no longer be a legal requirement for generators to provide their products to the public in a particular geographic area, the prices they earn will no longer be fixed, and the facilities will be economically segregated from the remaining elements of electricity service.

As the BOE considers this issue as proposed Property Tax Rule 905, it should focus on these jurisdiction guideposts: The rule should be clear and predictable; it should withstand changes in the market place; it should be consistent with the underlying purpose of state assessment; it should not be governed by implications of state or local revenues, and it should treat similarly situated taxpayers similarly.

After evaluating alternatives, including a BOE staff proposal, Cal-Tax firmly believes that the solution to the question of assessment jurisdiction lies in the understanding of the very purpose of state assessment, not to mention the legal precedent that has already been established by the courts. This is valid not just for companies transmitting or selling electricity, but for any company of the type covered by the California Constitution in Article XIII, Section 19.

Section 19 provides in pertinent part that the BOE shall annually assess "companies transmitting or selling gas or electricity." While the casual reading might lead one to the conclusion that any company selling electricity would be within the BOE's assessment jurisdiction, from the origins of the state Constitution of 1879 through today, it can be clearly established that the BOE's assessment jurisdiction is limited to the properties of public utilities. See Story v. Richardson (1921) 186 Cal. 162; Cudahy Packing Co v. Johnson (1939) 12 Cal. 2d 583, 86 P.2d 348; General Pipeline Co. v. SBE (1936) 5 Cal.2d 253, 54 P.2d 18; ITT World Communications v. City and County of San Francisco (1985) 37 Cal. 2d 859.

But what constitutes a public utility? Does it or should it differ from the definition used to define public utilities for purposes of the jurisdiction of the California Public Utilities Commission (CPUC)? Here again, the California Supreme Court has provided some guidance. In Story, the court held that a building owner selling electricity to tenants of a neighboring building was not subject to BOE jurisdiction because that building owner was not a public utility which requires some dedication of the property to public use. To support its conclusions, the court relies on regulatory cases suggesting that what constitutes a public utility for purposes of regulation by the CPUC is in fact the same as a public utility for purposes of BOE jurisdiction. CPUC jurisdiction, as suggested in Story and certainly so held in Richardson v. Railroad Commission (1923) 191 Cal. 716; 218 P. 418 and Allen v. Railroad Commission (1918) 179 Cal. 68, 175 P. 466 depends on some dedication of the property to public use. We believe that dedication to public use is best evidenced by a company having a certificate of public convenience and necessity (CPCN) from the CPUC.

Consequently, it can be argued that the BOE has no discretion in the matter at all. The state's highest court has already decided the scope of its jurisdiction.

The legal precedent, however, is not the sole basis that we believe compels the BOE to establish its jurisdiction based on the CPCN. By looking to the purpose of state assessment, the BOE is inexorably led to the same conclusion.

Greg Turner is Cal-Tax general counsel and legislative director.

There are primarily two reasons for the assignment of assessment jurisdiction to the BOE: Inability of local assessors to accurately and uniformly assess the property of utilities that span several counties and who have historically wielded considerable political influence on the assessment function (particularly true of railroads in the late 1800s), and the persistent theory that public utility property cannot be regarded as merely land, buildings and other assets, but must be valued as a "unit."

However, deregulation eliminates the central features of state assessment at least with respect to electricity generation. In a competitive marketplace, electricity has far more in common with the manufacturer of any other product or service than with the historical electric utility monopolies. Their products are subject to the ebbs and flows of the marketplace. They have no guaranteed customers, nor the legal obligation to continue to provide service to whomever may want it. Competition ensures that no one will have a dominating influence on the market or the California economy.

The conceptual framework for valuing public utilities has also been eliminated. The unit, or the system, of providing electricity has essentially been broken up and sold to a competitive market. The "unit," as the basis for state assessment, no longer includes the generation facilities. Because those facilities are open to competition, are not required to provide service to the public and can be constructed, acquired or operated by virtually anyone, they should not be subjected to a valuation different and apart from any other manufacturer, simply because the product they manufacture is electricity.

The premise of state assessment - that these utilities are unique companies and their value lies in the unit of their operation, which is in the nature of a monopoly dedicated to public use - has essentially evaporated and with it the need for continued state assessment.

The BOE staff's proposal to confirm board authority to assess all companies transmitting or selling electricity, defining as a public utility any company that is operated primarily to sell electricity to the public, raises constitutional questions if the board's assessment jurisdiction is limited to "public utilities" that require dedication to public use.

Further, the staff's proposed rule, by treating facilities built after December 31, 1999 differently than others that had obtained earlier "qualifying facilities" designation, treats similarly situated taxpayers differently.

Sometimes the best answer to a complex question is the most simplistic. Cal-Tax's "bright line proposal" - basing the BOE's jurisdiction on the existence of a CPUC certificate of public convenience and necessity - ensures a clear and predictable rule for taxpayers as well as state and local governments.

The rule would be durable because its underlying rationale could be readily applied to future questions of assessment jurisdiction as market forces change.

Perhaps most importantly, the Cal-Tax proposal is consistent with the fundamental purposes of state assessment and promotes, rather than retards, competition in electricity service.

Find Cal-Tax's full submission to the State Board of Equalization on assessment of public utilities on Cal-Tax Online - www.caltax.org