FISCAL NOTE

Date Requested: February 22, 2016
Time Requested: 01:04 PM
Agency: Tax Department, State
CBD Number: Version: Bill Number: Resolution Number:
2617 Revised HB4634
CBD Subject: Energy, Taxation, Utilities


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill is to increase the tax on generating units in this state owned or leased by the taxpayer. The bill provides a credit on the tax increase based upon megawatt hours generated above sixty percent of rated capacity of the plant and places a cap on the credit. The bill designates amendments to this section as the “Coal Jobs and Revenue Stabilization Act” with definitions. Finally, the bill sets forth an explanation for arriving at a “historic average tonnage for a given calendar month” in order to apply the increased tax and credit in this bill. According to our interpretation, the provisions of this bill would increase the tax rate for most existing coal-fired electric power generation capacity from $20.70 per kilowatt of taxable capacity to $21.61 per kilowatt of taxable capacity. The provisions of the bill would also decrease the tax rate on taxable electric power generation from hydroelectric, natural gas and wind power sources from $22.78 per kilowatt to $22.69 per kilowatt. The bill also provides a 50 cent per megawatt-hour tax credit for coal-fired generation in excess of 60% of capacity for any coal-fired taxable generating unit. The bill also provides that each ton of West Virginia sourced coal consumed by the coal-fired generating unit in excess of the amount necessary to operate the plant at 40% of capacity is exempt from the 5% coal severance tax with the exemption treated as a refundable tax credit to the electric power generating company. In the aggregate, West Virginia coal-fired power plants have recently operated near or slightly above 60% of summer capacity. In addition, roughly 55% to 60% of coal consumed in West Virginia coal-fired electric generation plants has been coal from West Virginia mines. However, some generating facilities use 100% West Virginia coal and other facilities use no West Virginia coal. Those using West Virginia coal may benefit from the refundable Coal Severance Tax credit without need to increase generation. Based on available information, passage of this bill would initially increase Business and Occupation Tax revenues by roughly $15.4 million due to a 4.4% increase in tax rate on most coal-fired electric power generation facilities. Some electric power generation facilities might be able to offset their portion of the tax increase through the combination of two tax credits. Given current coal-fired capacity levels, the maximum potential tax credit for generation in excess of 60% of capacity would likely be less than $10 million per year. The maximum potential tax credit for increased West Virginia coal consumption would also likely be less than $15 million per year at current prices. In the current market with low competitive natural gas prices, the provisions of this bill would not likely result in significant tax credit claims, other than claims by those already using 100% West Virginia coal, but might result in further coal-fired generation decline at West Virginia electric power plants associated with the proposed tax rate changes. In a market with natural gas prices at pre-shale boom levels, there would be greater utilization of the proposed tax credits with maximum potential tax credits in excess of the revenue gain associated with the proposed tax increase. Additional administrative costs would be $48,150 in FY2017 and $35,000 per year thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2016
Increase/Decrease
(use"-")
2017
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 48,150 35,000
Personal Services 0 35,000 35,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 13,150 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


According to our interpretation, the provisions of this bill would increase the tax rate for most existing coal-fired electric power generation capacity from $20.70 per kilowatt of taxable capacity to $21.61 per kilowatt of taxable capacity. The provisions of the bill would also decrease the tax rate on taxable electric power generation from hydroelectric, natural gas and wind power sources from $22.78 per kilowatt to $22.69 per kilowatt. The bill also provides a 50 cent per megawatt-hour tax credit for coal-fired generation in excess of 60% of capacity for any coal-fired taxable generating unit. The bill also provides that each ton of West Virginia sourced coal consumed by the coal-fired generating unit in excess of the amount necessary to operate the plant at 40% of capacity is exempt from the 5% coal severance tax with the exemption treated as a refundable tax credit to the electric power generating company. In the aggregate, West Virginia coal-fired power plants have recently operated near or slightly above 60% of summer capacity. In addition, roughly 55% to 60% of coal consumed in West Virginia coal-fired electric generation plants has been coal from West Virginia mines. However, some generating facilities use 100% West Virginia coal and other facilities use no West Virginia coal. Those using West Virginia coal may benefit from the refundable Coal Severance Tax credit without need to increase generation. Based on available information, passage of this bill would initially increase Business and Occupation Tax revenues by roughly $15.4 million due to a 4.4% increase in tax rate on most coal-fired electric power generation facilities. Some electric power generation facilities might be able to offset their portion of the tax increase through the combination of two tax credits. Given current coal-fired capacity levels, the maximum potential tax credit for generation in excess of 60% of capacity would likely be less than $10 million per year. The maximum potential tax credit for increased West Virginia coal consumption would also likely be less than $15 million per year at current prices. In the current market with low competitive natural gas prices, the provisions of this bill would not likely result in significant tax credit claims, other than claims by those already using 100% West Virginia coal, but might result in further coal-fired generation decline at West Virginia electric power plants associated with the proposed tax rate changes. In a market with natural gas prices at pre-shale boom levels, there would be greater utilization of the proposed tax credits with maximum potential tax credits in excess of the revenue gain associated with the proposed tax increase. Additional administrative costs would be $48,150 in FY2017 and $35,000 per year thereafter.  



Memorandum


The stated purpose of this bill is to increase the tax on generating units in this state owned or leased by the taxpayer. The bill provides a credit on the tax increase based upon megawatt hours generated above sixty percent of rated capacity of the plant and places a cap on the credit. The bill designates amendments to this section as the “Coal Jobs and Revenue Stabilization Act” with definitions. Finally, the bill sets forth an explanation for arriving at a “historic average tonnage for a given calendar month” in order to apply the increased tax and credit in this bill. There is a title defect in that it fails to mention the refundable severance tax credit. Also, the title states that the bill increases the tax on generating units in this state, when, in fact, one rate is raised and one rate is lowered. According to the bill, “when net generation available for sale from a West Virginia-based generating unit exceeds sixty percent of the rated capacity of that generating unit in a tax year, the taxpayer will receive a credit equal to fifty cents per megawatt hour for every megawatt hour generated at that unit in excess of the sixty percent threshold.” There are several issues with this credit. The language is vague and ill-defined, which may cause confusion in administering the credit. First, the proposed bill does not define a “coal-fired generating unit.” Also, the term “rated capacity” is not defined in the bill. It is unclear if this is meant to be the same as the “official capacity” of the unit, or if it means something different. It is unclear why the credit section is measured in megawatts, while the tax itself is measured in kilowatts. Subsection (f) provides that when the combined tonnage of West Virginia sourced coal consumed by a coal fired generating unit exceeds “the forty percent threshold” for that generating unit in a calendar year, each ton of West Virginia sourced coal in excess of “the forty percent capacity threshold” consumed at the generating is exempt from the five percent West Virginia coal severance tax. All coal consumed up to reaching that threshold is still subject to the tax. The issue again is that the “one hundred percent capacity factor” is not defined. The term “maximum possible annual generation” is defined in the Code and it is defined as “the product, expressed in kilowatt hours, of official capability times eight thousand seven hundred sixty hours,” which is the number of hours in a year. See, W. Va. Code §11-13-2o(a)(5). Again, the credit is being calculated in megawatts rather than kilowatts, but, beyond that, it is unclear how a “one hundred percent capacity factor” might differ from “maximum possible annual generation.” The ambiguity in the definitions may make this section difficult to administer.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov