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January 12, 1999

Tax Break Ruling Angers Advocates of Cheaper Power


ALBANY -- Even as it pushes for market competition as a means to cheaper electricity, the Pataki administration has withdrawn a tax break granted to businesses and individuals that shop around for a power company.

The decision, reversing a ruling made less than two years ago, raises the cost of electricity by up to 4 percent for the small but rapidly growing group of consumers who choose competing suppliers over their established local utility.

The move has infuriated companies trying to break into the vast energy market in New York, whose electric rates are among the country's highest. They had expected the earlier policy to stand, but the reversal has made their product more expensive and less attractive to customers.

"The state is raising taxes, raising rates and discouraging competition," said Craig G. Goodman, president of the National Energy Marketers Association, a trade group. "We've got the state encouraging choice, and then, when people take them up on it, they're singled out for punishment."

In many instances, he said, the reimposed tax has wiped out whatever savings consumers gained from buying cheaper power.

Energy companies say most of the 72,000 customers statewide who buy power on the open market do not yet know that their taxes have increased.

A spokeswoman for the State Department of Taxation and Finance, which made the tax ruling, contends that all it has done is reinterpret existing law and remove an unfair advantage that people and businesses who bought power on the competitive market held over those who remained traditional utility customers and must pay the tax. "This evens the playing field," said the spokeswoman, Leah Powell.

She added that the ruling would protect utilities from an unfair advantage given to their new competitors.

But the utilities insist that they did not want the tax imposed. They have put considerable effort into revamping their operations to prepare for the new market, and they hope that robust competition will mean higher prices for their power plants, which they are selling off as part of the reorganization.

"We've invested a lot in retail choice, and we don't want something like this slowing it down," said Richard Mulieri, a spokesman for Consolidated Edison.

The issue could be a sensitive one for Gov. George E. Pataki, whose proudest accomplishment has been cutting taxes. He has spoken often about the need to lower electric rates to make New York more competitive economically, and his administration has brought about the first rate cuts in decades.

Adding to the paradox, the imposition of the tax falls most heavily on large, electricity-hungry businesses, the very customers the Governor says need rate relief most.

The Governor's office declined to comment on the tax ruling. But administration officials say the office had known about it.

The ruling has frustrated officials at another state agency, the Public Service Commission, which governs utilities. They fear that it undermines the work that they have done to encourage power companies to enter the New York market.

The dispute comes as New York, like many other states, is overhauling its electric power market, which has long belonged exclusively to seven utilities, like Consolidated Edison, each with a regional monopoly.

In the future, all customers will be able to choose from several power suppliers, just as they do with long-distance telephone companies. Companies that until recently were only energy wholesalers are being allowed to sell directly to consumers, competing with the established utilities.

The transition is expected to take about five years, except on Long Island, where it has been put off indefinitely by the partial state takeover of the old Long Island Lighting Company.

The tax dispute arises from the fact that an electric bill reflects not one service but several, such as maintaining the system, generating the power and transmitting it. In the past, the utility provided all the services, which were lumped together in one bill. But in a competitive market, the different services are provided by different companies, so they can be itemized.

In 1997, the State Taxation and Finance Department ruled that once competition began and it was possible to separate the charges, the sales tax would not apply to the transmission part of the bill, which experts say is usually 20 to 50 percent of the total. In New York City, the sales tax on electric bills is 8.25 percent for commercial users and 4.25 percent for residences, and it varies slightly around the state.

The 1997 decision meant that most users that chose their power company would save 1 to 4 percent on their electric bills. Traditional utility customers continued to pay sales tax on the whole bill.

But on Jan. 1, Steven U. Teitelbaum, deputy commissioner and counsel at the taxation department -- the same official who wrote the 1997 decision -- reversed himself and ruled that the sales tax applied to the entire bill for all customers. He did not return telephone calls on Friday or today seeking comment.

State law applies the sales tax to goods and some services, but not to the transportation of goods. The 1997 ruling said transmission of electricity was akin to shipping merchandise; the 1999 decision says it is more like a service.

Last year, for the first time, some electricity was made available to customers in New York on the open market, on a first-come-first-served basis. The first steps were in Con Edison's territory, New York City and Westchester County, where 1,000 megawatts, or 9 percent of the power supply, was made available, and quickly bought up by about 2 percent of the customers. An additional 1,000 megawatts is to be opened up to competition on April 1.

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