By William Corvo
The new tax on electric generators included in Connecticut’s 2011 budget approved by the House and Senate and signed by Governor Malloy will have a significant negative impact on Connecticut’s consumers, workers and businesses. It also reverses long-term environmental policy by punishing projects that are the least polluting and most efficient while having little negative impact on old bunker oil fired and coal-fired projects.
How could so many bad ideas come together so quickly in one small portion of the Connecticut 2011 budget?
Caught in this budget are a number of new taxes including the Connecticut generator tax. The tax results in a $2.50 per megawatt per hour charge against any power plant generating electricity inside Connecticut. To put that in context, one needs to look at the size and number of hours that electric generators run to provide electricity to Connecticut. Millstone Nuclear plant produces more than 2,000 megawatts per hour. It usually operates around the clock — 24 hours a day seven days a week. When applying the tax to Millstone, you can see that the tax is not cheap — 2,000 megawatts x $2.50 per hour = $5,000 dollar an hour tax. The most efficient natural gas plants would also pay a high tax since they operate the most. Older, inefficient power plants that are seldom run will pay little or no tax.
The tax is poorly designed because it is a “flat tax.” It does not charge based on revenue earned, but charges for the amount of electricity produced. This tax has no respect for the complex electricity market that Connecticut’s generators service through the ISO New England system. As a result of this poor design the following unintended impacts will occur:
1) Anticipated tax revenue from Connecticut generators will be much lower than the budget estimate;
2) The tax will end up being passed through to the consumer;
3) Old polluting plants get a break while the cleanest most efficient power plants in Connecticut will pay 95 percent of the tax;
4) The tax will make Connecticut’s projects less competitive in the ISO market;
5) Connecticut’s natural gas projects will operate substantially fewer hours and make less money;
6) There will be no new power plants built in Connecticut until this tax is terminated, which means no new construction jobs and no new taxes for local communities;
7) Existing tax rates on some power plants will drop as a result of lower revenue;
8) The tax sends a message to the business community that is extremely negative.
The projected revenue from the generator tax is in the range of $74 million per year. While this tax in any configuration will be passed through to consumers, there is a way to reduce the negative impacts while keeping the revenue stream.
The simplest way to lessen the negative impact would be to remove the tax from the budget. That is unlikely due to the extremely difficult fiscal situation. The second best way to mitigate the negative impact of the tax is to modify it so that it will work in coordination with the ISO-NE market. This requires changing the tax structure to a tiered tax based purely on how the ISO-NE market place functions. The tax should be equitable among generators so that all generators will pay about the same percentage of net revenue to the State of Connecticut.
The key with the generator tax, as with most taxes, is to tax revenue rather than taxing production.
If this methodology is properly implemented and the tax is truly “sunset” at the end of the two year Connecticut budget crisis, most of the harm to Connecticut consumers, generators and the business community will have been reduced.
William Corvo is owner and president of Wm. Corvo Consultants Inc. in Middletown.
