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F I S C A L I M P A C T R E P O R T

SPONSOR Cisneros

ORIGINAL DATE

LAST UPDATED

2/18/07

2/24/07 HB

SHORT TITLE Electric Power Plant Property Valuation

SB 874

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

* See Narrative

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates HB666

Relates to HB665, SB340

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Response Received From

Taxation and Revenue Department

SUMMARY

Synopsis of Bill

Senate Bill 874 modifies the valuation methodology for property used in the generation,

distribution or transmission of electricity. The valuation can include deductions for “functional"

and “economic" obsolescence.

.

Economic obsolescence is defined as the loss of value caused by unfavorable economic

influences or factors outside of the property not including physical depreciation.

.

Functional obsolescence is loss due to functional inadequacies or deficiencies caused by

factors within the property not including physical depreciation.

The taxpayer choosing to include economic and/or functional obsolescence must submit a claim

documenting the obsolescence. Such documentation may include industry comparisons, volume

reductions, and other objective evidence of obsolescence. The Taxation and Revenue

Senate Bill 874 – Page

2

Department (TRD) will determine if the evidence is sufficient and notify the taxpayer if a claim

is rejected with the reasons and what additional information is needed to establish obsolescence,

giving a taxpayer enough time to comply.

A taxpayer is given a choice of valuation methods:

1.

capitalization of income

2.

market value of stock

3.

cost less allowance for obsolescence and depreciation.

Whichever method chosen the taxpayer must use that method for subsequent years unless, after

three years, the taxpayer can show sufficient cause to change methods.

This act is applicable to property tax years 2007 forward.

FISCAL IMPLICATIONS

There is no significant general fund impact though there may be significant impacts in counties

where there are electrical generating plants. There is no precise way to determine the impact of

this modification to the valuation methodology. Since there is a choice of methods, the likely

result is that property valuation will be lower in the future.

If assessed values do decrease as a result of this change, the impact depends on what the affected

county requires from property tax collections. If the county requires the revenue prior to this

change in valuation, rates for all property taxpayers will rise or fall to compensate for the change

in valuation. The county could keep the rates the same and the impact would come from tax

collections.

ADMINISTRATIVE ISSUES

TRD reports that they would need an additional FTE at $65,000 to manage an estimated five

additional unitary valuations per year.

ALTERNATIVES

TRD:

Proposed Amendments: 1) insert an emergency clause into the proposal, 2) delete

sections of the proposal allowing taxpayers an election to be assessed using unitary

appraisal methods, and 3) specify that an electric plant may not be valued at a higher

“level than ‘tangible property cost’ less the appropriate straight-line depreciation over the

economic life of the property". In cases where the Department disputes an investor-

owned utility’s claim for functional or economic obsolescence, however, the claims may

be adjudicated by use of unitary appraisal methods based on 1) one-third capitalization of

earnings; 2) one-third market value of stock and debt; and 3) one-third cost less

depreciation, economic and functional obsolescence.

OTHER ISSUES

TRD:

Unitary Assessment, Functional and Economic Obsolescence

The unit rule of appraisal is defined as "...an appraisal of an integrated property as a

Senate Bill 874 – Page

3

whole without reference to the value of its component parts. The approach is based on a

view that informed buyers and sellers purchase or sell a viable operating unit, rather than

portions of the property. This procedure incorporates "going concern" value associated

with a customer base, as opposed to a new customer base a firm would need to develop if

it purchased only portions of an established business. The unit rule may be applied

appraisals based on the cost approach, comparable sales approach or income approach.

As indicated above, the cost approach to appraisal estimates market value by making a

series of adjustments to estimates of replacement cost, including allowances for economic

and functional obsolescence. The sales comparison approach essentially appraises

property by comparing the property to prices of similar properties that have recently sold

– with appropriate adjustments. The income approach estimates the amount of money a

typical purchaser would pay for a (typically income-producing) property based on the

income generating ability of the property.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB 874 relates to HB665 and SB340 as far as proposing to use functional and economic

obsolescence as a factor for valuation. SB 874 refers to electrical transmission property where

the other two bill refer to oil and gas transmission property. HB 666 is a duplicate of SB874.

NF/mt