Washington State House of Representatives Office of Program Research	BILL ANALYSIS
Technology, Telecommunications & Energy

HB 1404

Brief Description:  Establishing tax credits for new facilities that provide electricity for direct service industrial customers.

Sponsors:  Representatives Casada, Poulsen, Crouse, Ogden, Linville, Kagi, Hatfield, Van Luven, Cooper, Dickerson, O'Brien, Campbell, Conway, Roach, Bush, Lisk, Berkey, Miloscia and Kessler.

Brief Summary of Bill

$Establishes tax credits and deferrals available for new gas turbine electrical generating facilities that provide electricity for direct service industrial customers.

Hearing Date:  1/31/01

Staff:  Pam Madson (786‑7166).

Background:

Direct Service Industries

While the vast majority of the electricity that Bonneville Power Administration (BPA) sells is to utilities for resale, BPA does sell electricity for direct consumption to 12 direct-service industrial (DSI) customers in Washington State.  These companies are large industrial manufacturers, mostly aluminum producers, which consume significant amounts of electricity in their operations.  The current five-year contract with BPA is set to expire in September 2001.  In late 2000, in the wake of spiking wholesale electricity prices, a number of these companies curtailed production.

Business and Occupations Tax  (B&O)

The business and occupation (B&O) tax is Washington State=s major business tax. The tax is imposed on the gross receipts of business activities conducted within the state. Revenues are deposited to the state general fund.  A business may have more than one B&O tax rate, depending on the types of activities conducted.  Some key B&O tax rates that may apply to DSIs are:  Manufacturing and wholesalingat 0.484 percent; and services at 1.5 percent.

Brokered Natural Gas Use Tax

Natural or manufactured gas that is consumed within the state is subject to the brokered natural gas use tax, if the supplier was not subject to the state public utility tax.  The tax is measured by the value of the gas as delivered to the customer.  If costs of transportation of the gas were not subject to the public utility tax, then such costs are included in the value of the gas.  The rate is the same as the gas distribution rate under the public utility tax.  Revenues are deposited to the state general fund.

Public Utility Tax  (PUT)

Public and privately-owned utilities, and certain other businesses, are subject to the state public utility tax (PUT).  The PUT is applied to the gross receipts of the business.  For gas distribution businesses, the applicable tax rate, including permanent surtaxes, is 3.852 percent; for light and power businesses, the rate is 3.873 percent.  Revenues are deposited to the state general fund.

Summary of Bill: 

Tax credits and deferrals are provided to direct service industrial (DSI) customers who currently purchase electricity from the Bonneville Power Administration.

Business and Occupations (B&O) tax credits

Beginning July 1, 2004, a direct service industrial customer (DSI) may receive a credit against its B&O tax  for natural gas purchased to generate electricity at a gas turbine electrical  generation facility that is owned by the DSI.  This credit applies to natural or manufactured gas that is purchased from a company that pays the public utility tax (PUT).

The amount of the credit is the same as the amount of the PUT paid by the gas company that provides the gas to the DSI.  The credit is available for five years.

Brokered Natural Gas Use Tax

Beginning July 1, 2004,  a deferral of the brokered natural gas use tax is available to a DSI that purchases gas from a company that is not subject to the state PUT.  The gas must be used to generate electricity at a gas turbine electrical generation facility owned by the DSI.  The deferral is available for gas purchases for the first five years of the facility=s operation.  If the employment requirement discussed below is met by the DSI, the deferred tax need not be paid.

Public Utility Tax credit

Beginning, July 1, 2004, a credit is available against the PUT paid by an electricity generator that sells electricity to a DSI from a new gas turbine electrical generating facility if certain conditions are met:  (1) The DSI must contract with the generator for purchase of electricity for a period of at least 10 years; (2) the generator must pass on the amount of the credit to the DSI; and (3) the DSI is responsible for any repayment of the credit if certain additional requirements are not met.

The amount of the credit is the same as the amount of the PUT paid by the electrical generator for the sale of electricity to the DSI.  The credit is available for five years.

Conditions applicable to the tax credits and deferrals

The tax credits and deferrals are available if requirements regarding employment and diversity of resources are met (if such a requirement is enacted).

The maximum  tax credits or deferrals are available if the DSI maintains employment levels equal to or greater than the average of annual employment for the six years prior to the first purchase of gas for use in the generation facility.  Reductions in employment during the five years following the first purchase of gas that are below the average of annual employment for the six years prior will result in a reduction in the amount of the credit or deferral available.  A repayment schedule is established for this circumstance.  In the case of the brokered natural gas use tax, the deferred tax need not be paid if this employment requirement is met.

If a diversification of resources requirement is enacted during the 2001 legislative session, the credit or deferral will only be available to those who meet the requirement.

Effective Date:  Ninety days after adjournment of session in which bill is passed.

Appropriation:  None.

Fiscal Note:  Requested on January 25, 2001.