BILL ANALYSIS                                                                                                                                                                                                    




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 792                      HEARING:  7/3/13
          AUTHOR:  Mullin                       FISCAL:  No
          VERSION:  6/25/13                     TAX LEVY:  No
          CONSULTANT:  Weinberger               

                              UTILITY USERS TAXES
          

          Exempts, from a utility users tax, the consumption of  
          electricity generated through renewable distributed  
          generation for use by a single consumer.


                           Background and Existing Law  

          Utility users taxes (UUTs) are excise taxes imposed by  
          cities and counties on the consumption of utility services,  
          including electricity, gas, water, sewer, telephone,  
          sanitation, and cable television.  In jurisdictions that  
          impose a UUT, a utility company collects the tax through  
          the bills it sends to utility customers and remits the  
          revenues to the local government that imposed the tax.   
          Although a city or county can impose a UUT as a special  
          tax, generating revenues that must be used for a specific  
          purpose, nearly all UUTs are imposed as general taxes,  
          which allow revenues to be used for any purpose.  In the  
          2010-11 fiscal year, cities and counties reported  
          collecting more than $1.8 billion in UUT revenues.

          The California Constitution allows a city, with the consent  
          of the local voters, to govern its "municipal affairs" by  
          adopting a charter.  The constitutional municipal affairs  
          doctrine allows charter cities to levy taxes which are not  
          preempted by the state or federal governments.  66 charter  
          cities levy a UUT.

          A general law city can impose only those taxes that are  
          allowed by state statutes.  However, the Government Code  
          allows all general law cities to levy any tax which may be  
          levied by any charter city unless a different general law  
          limits or prohibits such a tax (SB 1326, Alquist, 1982).   
          87 general law cities levy a UUT.
           
          Counties can levy only those taxes that are allowed by  




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          state statutes.  A county board of supervisors can levy a  
          UUT on the consumption of electricity, gas, water, sewer,  
          telephone, telegraph, and cable television services in the  
          unincorporated area of the county (SB 2557, Maddy, 1990).   
          Alameda, Los Angeles, and Sacramento counties are the only  
          counties to levy a UUT using this statute.

          A small number of cities' ordinances specify that the  
          consumption of electricity generated from renewable sources  
          on the consumer's property for the consumer's use is exempt  
          from a UUT.  Although nearly all UUT ordinances do not  
          contain any exemption for self-generated renewable  
          electricity, it does not appear that any cities or counties  
          currently collect UUT revenues from electricity generated  
          by solar or wind distributed-generation systems.

          Some renewable energy firms sell renewable electricity  
          generation systems, like solar panels, directly to property  
          owners who must finance the cost of those systems  
          themselves and recover their initial investments over time  
          through reduced energy bills.  As an alternative, several  
          solar energy firms have developed sophisticated financing  
          transactions in which the renewable energy system is owned  
          by a third-party and the property owner is responsible only  
          for paying for the power generated by the system.  For  
          example, under a sale-leaseback financing structure, a  
          solar energy firm installs, operates, and maintains a solar  
          generation system at no cost to the property owner. The  
          property owner contracts for the power generated by the  
          system through a power purchase agreement. The solar firm  
          then sells the system to a third-party, which can claim tax  
          credits and depreciation as the system owner and leases the  
          system back to the solar firm.  Using third-party ownership  
          and power purchase agreements to finance distributed  
          generation renewable systems expands the renewable energy  
          market by allowing property owners to self-supply  
          electricity from renewable sources with little or no  
          up-front cost.

          Solar firms that use this type of third-party ownership  
          business model anticipate that some cities and counties may  
          decide to apply a UUT to the payments that a property owner  
          makes under the terms of a power purchase agreement.  They  
          worry that the added costs of a UUT would make their  
          business model less competitive with the alternative of  
          purchasing a solar system and would be an obstacle that  





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          prevents some property owners from installing renewable  
          electricity generation systems.  They want the Legislature  
          to exempt electricity generated by renewable distributed  
          generation systems for a single property owner's use from  
          any locally imposed UUT.


                                   Proposed Law  

          Assembly Bill 792 exempts, from any utility user tax  
          imposed by a local jurisdiction, a customer's consumption  
          of electricity generated by a renewable distributed  
          generation system that is installed for the exclusive use  
          of a single customer.

          AB 792 defines "local jurisdiction" as any city, county,  
          city and county, including any charter city, county, or  
          city and county, district, or public or municipal  
          corporation.


                               State Revenue Impact
           
          No estimate.
                                     Comments  

          1.   Purpose of the bill  .  Access to solar electricity is  
          critical to California's achieving its clean energy and  
          greenhouse gas emission goals, while also enabling more  
          homeowners to reduce their electricity bills.  Solar  
          distributed generation is one of the fastest-growing  
          markets in California.  Industry participants estimate that  
          more than 150,000 customers in California self-supply some  
          or all of their electricity using solar distributed  
          generation, and that more than 43,000 Californians are  
          employed by firms that are involved in the market for solar  
          distributed generation.  Uncertainty about the potential  
          application of UUTs to electricity from distributed  
          generation systems poses a threat to continued growth of  
          this dynamic distributed solar generation market.  Applying  
          a UUT to third-party power purchase agreement financing  
          would greatly disadvantage this business model.  An  
          internal analysis conducted by SunEdison found that  
          applying a 7.5% UUT to would make 15% of solar projects  
          financially unviable for SunEdison's customers.  By  
          eliminating uncertainty about the application of local UUT  





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          ordinances to renewable distributed generation and ensuring  
          consistent treatment for all customers, AB 792 will enable  
          the renewable distributed generation industry to continue  
          to grow throughout California.

          2.   Local control  .  Local voters elect county supervisors  
          and city council members to make public policy in response  
          to local needs.  Deciding how to apply local taxes to  
          generate local revenues is exactly what county supervisors  
          and city council members are elected to do.  Exempting all  
          renewable distributed generation electricity from UUTs  
          erodes local officials' ability to manage local affairs by  
          making it harder for them to raise scarce general fund  
          revenues.  Local elected officials, and the voters to whom  
          they are accountable, are well-positioned to judge the  
          merits of imposing a UUT on renewable  
          distributed-generation systems.  The Committee may wish to  
          consider whether SB 792 unnecessarily substitutes a  
          one-size-fits-all standard for local officials' informed  
          judgment about their communities.

          3.   Winners and losers  .  Because most UUTs apply to the  
          consumption of electricity, regardless of the source, the  
          tax functions as a broad-based source of general revenue  
          for local governments without favoring any particular  
          utility's business model.  By contrast, the statewide  
          exemption proposed by AB 792 would function like so-called  
          "sin taxes" on cigarettes and alcohol, which influence  
          consumer behavior by imposing higher taxes on disfavored  
          products.  The exemption would, for example, favor the  
          consumption of solar electricity produced on-site over  
          utility programs that allow customers to consume solar  
          electricity that is transmitted through the grid.   
          Proponents of the exemption could argue that  
          distributed-generation systems produce economic and  
          environmental benefits that justify this favorable  
          treatment.  However, some observes may see the exemption as  
          regressive, allowing property owners to avoid paying UUTs  
          for electricity from renewable sources while requiring  
          renters, who can't install on-site renewable generation, to  
          pay the tax. The Committee may wish to consider whether  
          state law should be changed to grant a UUT exemption that  
          favors specific kinds of renewable electricity generation.

          4.   Equity  .  One argument for AB 792 is that cities and  
          counties should not impose a UUT only on monthly bills sent  





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          to consumers under the terms of power purchase agreements  
          without also taxing the consumption of electricity  
          generated on-site through renewable systems owned by other  
          consumers.  In other words, the application of a UUT to  
          distributed generation renewable energy should not vary  
          based on the ownership of the renewable generation system.   
          The bill responds to this concern by uniformly exempting  
          all on-site renewable systems from the UUT.  An alternative  
          approach, that would maintain some local discretion while  
          ensuring uniformity, would be to require that any local  
          government that collects a UUT on electricity from  
          distributed generation renewable systems must collect the  
          tax on electricity from all comparable distributed  
          generation renewable energy systems within its  
          jurisdiction.  The Committee may wish to consider amending  
          AB 792 to require that local UUTs must apply uniformly to  
          similar types of on-site renewable generation systems.

          5.   Short-term alternative  ?  The exemption granted by AB  
          792 is similar to the support that state law provides to  
          active solar energy systems by excluding those systems from  
          the definition of "new construction" for the purpose of  
          reappraising property values (AB 1451, Leno, 2008).  Unlike  
          AB 792, the property tax exclusion does not provide a  
          permanent incentive for active solar systems; it is  
          scheduled to expire in 2016.  As an alternative to the  
          indefinite UUT exemption granted by AB 792, the exemption  
          could be enacted in a manner that mirrors other temporary  
          state incentives for renewable energy systems.  The  
          Committee may wish to consider amending AB 792 to exempt,  
          from a UUT, electricity from renewable distributed  
          generation systems installed before July 1, 2016, a date  
          that is concurrent with the expiration date for other major  
          state solar incentive programs.

          6.   Charter cities  .  The California Constitution allows  
          cities that adopt charters to control their own "municipal  
          affairs."  In all other matters, charter cities must follow  
          the general, statewide laws.  Because the Constitution  
          doesn't define "municipal affairs," the courts determine  
          whether a topic is a municipal affair or whether it's an  
          issue of statewide concern.  AB 792 says that it applies to  
          all cities, including charter cities.  To support this  
          assertion, the bill includes a legislative finding and  
          declaration that the bill's exemption is a matter of  
          statewide concern because of the need to ensure statewide  





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          uniformity and fairness in the overall imposition of the  
          utility user tax.  Ultimately, the courts may decide  
          whether AB 792 applies to charter cities.

          7.   Gut-and-amend  .  As introduced, AB 792 made changes to  
          state laws governing the posting of notices and agendas for  
          local governments' meetings.  The Committee never heard  
          that version of the bill.  The June 25 amendments deleted  
          the bill's contents and inserted the language relating to  
          UUTs.


                                 Assembly Actions  

          Not relevant to the June 25, 2013 version of the bill.


                         Support and Opposition  (6/27/13)

           Support  :  SunEdison; Environment California; Solar Energy  
          Industries Association; Sunrun; Vote Solar.

           Opposition  :  Unknown.