BILL ANALYSIS Ó 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 AB 792 -- 6/25/13 -- Page 2 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 AB 792 -- 6/25/13 -- Page 3 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 AB 792 -- 6/25/13 -- Page 4 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 AB 792 -- 6/25/13 -- Page 5 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 AB 792 -- 6/25/13 -- Page 6 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.