Bangor-Hydro gain is Veazie loss> Town loses tax dollars as utility struggles to survive deregulation

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VEAZIE — At least two dozen residents here called the town office earlier this month complaining of errors in the tax bills they’d just received.

Unfortunately for them, there were no errors.

Veazie taxes simply increased, with the rate jumping from $14.20 per $1,000 to $16.50.

While local officials had kept municipal and school costs down, they couldn’t overcome the loss in tax dollars from a reassessment which reduced the value of Bangor Hydro-Electric Co.’s property in the community by $10 million.

The problem now is that the town’s largest taxpayer still doesn’t believe its valuation is fair.

While officials with the company haven’t publicly stated what they are seeking for an abatement, they have referred to documents filed with the state which estimate the value of the Veazie property at $17 million. That figure is about $9 million less than the town’s current assessment and could mean another hike for local taxpayers of as much as $1.90 per thousand.

Veazie Tax Assessor Allan Thomas acknowledged that he is aware of the pressures recent market and regulatory changes have put on electric utility companies.

“They’re under the gun, too. I understand that,” he said. “Probably the biggest trigger is deregulation.”

But the situation has nonetheless been devastating to the town’s tax base.

Maine is among a handful of states either contemplating or starting to deregulate electric utilities. In theory, deregulation is supposed to open the state to increased competition among power providers, thereby increasing efficiency and lowering the cost to consumers.

Early next year, the Public Utilities Commission and an 18-member work group will recommend to the Legislature whether, when and how retail electric competition should be introduced in Maine.

Deregulation could, among other things, allow consumers to buy power from producers other than their local power companies, much like telephone users can choose their long-distance telephone carriers. The electricity could be “wheeled” for a fee along existing power lines from generators as far away as the Midwest.

Central Maine Power has already lost a customer to an out-of-state electric company. In 1994, Madison Electric Works, which is owned by the town of Madison, shopped around and signed a 10-year deal with Northeast Utilities of Hartford, Conn. The move enabled Madison Electric to provide its customers electricity at half of what it cost under the previous contract with CMP.

To offer their customers better rates, the Maine utilities have also been trying to deal with the “stranded costs” of investments they made in nonutility generating (NUG) facilities in the mid-1980s. Under the threat of soaring oil prices, the utilities entered into long-term contracts with small plants that created power by burning wood chips, peat, and even garbage. But as oil prices stabilized, the previously attractive fixed prices negotiated with the NUGs became a burden.

While the state had encouraged the investments in the NUGs, officials could not allow the utilities to simply abandon their contracts to provide ratepayer relief. To cut their losses and satisfy customers, however, CMP and Bangor Hydro renegotiated with some NUGs and began buying back their contracts.

Last year, for instance, Bangor Hydro borrowed more than $160 million to buy out a power contract it had with two Babcock Ultra Power biomass plants in Enfield and Jonesboro. The price of buying back those contracts is what the utilities refer to as stranded costs.

To become as competitive as possible, the utilities have been looking at other hard ways to cut costs, including haggling with towns over the property taxes they must pay for buildings and equipment housed in those communities.

A tax assessment dispute between CMP and the town of Moscow, for instance, lasted four years and made it all the way to the Maine Supreme Judicial Court in 1994. When the state ordered Moscow to update its figures in 1988, the town hiked the value of its half of the dam to $49 million based on an independent appraisal.

The company argued that its assets were worth only $970,000, based on the original cost of the 70-year-old dam minus depreciation. It further argued that its lower figure should be used for tax purposes because that was the figure the PUC used to set its rates and to limit its profits from the dam.

The court ruled that CMP had not met its burden of proof, and sided with the town of Moscow. The justices decided that the value of property for tax purposes and its value for rate-making purposes need not be the same.

The difficulty lies, however, in determining what is a fair appraisal of a utility’s holdings in a community.

It’s a matter of public record that the dollar value Veazie has assigned Bangor Hydro’s assets in the town has dropped from $43 million in 1992 to $25.9 million this year. The utility’s Veazie assets include land, power generating stations and substations, transmission lines and distribution equipment.

Most of the valuation decreases have been gradual, in the $1 million and $2 million per year range. But in the past year, the town assessor knocked more than $10 million off the utility’s bottom line on the grounds of “economic and functional obsolescence.”

“It’s not like we’ve been ignoring them,” says Allan Thomas, who has been Veazie’s tax assessor since 1990. At one time, Bangor Hydro paid more than half the town’s taxes. That share has continued to shrink and now stands at about 30 percent.

Bangor Hydro still believes, however, that it is paying too much.

The company considers one of its power-generating stations obsolete. Graham Station once comprised three oil-powered generating units, which until about four years ago supplied power when needed during periods of peak demand.

When it became cheaper for the company to buy excess from the market, one of the the units was taken apart and removed. The other two were mothballed, but could be put back into service if the need arose.

The gulf between the town’s assessment and the dollar value the company assigns to its Veazie holdings also could be due to different approaches to property valuation.

Under state law, the value on property for taxation purposes must be the property’s “just value,” which has been determined to be its fair market value, or the price a willing buyer would pay a willing seller at fair public sale.

But the figure that utilities submit to the PUC for rate-making purposes typically is based on original cost, with adjustments for depreciation and improvements. That is to prevent ratepayers from paying for assets after the utility companies have recouped the cost. The figure submitted to the PUC is provided in a document called Bulletin No. 25.

In an early August request to Veazie town officials, Bangor Hydro indicated that it believed its assessment should be decreased “based upon the information provided in [Property Tax] Bulletin No. 25.”

According to that document, Bangor Hydro set the value of its holdings in Veazie at about $17 million, or about $1 million for its transmission and distribution equipment and $16 million for everything else.

Bangor Hydro officials have not stated publicly whether they want Veazie to reduce its property tax assessment all the way down to $17 million.

Asked what the tax rate would have been had Bangor Hydro’s assessment been $17 million this year, Thomas calculated that it would have cost residents $18.40 per $1,000 in valuation, or 29.5 percent more than what they paid in 1995.

Representatives from Veazie and Bangor Hydro agree that their working relationship has remained “amicable,” and they intend to keep it that way.

Last fall, they hired American Appraisal Associates, a worldwide firm with experience in appraising utility industry facilities, in an attempt to find common ground. The two parties agreed to split the $67,000 appraisal bill, and additional related expenses estimated at $10,000.

They could have chosen a more costly route. The cost for separate appraisals was estimated at between $75,000 and $100,000 apiece. The matter then would have gone to litigation before the state Board of Property Tax Review, which would have added many thousands of dollars in legal fees.

While neither side has to accept the findings, the results are expected to help the town and the utility agree upon a fair valuation for Bangor Hydro property within Veazie’s town limits.

Both town officials and Bangor Hydro representatives are closemouthed about the matter. The two parties signed an agreement last October which sent negotiations behind closed doors.

The appraisal company reportedly issued an initial draft this spring, but that report, which was never made public, was not acceptable to either party because it left a number of unanswered questions. A more comprehensive report is expected to arrive soon.