Was an independent private cogeneration power producer subject to Connecticut's utility company tax merely because electricity was its principal business?

Plain-English summary

A corporation generated electricity in Connecticut solely through a cogeneration facility. Electricity or steam was its principal business, but it was a statutory private power producer, not a public service company, and it was not affiliated with or descended from a public service company in any of the listed ways.

DRS held the company was not subject to the utility company tax under Conn. Gen. Stat. § 12-264. Principal business was only the first part of the analysis. The historical tax also depended on utility-account classifications or a legislatively recognized exception. Private power producers were excluded from the public-service-company definition and not subject to the uniform systems of accounts. Unlike certain steam companies, they had not been expressly placed in the utility-tax class.

The answer was conditional: it applied only if the producer was not a public service company, a holding company or subsidiary tied to one, a subsidiary of a holding company controlling one, or a former public service company that consented to regulation.

What this means for you

Operating an electricity-generation business did not by itself establish utility-company-tax status. Entity classification, regulatory status, and public-service affiliations were decisive.

Common questions

Did electricity being the principal business satisfy part of the test? Yes, but it was not enough by itself.

Why was the producer outside the tax? It was an independent private power producer outside the public-service-company classification and uniform accounting system, with no applicable statutory exception.

Citations and references

• Conn. Gen. Stat. § 12-264.
• Conn. Gen. Stat. § 16-243b(a)(1) and (3).
• Conn. Gen. Stat. § 16-1(a)(4).
• State v. United Electric Light & Water Co., Hartford Electric Light Co. v. McLaughlin, Hartford Electric Light Co. v. Sullivan, and Hartford Steam Service Co. v. Sullivan, discussed in the ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-71

Original ruling text

Ruling 90-71, Utility Company Tax

Ruling 90-71

Utility Company Tax

ISSUE:

Whether a private power producer, as defined in Conn. Gen. Stat. §16-243b(a)(3), generating electricity solely through its ownership of a private power production facility, as defined in Conn. Gen. Stat. §16-243b(a)(1), is subject to the tax imposed under Conn. Gen. Stat. §12-264, if it is not (1) a public service company, (2) a holding company for a public service company, (3) the subsidiary of a public service company, (4) the subsidiary of a holding company controlling, directly or indirectly, a public service company or (5) a corporation that, prior to July 1, 1981, was a public service company and that consents to being regulated as a public service company.

FACTS:

A request for the issuance of a letter ruling was made by a corporation [hereinafter, "the Corporation"] that is a private power producer, as defined in Conn. Gen. Stat. 16-§243b(a)(3), generating electricity solely through its ownership of a private power production facility, as defined in Conn. Gen. Stat. §16-243b(a)(1).

The private power production facility that is owned by the Corporation is a facility which generates electricity in Connecticut solely through the use of cogeneration technology.

The Corporation is not (1) a public service company, (2) a holding company for a public service company, (3) the subsidiary of a public service company, (4) the subsidiary of a holding company controlling, directly or indirectly, a public service company or (5) a corporation that, prior to July 1, 1981, was a public service company and that consents to being regulated as a public service company.

The Corporation's principal business is manufacturing, selling or distributing electricity or steam to be used for light, heat or power.

By letter dated December 13, 1989, the Corporation requested an opinion from the Department of Public Utility Control concerning whether it was subject to the Uniform Systems of Accounts.

By letter dated December 20, 1989, the Department of Public Utility Control advised the Corporation that, because the Corporation was a private power producer, as defined in Conn. Gen. Stat. §16-243b(a)(3), it was not subject to the Uniform Systems of Accounts.

DISCUSSION:

In general, a company is subject to the utility tax imposed under Conn. Gen. Stat. §12-264 if it meets both of the following conditions:

The first condition is that its "principal business ... is manufacturing, selling or distributing gas or electricity or steam to be used for light, heat or power ...." Conn. Gen. Stat. §12-264. The Supreme Court has long indicated that a company manufacturing, selling or distributing gas or electricity or steam to be used for light, heat or power would not be subject to the tax if such activities were not its principal business.

"Section 11 [of Chapter 292 of the Public Acts of 1915--the statutory forebear of Conn. Gen. Stat. §12-264] designates or describes the companies which are to be taxed under part two [of Chapter 292], by reference to their 'principal business.' Companies whose principal business is not the manufacture of gas, electricity or power, or the operation of water-works, may, under the statutes or their charters, operate plants for these purposes in connection with their principal business, and may sell surplus power, water, gas or electricity to their neighbors. Such companies are not included in the class of companies taxed under part two, but in classes taxed under other provisions of the Act."

State v. United Electric Light & Water Co., 90 Conn. 452, 456 (1916). The facts represented support a finding that this first condition is met.

The second condition is that, subject to the exception discussed, infra, its gross earnings be "income classified as operating revenues by the department of public utility control in the uniform systems of accounts prescribed by said department" or "income classified in said uniform systems of accounts as income for merchandising, jobbing and contract work, income from non-utility operations and revenues from lease of physical property not devoted to utility operation, and receipts from the sale of residuals and other by-products obtained in connection with the production of gas, electricity or steam". Conn. Gen. Stat. §12-264.

Until 1945, if a company's principal business were manufacturing, selling or distributing gas, electricity or steam to be used for light, heat or power, then all its gross earnings were subject to the tax. Hartford Electric Light Co. v. McLaughlin, 131 Conn. 1, 5 (1944). The passage of 1945 Conn. Pub. Act 279 limited the gross earnings that were taxable to those fitting under certain classifications of the Uniform Systems of Accounts.

"In 1944 we held, in Hartford Electric Light Co. v. McLaughlin , 131 Conn. 1, 6, 37 A.2d 361, that the statute, as it then read, included all earnings of a utility. It is significant that the statute was amended in the next legislative session. Clearly, without an amendment, the statute included all income. The only reason for the legislature to act on that statute would be to clarify it, and since this court had already clarified the fact that the old statute contemplated all income, it is only logical to infer that the legislature intended to restrict that definition. Were that not the intent, the legislation would have accomplished no purpose, and we may not presume that the legislature has enacted futile or meaningless legislation."

Hartford Electric Light Co. v. Sulliva n, 161 Conn. 145, 151-152 (1971). The Supreme Court further concluded that

"[the reference [in 1945 Conn. Pub. Acts 279] to 'the uniform systems of accounts' is a reference to a specific regulation or document. The adoption, therefore, considered a classification, or list, which was already in existence... The uniform systems which were in existence at the time of the 1945 amendment to the predecessor of §12-264, and relevant to gas and electric companies, were those of January 1, 1941. The items listed therein, therefore, were those adopted by the legislature in §12-264... 'Operating revenues,' as used in §12-264, are thus limited to those items classified as such in the 1941 uniform system [sic] of accounts."

Id. at 155.

Public service companies are subject to the uniform systems of accounts. The Department of Public Utility Control was created to regulate the operations of public service companies, and, to regulate their accounting practices, the Department has prescribed the uniform systems of accounts and has required the accounting practices of public service companies to be in conformity therewith. (For example, the instructions for the uniform system of accounts for electric companies state that

"[each electric company or utility as defined in Section 16-1 ... and each municipal electric utility, or department thereof, subject to accounting regulation by the Commission [now, the Public Utility Control Authority], shall keep its records and accounts in conformity with this Uniform System of Accounts and in conformity with the definitions and instructions contained herein.") Conn. Gen. Stat. §16-6b authorizes the Department of Public Utility Control to "adopt such regulations with respect to rates and charges, services, accounting practices, safety and the conduct of operations generally of public service companies subject to its jurisdiction as it deems reasonable and necessary." [Emphasis furnished]

The Department of Public Utility Control is charged pursuant to Conn. Gen. Stat. §16-11 with "[keeping] informed as to the condition of the plant, equipment and manner of operation of all public service companies in respect to their adequacy and suitability to accomplish the duties imposed upon such companies by law and in respect to their relation to the safety of the public and of the employees of such companies... The general purposes of this section and sections 16-19, 16-25, 16-43 and 16-47 are to assure to the state of Connecticut its full powers to regulate its public service companies , to increase the powers of the department of public utility control and to promote local control of the public service companies of this state ...." [Emphasis furnished]

Each public service company is required to "have an annual comprehensive audit and report made of its accounts and operations... A copy of such annual report shall be filed with the department ...." Conn. Gen. Stat. §16-32. Each public service company is required to "return [an annual report in such format as the Department of Public Utility Control requires] with all questions fully answered to the department ...." Conn. Gen. Stat. §16-27(a). The department head of the Department of Public Utility Control is the chairperson of the public utility control authority. Conn. Gen. Stat. §16-1b. "To insure the highest standard of public utility regulation, at least three commissioners of the authority shall have training or experience in at least one of the following fields: Economics, engineering, law, accounting or finance. At least two of these fields shall be represented on the authority at all times." Conn. Gen. Stat. §16-2(e). "The chairperson of the authority, with the consent of two or more other members of the authority, shall appoint an executive director, who shall be the chief administrative officer of the department of public utility control... The executive director shall require the staff of the department to have expertise in public utility engineering and accounting, finance, economics, computers and rate design." Conn. Gen. Stat. §16-2(f).

The uniform systems of accounts are not prescribed for persons other than public service companies, and their accounting practices cannot be required to be in conformity therewith. From the definition of "public service company", Conn. Gen. Stat. §16-1(a)(4) expressly excludes "a private power producer, as defined in section 16-243b." The Corporation is a private power producer, as so defined; therefore, it is not a public service company and, consequently, is not subject to the uniform systems of accounts.

But the Corporation not being subject to the uniform systems of accounts is not controlling, because there are two exceptions to the rule that only companies subject to the uniform systems of accounts, namely, public service companies, are subject to the utility company tax.

The first exception pertains to water companies. Prior to the passage of 1984 Conn. Pub. Acts 458, a water company that was not a "water company", as the term is defined in Conn. Gen. Stat. §16-1(a)(10), and, therefore, not a "public service company", as the term is defined in Conn. Gen. Stat. §16-1(a)(4), was nonetheless subject to the utility company tax. (Generally, a water company with fewer than 50 customers was not a "water company", as the term is defined in Conn. Gen. Stat. §16-1(a)(10), but was a company "operating a system of water works for selling and distributing water for domestic or power purposes"; Conn. Gen. Stat. §12-264.) Conn. Gen. Stat. §12-264, as amended by 1984 Conn. Pub. Acts 458, now provides that "[any company operating a system of water works for selling and distributing water for domestic or power purposes, which company is not a water company as defined in section 16-1, shall not be subject to the provisions of this chapter and chapter 212a."

The second exception pertains to certain steam companies. With the enactment of 1961 Conn. Pub. Acts 604, §§14 and 15 [approved June 9, 1961], amending Conn. Gen. Stat. §§12-264 and 12-265, respectively, each company, the principal business of which is manufacturing, selling or distributing steam to be used for light, heat or power, became subject to the utility company tax. A steam company is not a public service company, as defined in Conn. Gen. Stat. §16-1(a)(4), and, consequently, is not subject to the uniform systems of accounts.

During the same session, the General Assembly amended the charter of Hartford Gas Company, a specially charter public service company, to authorize and empower it, "through the agency of one or more wholly owned subsidiaries, whether incorporated by special act of the general assembly or under the general statutes of the State of Connecticut, as well as by itself, to engage in the business of furnishing, from one or more plants, heat or air conditioning, or both, by means of steam, heated or chilled water or other medium ...." 1961 Conn. Spec. Acts 119, 2 [approved May 31, 1961].

Pursuant to this authority, Hartford Gas Company organized two wholly owned subsidiaries: The Hartford Steam Co., a specially chartered company, and The Hartford Steam Service Co., a company organized under the general law. Apparently, The Hartford Steam Service Company was the only company in Connecticut that sold steam and chilled water as its principal business.

The trial court was of the opinion that the utility company tax was properly imposed on Hartford Steam Service Company's gross earnings. "The legislature by including steam companies subject to gross earnings tax clearly expressed an intention that such companies were to be placed in the same classification as public utility and service companies supplying electricity, gas or water because of the similarity of their operation in so far as the nature and use of equipment, facilities, use of natural resources, use of underground conduits and the availability of its product to the general public." Hartford Steam Service Co. v. Sullivan, No. 130402 (Super. CT. June 4, 1963). The Supreme Court affirmed this holding, concluding that Conn. Gen. Stat. §12-264 "imposes an annual tax upon the gross earnings from operations in this state of municipal utilities and of certain companies in the utility field , including those whose principal business is the manufacture, sale or distribution of gas, electricity or steam to be used for light, heat or power" and that The Hartford Steam Service Co. was such a company. Hartford Steam Service Co. v. Sullivan, 151 Conn. 687, 688 (1964). [Emphasis added]

But the legislature has not, as it did with steam companies, "clearly expressed an intention that [private power producers such as the Corporation] were to be placed in the same classification as public utility and service companies supplying electricity, gas or water ..." Hartford Steam Service Co. v. Sullivan , No. 130402 (Super. Ct. June 4, 1963). That is not to say that there is no "similarity of ... operation in so far as the nature and use of equipment, facilities, use of natural resources ...." Id. But there is clearly a dissimilarity with respect to "the availability of its product to the general public." Id .

The courts have consistently stated, since the tax was first imposed, that the legislature intended the tax to be imposed on public service companies or, as was the case with The Hartford Steam Service Co., their affiliates. "The class of companies taxed necessarily operate under Special Acts permitting them to lay their pipes and string their wires in the streets and highways of the State. They are thus properly subject to a State tax upon the franchises and privileges thus granted them." State v. United Electric Light & Water Co ., 90 Conn. 452, 459 (1916). "[The statute prescribes a tax on gross earnings of utility corporations engaged in a noncompetitive business, instead of a franchise tax measured by net income such as is imposed upon the ordinary business concern." Hartford Electric Light Co. v. McLaughlin, 131 Conn. 1, 5 (1944). A private power producer that is not (1) a public service company, (2) a holding company for a public service company, (3) the subsidiary of a public service company, (4) the subsidiary of a holding company controlling, directly or indirectly, a public service company or (5) a corporation that, prior to July 1, 1981, was a public service company and that consents to being regulated as a public service company is not a company that the legislature expressly intended to be placed in the same classification as public utility and service companies. Hartford Steam Service Co. v. Sullivan, No. 130402 (Super. Ct. June 4, 1963).

RULING:

A private power producer, as defined in Conn. Gen. Stat. §16-243b(a)(3), generating electricity solely through its ownership of a private power production facility, as defined in Conn. Gen. Stat. §16-243b(a)(1), is not subject to the tax imposed under Conn. Gen. Stat. §12-264, provided it is not (1) a public service company, (2) a holding company for a public service company, (3) the subsidiary of a public service company, (4) the subsidiary of a holding company controlling, directly or indirectly, a public service company or (5) a corporation that, prior to July 1, 1981, was a public service company and that consents to being regulated as a public service company.

LEGAL DIVISION

November 5, 1990