Did an electric utility's securitization issuer owe pre-2008 franchise tax on transition charges or short-term earnings, and did the letter decide property tax?

Plain-English summary

The securitization issuer's transition charges and specified short-term investment earnings were excluded from taxable capital and taxable earned surplus, but the letter did not decide property tax.

Company A proposed creating a wholly owned LLC in Texas, Nevada, or Delaware, qualified to do business in Texas. After a Public Utility Commission financing order, Company A would transfer that order to the issuer as transition property. The issuer would issue transition bonds, receive transition charges, hold an initial cash contribution for credit enhancement, invest cash temporarily, and dissolve after the bonds were retired.

The Comptroller applied Section 39.311 to exclude from the issuer's taxable capital and taxable earned surplus:

• the transfer and ownership of transition property;
• receipt of transition charges; and
• short-term earnings on accumulated bond funds and the initial cash requirement.

The taxpayer also requested a ruling that no Texas state or local property or ad valorem tax would apply to the financing order or transition property. The Property Tax Division said it lacked authority in that situation and directed the taxpayer to the appropriate local appraisal districts. The letter also said responses to remaining questions would be forthcoming, so those issues were not resolved here.

Currency note: The franchise-tax holding uses the taxable-capital and earned-surplus bases replaced by the margin tax effective January 1, 2008. Confirm current Section 39.311 and margin-tax treatment.

What this means for you

Utility securitization entities

The exclusion covered the issuer's specifically described transition-property transactions and related short-term earnings. It should not be generalized to unrelated investment income or other activities not addressed in the letter.

Property-tax questions

This ruling provides no property-tax exemption. The Comptroller expressly referred that question to local appraisal districts.

Common questions

Q: Were transition charges included in the old franchise-tax bases?
A: No. The described charges and transition-property transactions were excluded from taxable capital and taxable earned surplus.

Q: Were short-term investment earnings excluded too?
A: Yes, for accumulated bond funds and the issuer's initial cash requirement as described.

Q: Did the Comptroller exempt the financing order from property tax?
A: No. The Property Tax Division said it lacked authority and referred the issue to local appraisal districts.

Citations and references

• Senate Bill 7, 76th Legislature, Chapter 39, Subchapter G - transition financing orders, property, charges, and bonds
• Section 39.311 - franchise-tax exclusion applied by the Comptroller

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200002272L

Original ruling text

February 3, 2000

Dear **:

You have requested a ruling regarding the applicability of Texas franchise tax
to a proposed transition property securitization transaction undertaken
pursuant to Senate Bill 7, passed by the 76th Legislature.

Senate Bill 7 (the "Act") provides for the restructuring of the electric
utility industry and sets forth provisions for the industry's transition from a
regulated to a competitive electric market. Pursuant to Chapter 39, Subchapter
G, of the Act, an electric utility may request the Public Utility Commission to
adopt a financing order allowing the utility to impose transition charges to
recover its stranded and other costs and regulatory assets. An electric
utility's rights under such a financing order, including the right to impose,
collect, and receive transition charges authorized in the order, may be
transferred to an assignee or pledged to secure financing; the transferred or
pledged rights become "transition property."

The Act specifically provides that transition property constitutes a present
property right for purposes of contracts concerning the sale or pledge of
property. Pursuant to a financing order, an electric utility or its assignee
may issue transition bonds that are secured by or payable from transition
property. The transition bonds are retired by use of proceeds from the
transition charges.

COMPANY A proposes to create a Texas, Nevada, or Delaware limited liability
company ("Issuer") qualified to do business in Texas, of which COMPANY A will
be the sole member. COMPANY A will apply to the PUC for a Financing Order.
Upon its issuance, COMPANY A will transfer the Financing Order to Issuer. As a
result of such transfer, the Financing Order will become Transition Property.

The purposes of Issuer will be limited to:
(i) the acquisition, management, administration, pledge, assignment, and sale
of Transition Property,
(ii) the issuance and sale of Transition Bonds,(iii) the receipt of Transition Charges and corresponding payment of amounts
due under Transition Bonds,
(iv) the investment in short-term financial assets or securities of cash (a)
generated from the foregoing activities ("Accumulated Bond Funds") or (b)
initially contributed by COMPANY A to Issuer in satisfaction of a Transition
Bond Indenture, or similar agreement or covenant providing credit enhancement
(the "Initial Cash Requirement"), and
(v) those activities necessary, suitable, or convenient to accomplish the
foregoing purposes.

In connection with Issuer's securitization of Transition Property and issuance
of Transition Bonds, COMPANY A will:
(i) contribute to Issuer the Initial Cash Requirement,(ii) act as servicer of the Transition Property and Transition Charges for and
on behalf of Issuer and receive a fee therefore (the "Servicer Fee"),(iii) invest Transition Charge collections in short-term financial assets or
securities prior to the periodic remittance of such Transition Charge
collections to Issuer ("Collection Earnings"), and
(iv) receive from Issuer distributions of (a) net proceeds from Transition Bond
sales and (b) net earnings from short-term investments of the Initial Cash
Requirement (together, "Issuer Distributions").

Upon retirement of the Transition Bonds, Issuer will terminate its operations
and dissolve.

The exemption from taxation provided in Section 39.311 expressly references
franchise tax and transactions involving the transfer and ownership of
transition property and receipt of transition charges within a financing order
of the Public Utility Commission. As such, transactions involving the transfer
and ownership of transition property and the receipt of transition charges as
described in Section 39.311 will be excluded from the computation of taxable
capital and taxable earned surplus for Issuer. In addition, Issuer's
short-term earnings on Accumulated Bond Funds and the Initial Cash Requirement
as described above will be excluded from the computation of taxable capital and
taxable earned surplus for Issuer.

You have asked that we rule that no Texas state or local property or ad valorem
tax will be imposed on or with respect to a Financing Order or Transition
Property. Dan Wilson of the Comptroller's Property Tax Division advises that
they have no authority in this situation and that you should contact the
appropriate local appraisal district(s).

Responses to your remaining questions will be forthcoming.

This response is based on the facts presented in your letter. If the facts
change or if there are additional relevant facts, the response may change.

If you have additional franchise tax questions, please write me or call me at
1-800-531-5441. My extension is 3-3958.

Sincerely,

Teresa Comer
Tax Policy Division

cc: Karey W. Barton, Director of Tax Policy
Bryant Lomax, Manager, Tax Policy
Dan Wilson, Property Tax Division