By James P. Regan, As published by Real Estate Chicago, January/February 2003
The passage of the Illinois Electric Service Customer Choice and Rate Relief Law of 1997 heralded a new era in the delivery of electric power to Illinois residents. The law aimed at developing a electricity generation market that would offer consumers more competitive pricing. On the positive side, it has been successful in reducing rates and also in spurring additional power sources, which has eliminated some of the peak-time brownouts that had become common.
But the law has also had other unforeseen consequences, such as the pitfalls arising from over-reliance on real estate taxes to fund essential services, particularly education. A most dramatic example of those pitfalls is playing out in Grundy County, where two electric generation facilities are located: Dresden Nuclear Plant and Collins Station Power Plant. In response to the 1997 legislation, ComEd began a divestiture program that resulted in the 1999 sale of all of its fossil fuel generation facilities. Collins Station was included in that sale, but ComEd's nuclear plans were retained.
We must go back to the late 1970s to understand how the pitfall evolved. At that time, demand for power was increasing in Grundy County, which caused ComEd to begin development of three nuclear plants. Delays prevented them from bringing the plants on line as scheduled. In response to those delays, ComEd built Collins Station to serve as an interim power source and back up to the nuclear plants, once they came on line. Collins Station has a capacity greater than any one of the nuclear plants, so that if one of them went out of service, an equivalent output would be available from the Collins Plant.
Since 1981, Collins has never operated at more than 18.3% of capacity. In most years, it has run at less than 10%. This situation was possible as long as Collins operated under a regulated market. In the regulated market, 100% of the plant's capital costs and actual operating costs, including real estate taxes, were passed through in the electricity rates charged to consumers.
Beginning in 2000, when the 1997 legislation came into effect, that scenario changed significantly. Collins Station had to operate under an unregulated market-based system. In that system, rates are not set by government regulatory bodies. They are established by the "market." By 2002, the market price of electricity was somewhere between $21 and $23/mwh, while production costs at Collins Stations were up to $36 to $48/mwh.
It is doubtful that a facility like Collins, with its very low capacity usage, can survive in Grundy County. Before deregulation, the county had supported a tax system that discouraged commercial and industrial development. The county's tax base was small, but the revenue demands of a rural and agricultural county were not too great, and the enormous taxes on Dresden and Collins could be factored into the consumers' rate structure.
When deregulation came, by happenstance, the population of Grundy County began to grow. This resulted from the fact that as land closer to Chicago became increasingly more expensive, people looked for land which was less costly and found it in Grundy County. The increasing population created demands for additional revenues. All these revenue demands have been placed on the few existing industrial facilities because the County continues its high-real estate tax system that discourages commercial and industrial development.
For example, as a result of the sale of Collins Station, the County raised the real estate taxes from $6 million in 1999 to almost $12 million by 2001. In 1999, Collins supplied 38% of the grade school district's budget and 29% of the high school district's budget. By 2001, those numbers reached 58% and 47%, respectively. Squeezed by these high rates, in 2002 Collins Station announced it will mothball two if its five generators, and intimated that it would consider shutting down the plant completely in 2004.
Under deregulation, electricity producers must operate at a profit. In Grundy County, exorbitant real estate taxes helped make that impossible for Collins Station. The lesson learned here is that deregulation must be accompanied by a tax system that encourages the expansion of the tax base. To do otherwise will all too quickly cause the exodus of a county's commercial and industrial tax base.
James P. Regan is a partner in the Chicago law firm of Fisk Kart Katz and Regan, Ltd., the Illinois member of American Property Tax Counsel. He can be reached at jregan@proptax.com.