Taxation and Regulation of Public Utilities (Informational Paper 9)

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Informational Paper 9

Taxation and Regulation of Public Utilities

Wisconsin Legislative Fiscal Bureau

January, 2009

Taxation and Regulation of Public Utilities

Prepared by

Rick Olin

Wisconsin Legislative Fiscal Bureau One East Main, Suite 301 Madison, WI 53703

Taxation and Regulation of Public Utilities

Introduction service commitments. Legislation also required such utilities to disaggregate the costs of providing This paper provides information on the taxation various basic network services as an essential step of regulated public utility corporations in in pricing these services in a competitive Wisconsin. The focus is on the separate state environment. taxation of utilities on the basis of gross receipts or property value (ad valorem), in lieu of local Change has also occurred in the electric property taxation. In addition, information is industry. The federal Energy Policy Act of 1992 and provided on the regulatory treatment of the utility subsequent orders by the Federal Energy sector and on other relevant tax provisions. Regulatory Commission paved the way for the development of a competitive interstate wholesale Several factors combine to make the economics power market. A number of states have since taken and taxation of the public utility sector different steps to implement restructuring at the wholesale, than that of most other corporations. The public and even retail, levels. However, in the wake of the services provided are relatively exclusive in nature California energy crisis of 2000 and 2001 and and the component industries are dominated by concerns about the possible manipulation of power relatively few, large corporations. One markets under deregulation, some state consequence of these characteristics is that each governments have opted away from deregulation. industry is subject to a regulatory system that, in Nonetheless, Wisconsin has directed electric turn, has significant implications for their tax utilities based in the state to transfer control over treatment. In addition, rapid economic, their electric transmission facilities to an technological, and regulatory changes, alterations independent operator. In recent years, changes in the energy use mix due to price changes and have also been enacted relating to financing the conservation efforts, and changes in company costs of construction or renovation of electric ownership or company structure all have major generating facilities. effects on the taxation of different types of utilities. Amidst a growing demand for energy, public Over the past 25 years, significant changes have officials and policy makers are concerned about the occurred with respect to the regulation of adequacy of investment in electric generation and telecommunications and electric utilities. While the transmission facilities. As a result, further 1984 U. S. District Court-ordered break-up of legislative or administrative decisions at both the AT&T was responsible for dramatic changes in the federal and state levels are possible regarding the telecommunications sector, the decision can be treatment of different types of utility companies characterized as a response to major technological and the classification of taxable revenues. To the changes that were impacting this utility sector and extent that the power industry remains in flux, were affecting competition. By the mid-1990s, projections of utility company taxable revenues Wisconsin had adopted legislation authorizing and resulting tax collections will contain an telecommunications utilities to elect lesser levels of element of uncertainty. state regulation in exchange for a certain level of

1 revenues license fees were imposed on telephone State Utility Taxes companies at graduated tax rates, and separate toll and exchange rates were extended in 1931. A gross revenues based tax was extended to car line Historical Development companies (lessors of passenger and freight railroad cars) in 1931 and to rural electric Public utilities in Wisconsin are subject to state cooperatives in 1939. taxation in lieu of local general property taxation. The state tax takes one of two general forms, Since 1986, the basis of taxation has shifted for a depending on the type of company: (a) an "ad number of utilities, but the two basic forms of taxa- valorem" tax based on the assessed value of tion continue. The tax basis for light, heat, and company property within the state; or (b) a tax or power companies was changed from ad valorem to license fee based on the gross revenues or receipts gross revenues in 1986. In the same year, telegraph of the company generated in Wisconsin. The companies were recognized as providing telecom- history of these tax provisions is varied for each munications services and also were shifted from ad type of company, but generally represents a valorem to gross revenues taxation. In addition, all movement from local to state taxation. other companies providing telecommunications services to the public (such as resellers) were made Almost since the state's creation, a recognition subject to the gross revenues license fee. has existed that certain public utility property may be difficult to tax locally. An 1854 law exempted The gross revenues license fee on telecommuni- railroads from the property tax, and, instead, the cations services was subsequently discontinued, state imposed a tax based on the railroads' and since 1998, all telephone companies have been earnings. In 1904 and 1905, that tax was phased out taxed on an ad valorem basis. As part of the shift to and replaced with an ad valorem tax based on the an ad valorem tax, a transitional fee was imposed statewide average tax rate. The state ad valorem on certain telecommunications service providers in tax was extended to street railway companies with 1999 and 2000, based on the tax that would have connected light, heat, and power operations in 1908 been due under the gross revenues license fee. The and to all light, heat, and power companies in 1917, ad valorem tax on telephone companies differs provided they operated in more than one from the state ad valorem tax imposed on other municipality. Previously, the state preempted local public utility property. A separate value of the taxation of conservation and regulation companies property of telephone companies is determined (owners of dams and reservoirs used for within each local taxing jurisdiction where tele- hydroelectric power generation), which became phone company property is located, and the tax is subject to the state's ad valorem tax in 1915. based on the prior year's net property tax rate of Subsequently, the tax was imposed on commercial the corresponding local taxing jurisdiction. airlines in 1946 and on gas and oil pipeline companies in 1950. Both types of tax are administered by the Department of Revenue (DOR). Table 1 As evidenced by the state's early taxation of summarizes the type of utility tax, the tax base, and railroad companies, the gross revenues tax has the tax rate that currently applies to each type of been an alternative to the state's ad valorem tax for Wisconsin utility company. most of the state's history. Starting in 1883, gross

Table 1: Summary of Utility Tax by Type of Utility

Utilities Subject to Ad Valorem Taxes Tax Base Tax Rate

Air Carrier Companies All real and personal property, including Average net property tax Conservation and Regulation Companies all franchises, title, and interest of the rate in state Municipal Electric Associations company used or employed in its Pipelines operations; value as a unit Railroad Companies

Telephone Companies Real property and tangible personal Net property tax rate in property; value within the local jurisdiction where jurisdiction where it is located property is located

Utilities Subject to Gross Revenues License Fee Tax Base Tax Rate

Car Line Companies Gross receipts from the operation of Average net property car line equipment tax rate in state

Electric Cooperative Associations Gross revenues, less certain deductions, from: - the sale of electricity for resale 1.59% - all other sources 3.19

Municipal Light, Heat, and Gross revenues from outside the municipality, Power Companies less certain deductions, from: - the sale of gas services 0.97 - the sale of electricity for resale 1.59 - all other sources 3.19

Private Light, Heat, and Gross revenues, less certain deductions, from: Power Companies - the sale of gas services 0.97 - the sale of electricity for resale 1.59 - all other sources 3.19

Ad Valorem Group Corporation, SkyWest Airlines, Midwest Airlines, Northwest Airlines, and Pinnacle Airlines. Airline Utilities subject to ad valorem taxation include: company utility taxes are categorized as segregated (a) air carrier companies; (b) conservation and revenue and deposited in the transportation fund. regulation companies; (c) municipal electric associations; (d) pipeline companies; (e) railroad Beginning in 2001, an exemption from ad companies; and (f) telephone companies. valorem taxes was extended for any air carrier that operates a hub facility in Wisconsin. For purposes Air Carrier Companies. The statutes define an of the exemption, a hub facility is defined as either air carrier company as any person engaged in the one of the following: (a) a facility from which an air business of transportation in aircraft of persons or carrier company operated at least 45 common property for hire on regularly scheduled flights. carrier departing flights each weekday in the prior The major air carriers operating in the state are Air year and from which it transported passengers to Wisconsin Airlines, American Eagle Airlines, Com at least 15 nonstop destinations or transported Air, Inc., Express Jet Airlines, Federal Express cargo to nonstop destinations; or (b) an airport or

3 any combination of airports in Wisconsin from utility. Of the group of utilities subject to ad which an air carrier company cumulatively valorem taxes, pipeline companies generate the operated at least 20 common carrier departing second highest amount of general fund taxes. In flights each weekday in the prior year, if the air 2008, ten pipeline utility companies operated in carrier company's headquarters is in Wisconsin. As Wisconsin. The largest carriers, in terms of their of 2008, Midwest Airlines is the only carrier property value allocated to Wisconsin, are the ANR expected to qualify for this exemption, although Pipeline Company and the Great Lakes Gas Air Wisconsin Airlines also received the exemption Transmission Company, which transport natural from 2001 through 2006. After being challenged as gas, and Enbridge Energy, which transports unconstitutional, the Wisconsin Supreme Court natural gas and oil products. upheld the exemption. Railroad Companies. A railroad company is Conservation and Regulation Companies. A any person, other than a local unit of government, conservation and regulation utility is any person owning and/or operating a railroad in the state or organized under the laws of the state for the owning or operating any station, depot, track, conservation and regulation of the height and flow terminal, or bridge for railroad purposes. There are of water in public reservoirs in the state. This is 11 railroad companies in Wisconsin. The major done by impounding the rivers' headwaters into carriers are the Burlington Northern and Santa Fe various reservoirs during times of heavy rainfall Railway Company, Soo Line Railroad Company, and then releasing the stored water during Union Pacific Railroad, and Wisconsin Central Ltd. subsequent periods. These companies normalize Railroad utility taxes are categorized as segregated river flow and the stored water is used for revenue and deposited in the transportation fund. hydraulic power generation by various light, heat, and power companies. The Chippewa & Flambeau Telephone Companies. A telephone company is Improvement Company and the Wisconsin Valley any person that provides telecommunications ser- Improvement Company have been established to vices to another, including the resale of services conserve runoff waters in the Chippewa River and provided by another telephone company. "Tele- Wisconsin River watersheds. communications services" means the transmission of voice, video, facsimile, or data messages. Tele- Municipal Electric Associations. Under the graph messages are specifically included in this state statutes, any combination of municipalities definition, but cable television, radio, one-way ra- may contract to create a public corporation for the dio paging, and transmitting messages incidental joint development of electric energy resources or to hotel occupancy are specifically excluded. A for production, distribution, and transmission of telephone company does not include a person who electric power or energy, wholly or partially, for operates a private shared communications system the benefit of the municipalities. Three municipal and who is otherwise not a telephone company. As electric associations are subject to ad valorem described below, state law provides a different as- utility taxes -- Badger Power Marketing Authority sessment procedure for telephone companies than of Wisconsin, Western Wisconsin Municipal Power for other ad valorem taxpayers. Group, and Wisconsin Public Power, Inc. In 2008, there were over 200 telephone compa- Pipeline Companies. State law defines pipeline nies with a Wisconsin public utility tax assessment. company as any person that is engaged in the Some of these companies operate local exchanges. business of transporting or transmitting gas, Others offer interstate service or intrastate service gasoline, oils, motor fuels, or other fuels by means between local access and transport areas (LATAs). of pipelines and that is not a light, heat, and power A third group consists of firms that resell long dis-

4 tance services. These resellers purchase and resell Under the cost indicator, the Department may bulk services from another telephone company. consider four types of costs: historical; original; They own and operate switching facilities, but do reproduction; and replacement. To these costs, al- not have separate transmission lines. Finally, lowances are made for loss of value due to depre- commercial mobile telephone companies provide ciation, obsolescence, regulatory required write- wireless (cellular and personal communications) offs, and utility plant acquisition adjustments. The services. capitalized income indicator is based on a company's operating income (before subtracting depre- Even with the divestiture of AT&T, the tele- ciation), capitalized at a rate based on market rates communications industry in Wisconsin is charac- for equity, debt, and other factors. The premise be- terized by the dominance of a relatively few large hind this method is that the company is worth companies. Six telephone companies bore over half what it can earn. That is, the purchase price of the of the total 2008 ad valorem tax assessment on tele- company can be determined by estimating ex- phone companies. These companies include Ameri- pected future earnings and a required rate of re- tech Wisconsin, CenturyTel, and Verizon North, turn for investors. The stock and debt indicator Inc., which provide local exchange services, and uses the market value of these two items and other Verizon Wireless, U.S. Cellular, and Milwaukee current liabilities, which together are assumed to SMSA, which are commercial mobile companies. equal the market value of property and assets. As companies diversify or form conglomerates, the stock and debt method of valuation becomes more Determination of Tax Assessment. For all ad difficult to employ. Other indicators are also con- valorem utilities, a tax assessment is calculated by sidered, including company and independent ap- determining the full market value of the utility's praisals, prior year assessments, shareholders re- taxable property and multiplying that value by a ports, and comparable sales, if available. Based on tax rate. State law excludes from taxation the value these indicators, the Department uses its judgment of certain property that is also exempt from general to arrive at an estimate of fair market value. property taxes: (a) motor vehicles; (b) treatment plant and pollution abatement equipment; and (c) Telephone companies have been subject to a computers, cash registers, and fax machines. somewhat different assessment process since 1998. First, telephone company values are determined For the utilities other than telephone within each local taxing jurisdiction where the companies, the tax assessment equals the statewide company's property is located. Second, the value average net property tax rate multiplied by the within each local taxing jurisdiction is multiplied utility's Wisconsin value. DOR determines that by the net tax rate applied in that jurisdiction in the value by deriving a unit value, which is equivalent prior year under the general property tax. This to the utility's full market value if sold as a unit, procedure causes the value of intangible property and allocating a portion of that value to Wisconsin to be excluded from the telephone companies' according to statutorily established formulas. Since value, which differs from the unit value methods actual sales price data do not generally exist, this for valuing property, where the value of intangible process utilizes three distinct indicators of value -- property is generally included in the utility cost, capitalized income, and stock and debt -- company's assessed value. which attempt to take account of earning potential and are weighted differently according to the most State law requires DOR to value telephone appropriate indicator for a given type of utility. company property using the same methods the Department uses to assess manufacturing property, including a field review of all property once every

5 five years on a rotating basis. Generally, DOR uses conservation and regulation companies, or a sales-based approach to assess real property and November 1 for telecommunications companies. the cost-based approach to assess personal The remainder of the current year's assessment is property. For real property, DOR makes annual due on November 10. adjustments to reflect new construction and economic changes to value. Beginning in 2005, Gross Revenues Group DOR changed its procedure for valuing telephone company personal property. The property's value Utilities subject to the license fee on gross is initially determined on a company-wide basis by revenues include: (a) car line companies; (b) multiplying the property's original cost by a electric cooperatives; and (c) municipal and private conversion factor that reflects price changes and light, heat, and power companies. depreciation. The resulting value is allocated to individual local jurisdictions based on the original Car Line Companies. State law defines a car line cost of the personal property in each jurisdiction company as any person, not operating a railroad, relative to the original cost of personal property on that is engaged in the business of furnishing or a company-wide basis. leasing car line equipment to a railroad. Car line equipment means railroad cars or other railroad If telephone company property is used in part equipment used in railroad transportation pro- for utility operations and in part for nonoperating vided under a rental agreement. In 2008, seven car purposes, the property's predominant use line companies were subject to the state utility tax. determines how it is assessed. If real or tangible personal property is used more than 50% in the Electric Cooperatives. An electric cooperative is business's operation as a telephone company, then an entity organized under state law as a DOR assesses the property and the property is cooperative association that generates, transmits, exempt from the general property tax. If real or or distributes electric energy to its members at tangible personal property is used less than 50% in wholesale or retail. The major electric cooperative the business's operation as a telephone company, association is Dairyland Power Cooperative. It is then the property is assessed and taxed locally. headquartered in La Crosse and supplies wholesale electricity to 25 rural electric distribution For other companies subject to ad valorem cooperatives, including 18 in Wisconsin, and 19 taxation, if a structure is used in part for utility municipal utilities, including 11 in Wisconsin. In operations and in part for nonoperating purposes, 2008, Dairyland accounted for over 60% of total the structure is generally assessed for taxation by electric cooperative gross revenues. the state at the percentage of its full market value that represents its operating purposes. The balance Light, Heat, and Power Companies. There are is subject to local assessment and taxation. two basic types of light, heat, and power companies. They may be either investor-owned or Payment of Tax. Ad valorem taxpayers make operated as a municipal utility. State law defines a semiannual payments on May 10 and November light, heat, and power company as a person, 10. Under this payment schedule, the utility association, company, or corporation engaged in company must pay either 50% of its previous year's the following businesses: (a) generating and net utility tax liability or 40% of its estimated furnishing gas for lighting or fuel or both; (b) current year's liability on May 10. The utilities are supplying water for domestic or public use or for notified of their tax liability for the current year on power or manufacturing purposes; (c) generating, either August 10 for railroads and municipal transforming, transmitting, or furnishing electric electrics, October 1 for pipelines, airlines, and current for light, heat, or power; (d) generating and

6 furnishing steam or supplying hot water for heat, included 16 companies providing primarily retail power, or manufacturing purposes; or (e) service, 11 qualified wholesale electric companies, transmitting electric current for light, heat, or and one transmission company. Six companies power. Only municipal public utilities that meet comprised over 90% of total tax assessments: Wis- the definition and also provide service outside the consin Electric Power Company; Wisconsin Power boundaries of the municipality owning the utility and Light Company; Wisconsin Public Service are subject to the state tax. Corporation; Xcel Energy; Madison Gas and Elec- tric Company; and Wisconsin Gas Company. Since the tax on light, heat, and power companies was converted from an ad valorem to a Determination of Assessment. Gross revenues gross revenues tax in 1985, the definition of light, utilities submit annual reports to the Department heat, and power company has been expanded of Revenue on the amount of taxable gross several times to reflect industry changes. Beginning revenues for the preceding year. The gross revenue in 1996, the definition was modified to include amount is multiplied by the applicable tax rate to qualified wholesale electric companies, defined as determine the amount of taxes due. For each type any person that: (a) owns or operates facilities for of taxpayer, state law specifies a rate and defines the generation and sale of electricity to a public the tax base. Because the taxes are characterized as utility or to any other entity that sells electricity gross revenues or receipts, relatively few types of directly to the public; (b) sells at least 95% of its net revenues are excluded from the tax base. production of electricity; and (c) owns, operates, or controls electric generating facilities that have a Car line companies' gross earnings are defined total power production capacity of at least 50 as all receipts by a car line company from the megawatts. These companies are also called operation of equipment in the state. Earnings from independent power producers. interstate businesses are allocated to Wisconsin based on the ratio of Wisconsin car miles to total In 2001, the definition of qualified wholesale car miles. A tax rate equal to the average statewide electric company was extended to wholesale net property tax rate is applied against the receipts. merchant plants that have a total power production This is the same rate used for the state's ad valorem capacity of at least 50 megawatts. As part of a tax. broader effort to enhance electric reliability, state law governing the regulation of public utilities had For electric cooperatives, gross revenues are previously been amended to recognize these plants defined as the previous year's total operating as electric generating equipment and associated revenues, less interdepartmental sales and rents facilities in this state that do not provide service to and the retailers' discount from the sales tax. any retail customer and that are owned or operated Certain grants, public benefit fees, and low-income either by an affiliated interest of a public utility or assistance fees are excluded from gross revenues. by a person that is not a public utility. In addition, a deduction is allowed for the cost of power bought for resale if the cooperative buys In 2008, the state's gross revenues tax on light, more than 50% of the power it sells, or if the heat, and power companies extended to 105 utili- electric cooperative purchased more than 50% of ties. While the state's 77 municipal light, heat, and the power it sold in 1987 from an out-of-state seller. power companies outnumber the private light, For multistate associations, a share of total heat, and power companies, the municipal utilities cooperative revenues are apportioned to Wisconsin comprised only 1.3% of 2008 tax assessments. The using a three-factor formula based on the remaining 98.7% of the tax was attributable to 28 proportion of property, payroll, and sales in-state private light, heat, and power companies, which to the respective total of each factor. Electric

7 cooperatives are taxed at a flat 3.19% rate on gross to a company's gross revenues. The payroll factor revenues, except that the tax rate on wholesale includes management and services fees paid by a sales of electricity is reduced to 1.59%. light, heat, and power company to an affiliated public utility holding company. As a result of this Annual assessments for light, heat, and power treatment, the portion of a public utility holding companies are based on their taxable gross reve- company's property that is used to provide services nues earned during the previous year. Except for to a light, heat, and power company affiliated with qualified wholesale electric companies and trans- the holding company is exempt from local mission companies, gross revenues are defined as property taxation. total operating revenues reported to the state Pub- lic Service Commission (PSC), less interdepartmen- Revenues from the sale of gas services are tal sales and rents and the retailers' discount from subject to tax at the rate of 0.97%, and wholesale the sales tax. Also, gross revenues include receipts sales of electricity are taxed at 1.59%. The tax rate from total environmental control charges paid to on all other taxable revenues is 3.19%. The 1.59% companies under financing orders issued by the tax rate on wholesale sales of electricity was PSC. A private light, heat, and power company enacted as a temporary reduction from the 3.19% may deduct from its gross revenue either: (a) the tax rate on revenues for calendar years 2004 actual cost of power purchased for resale if that through 2009, but 2007 Wisconsin Act 20 made the company purchases more than 50% of its electric reduction permanent. power from a nonaffiliated utility that reports to the PSC; or (b) 50% of the actual cost of power pur- Payment of Tax. The Department makes a tax chased for resale if that company purchases more assessment based on taxable revenues earned in than 90% of its power and has less than $50 million the previous calendar year. Installment payments in gross revenues. Certain grants, public benefit are made toward the tax in the year that the fees, and low-income assistance fees are also ex- revenue is earned. A final payment is made in the cluded from the gross revenues of light, heat, and assessment year, to reconcile installment payments power companies. Municipal light, heat and power with final assessments. companies are only taxed on that portion of their revenues from outside the boundaries of the mu- For car line companies, at least 50% of the cur- nicipality operating the utility. rent or 50% of the subsequent year's liability is due on September 10 and the remaining liability is due For qualified wholesale electric companies, on April 15. "gross revenues" means total business revenues from the same services that are provided by light, For electric cooperatives and light, heat, and heat, and power companies. For transmission power companies, semiannual installment pay- companies, operating revenues are subject to the ments of either 55% of the previous assessment or license fee, except for revenues from transmission 50% of the estimated assessment are due on May 10 services to a Wisconsin public utility or electric and November 10 of the year in which the revenue cooperative. is earned. These utilities are notified of their actual license fee the following May 1. On May 10 of the To determine Wisconsin taxable revenues for year following the year in which the revenue was multi-state companies, an apportionment factor earned, either a final adjustment payment is made based on the shares of a company's total payroll, or a refund is issued to reconcile the two prior in- property, and sales that are in Wisconsin is applied stallment payments with the actual assessment.

Table 2: General Fund Utility Tax Collections (In Millions)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Ad Valorem Tax Conservation & Regulation $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 Municipal Electric 1.3 1.2 1.3 1.6 1.5 2.0 2.2 Pipeline 10.3 10.5 10.6 10.6 10.7 10.7 11.2 Telephone/Special Common Carrier 86.6 106.3 * 81.6 72.6 63.0 65.3 59.5 Total Ad Valorem Tax $98.3 $118.1 $93.6 $84.9 $75.3 $78.1 $73.0

Gross Revenues Tax Car Line Companies $0.5 $0.5 $0.4 $0.4 $0.3 $0.2 $0.2 Electric Cooperatives 8.6 9.4 8.5 7.2 8.1 8.8 9.4 Municipal Light, Heat & Power Cos. 1.7 1.7 1.8 1.9 2.4 2.3 2.7 Private Light, Heat & Power Cos. 143.1 147.0 165.4 159.6 189.1 195.4 212.1 Total Gross Revenues Tax $153.9 $158.6 $176.1 $169.1 $199.9 $206.7 $224.4

Refunds and Interest & Penalty Payments 0.1 0.0 0.1 0.5 0.0 0.1 0.0

General Fund Total Collections $252.3 $276.7 $269.8 $254.5 $275.2 $284.9 $297.4

* Includes approximately $10.0 million in one-time revenues from an audit and a property value dispute settlement.

Tax Collections heat, and power company taxes declined when the temporary reduction in the tax rate on wholesale Ad valorem tax collections from airlines and sales of electricity began. Since then, additional railroads are classified as segregated revenues and revenues related to the construction of new deposited in the state's transportation fund, while production plants have caused private light, heat, the general fund receives the remaining utility tax and power company taxes to increase by 32.9%. revenues. In 2007-08, general fund utility tax collections totaled $297.4 million and comprised Table 3 shows historical collections for the two 2.3% of total general fund tax revenues. Utility tax transportation fund utilities. Over the seven-year collections deposited in the transportation fund period, total collections have increased by 50.3%. equaled $26.6 million in 2007-08 and accounted for While airline collections have increased by 17.5%, 1.6% of the transportation fund's total revenues. railroad collections have increased by 65.8%. The large increase in railroad taxes was caused largely Table 2 shows the change in general fund utility by higher taxable values, and particularly by the tax collections over the last seven fiscal years. Over value of the Wisconsin Central Limited Railroad. the entire period, collections increased by 17.9%, The modest growth in airline taxes is due, in part, although collections decreased in two of the seven to the use of 2001-02 as the base year for Table 3. years. In 2003-04 through 2005-06, telephone After implementing the air carrier hub exemption company taxes declined due to reductions in in 2001, $1.3 million in tax prepayments was taxable values, caused by equipment depreciation refunded to Midwest Airlines and Air Wisconsin in and obsolescence. Decreases in ad valorem tax 2001-02. The airline tax figure in Table 3 is net of rates also contributed to these reductions and to this refund. The 2002-03 figure also reflects refund the reduction in 2007-08. In 2004-05, private light, and litigation settlements from prior years.

9 Table 3: Transportation Fund Utility Tax Collections (In Millions)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Ad Valorem Tax Airline $5.7 $5.4 $8.2 $5.8 $4.7 $6.7 $6.7 Railroad 12.0 12.5 11.9 16.0 16.4 18.3 19.9

Transportation Fund Total Ad Valorem Taxes $17.7 $17.9 $20.1 $21.8 $21.1 $25.0 $26.6

More detailed information about the state corpo- Other State Taxes on Utilities rate income tax may be found in the Legislative Fiscal Bureau's informational paper entitled, "Cor- porate Income/Franchise Tax." Corporate Income and Franchise Tax Sales Tax In addition to the ad valorem and gross revenues taxes described above, Wisconsin public Current law provides a number of energy- utilities are generally subject to the state corporate related sales and use tax exemptions to utilities and income and franchise tax on the same basis as other other businesses, including exemptions for the corporations. However, certain types of utility following: (a) purchases by power companies of companies are exempt from this tax. Municipal fuel used to produce electricity, steam, or other light, heat, and power companies are exempt due power; (b) transfers of transmission facilities to an to their status as agencies of local government. electric transmission company; (c) the gross Electric cooperatives are exempt from the corporate receipts of electric utilities and retail electric income tax based on the general exemption for all cooperatives from collections of public benefit fees; cooperatives organized under Chapter 185 of the (d) fuel and electricity consumed in manufacturing Wisconsin Statutes. tangible personal property; and (e) purchases of electricity and fuel, including natural gas, used in Taxable utility companies determine net corpo- farming. In addition, a sales tax exemption is rate income tax liability in the same manner as provided to power companies, as well as others, most corporations. State corporate income tax pro- for products, other than an interruptible power visions are generally referenced to federal law. source for computers, whose power source is wind Thus, the starting point for determining state in- energy, direct radiant energy received from the come tax liability, net taxable income, is deter- sun, or gas generated from anaerobic digestion of mined by subtracting allowable federal deductions animal manure and other agricultural waste, from federal gross income. However, there are cer- subject to minimum power production tain state adjustments that must be made in arriv- requirements. The sale, use, or consumption of ing at net taxable income for state purposes. (These electricity or energy produced from such a product specific adjustments are described in the informa- is also exempt. Finally, state law provides a sales tional paper on the state corporate income tax.) The tax exemption for residential purchases of state utility tax is specified as an allowable deduc- electricity and natural gas from November through tion in these adjustments. The state corporate in- April. Most other fuels purchased for residential come tax is imposed at a flat 7.9% rate on taxable use (such as coal, fuel oil, propane, steam, and income. If applicable, state tax credits are used to peat) are totally exempt. offset gross tax liability to arrive at net tax liability.

The state's sales tax is imposed on telecommu- Governor, with the advice and consent of the Sen- nications services, other than mobile telecommuni- ate, to staggered, six-year terms. The Governor des- cations services, that originate or terminate in Wis- ignates the Commission chairperson, who in turn consin and are charged to a service address in this may appoint division administrators from outside state, including the rights to purchase telecommu- the classified service. The agency's professional and nications services (pre-paid calling cards and au- support staff are all in the classified civil service. thorization numbers) and including access services to the Internet. In addition, the sales tax applies to While PSC regulation may vary based on such mobile telecommunications services utilized by factors as type of utility, utility size, and number of customers whose residential or primary business customers served, the Commission is generally street address is in Wisconsin, regardless of where responsible for: such services originate, terminate, or pass through. Countywide "911" emergency phone systems and • Setting the level and structure of rates for toll-free calls that originate outside this state and utility service based on authorized rates of return terminate in Wisconsin, however, are exempt from on investment; tax. • Regulating the construction, use, More information about the sales tax may be modification, and financing of utility operating found in the Legislative Fiscal Bureau's informa- property, including the use of depreciation tional paper entitled "Sales and Use Tax." accounts for new construction;

• Valuing operating property;

Public Service Commission's • Overseeing, examining, and auditing Regulation of Public Utilities utility accounts and records;

• Approving utility mergers, other than for History telecommunications utilities;

Wisconsin's Public Service Commission (PSC) • Overseeing transactions between a public was preceded by a Railroad Commission, which utility and an affiliated interest; and regulated railroad rates. In 1907, the Railroad Commission's responsibilities were expanded • Determining levels of adequate and safe when Wisconsin became the first state to regulate service and responding to consumer complaints essential utility services provided to the public by about utility operations and prices. entities that generally operated as noncompetitive, natural monopolies. The Public Service Commis- The statutes grant the PSC broad jurisdiction to sion was established as the successor to the Rail- do all things necessary and convenient in the road Commission in 1931. Currently, the PSC regu- exercise of its regulatory authority over public lates electric, natural gas, telephone, steam, water, utilities. The Commission has traditionally used a and combined water and sewer utilities. flexible approach in exercising its jurisdiction. Under this approach, the PSC has had Public Service Commission Overview discretionary authority to adjust, as needed, the degree of regulation of classes of public utilities. The PSC's regulatory authority is vested in The following material provides greater detail on three full-time commissioners, appointed by the the PSC's major responsibilities.

11 Traditional Rate Regulation process. Third, the decision-making phase occurs after the public hearing and involves an open Although recent legislation has changed the meeting held by the commissioners on the rate Commission's responsibilities, rate-setting has case. The commissioners make their decision, historically been the Commission's most visible based on the information presented in the initial regulatory function. In what has traditionally been formal filings and on the subsequent record a monopoly market, the rate-setting process developed at the public hearing. attempts to establish prices at levels that would occur naturally under competitive market forces. While PSC decisions are generally final, they While a utility's natural interest is to set prices at may be appealed by the utility or by other parties levels that maximize profits, the regulatory process with an interest in the matter. Appeals are made, provides a balance so that services are provided at first, at a PSC rehearing and, then, to circuit court. prices that are reasonable both to ratepayers and to utility owners. The PSC's authority extends to intrastate utilities and the intrastate operations of multi-state Rate-setting typically involves three basic utilities. At the federal level, regulatory responsi- determinations. First, the Commission sets a rate of bilities over interstate utility operations are divided return that the utility is allowed to earn on its between the Federal Communications Commis- investment in plant and equipment. Second, the sion, for interstate services of tele-communications amount of revenue necessary for the utility to companies, and the Federal Energy Regulatory operate, pay debt, and meet its allowable rate of Commission, for interstate operations and whole- return is determined. Third, prices are set at levels sale sales by energy service companies. With re- that will generate the company's revenue gard to the state's two commercial nuclear power requirement, allocated across categories of service reactors that generate electricity, the PSC's author- according to relative costs and other factors for ity is supplemented by the federal Nuclear Regula- each category. All corporate income taxes, ad tory Commission, which regulates the operation valorem or gross revenues utility taxes, and sales and decommissioning of nuclear power plants and taxes are treated as expenses, and are generally the transportation, storage, and disposal of nuclear fully recovered through the rates. waste from the plants. The line between state and federal regulatory authority is not always clear For utilities subject to such rate regulation, the and, particularly in the telecommunications field rate-setting process has three basic procedural and increasingly in the electric industry, relations phases: pre-hearing, public hearing, and decision- between the two levels of regulation are in a state making. First, the pre-hearing phase begins when a of flux. utility requests a rate increase. Prior to any formal hearing, PSC staff analyze the request and its The PSC authority over rates does not extend to impact and conduct a company audit. Also at this all public utilities. In addition to the interstate utili- time, interested parties wishing to participate at the ties, some intrastate utilities are also excluded from public hearing on the rate request prepare their PSC oversight. These include electric cooperatives, materials. Second, the public hearing phase of the telephone cooperatives, certain specified providers rate-setting process is an investigative and fact- of telecommunications services, and cable televi- finding process, rather than a decision-making sion companies. In recent years, state law has been forum. The utility makes a formal presentation of revised to lessen the scope of the Commission's its proposal. The public, authorized intervenors, or regulatory authority over other utilities, including the PSC staff may challenge the rate request or telecommunications service providers. suggest alternatives at this stage of the rate-setting

Partial Deregulation of Telecommunications A price-regulated telecommunications utility Services may reduce the charges for any service subject to price regulation upon one day's notice to the PSC. Telecommunications services are provided by a The telecommunications utility may change its rate variety of companies. Incumbent local exchange structure upon ten days notice, provided the companies (ILECs) are the local telephone service previous rate structure continues to be offered to providers that existed both before and following customers. the break-up of the "old AT&T Bell System." Resel- lers are companies that buy service at wholesale Once a telecommunications utility has operated from ILECs and resell that service to consumers. as a price-regulated utility for three years, it may Competitive local exchange carriers provide ser- alter its rate structure or increase rates for price- vice independently in areas served by ILECs. regulated services upon 120 days' notice to the Competitive local exchange companies, resellers, PSC, provided the notice is accompanied by docu- and wireless and cellular companies are not subject mentation that the change is just and reasonable. to traditional PSC rate regulation. The PSC may approve, modify, or reject the proposed change based on an investigation and may For the traditional telecommunications utilities suspend the proposed change pending the conclu- (the ILECs), many are now subject to forms of sion of its investigation. The Commission's investi- regulation other than the traditional rate of return gation is limited to: cost allocations of price- approach generally used for public utilities rate- regulated services that are beyond the control of setting. One regulatory mechanism under the stat- the utility; competition; network and service qual- utes is "price-regulation," which can be character- ity, improvement, and maintenance; changes in the ized as a form of incentive regulation. Instead of costs of providing the service that are beyond the regulating the total earnings of the utility, the PSC control of the utility; and the impact of the change regulates the utility based only on the prices of ba- on the public interest. Currently, AT&T and Veri- sic services offered. zon North are price-regulated. Since first coming under price regulation, AT&T has successfully peti- Once a telecommunications utility elects to be- tioned the PSC to remove from price regulation come price-regulated, its basic rates must be frozen limits its business services in all exchanges and its for three years. Thereafter, the telecommunications residential exchange line services in its 17 largest utility may change its rates for price-regulated ser- exchanges. vices only if the change in the revenue-weighted price indices for all services subject to price regula- Telecommunications utilities that do not elect to tion does not exceed the most recent annual change become price-regulated may petition the PSC to in the gross domestic price index, less a productiv- become subject to alternative regulation. Under an ity offset of 2% or 3%, depending on the size of the alternative regulation plan, the PSC may approve a utility. After six years, and every three years there- regulatory mechanism that imposes lesser rate or after, the PSC must revise the productivity offset earnings limitations on a company in exchange for percentages based on a statewide productivity the utility's commitment and obligation to main- study. In addition, a penalty due to inadequate tain service quality, reduce long distance access service may be added to increase the productivity prices, maintain and improve the service network, offset, and an incentive to encourage infrastructure limit price changes to specific levels, and open development may be subtracted to decrease the markets to competition. Small telecommunications productivity offset. Adjustments to the productiv- utilities (telecommunications utilities with fewer ity offset may be set up to 1% or 2%, depending than 50,000 lines) that are not subject to either upon the size of the utility. price-regulation or alternative regulation may

13 change prices without PSC approval pursuant to transmission, generation, and distribution opera- procedures established under ss. 196.213 and tions, and, one year later, an advisory committee 196.215 of the statutes. These provisions specify issued a report detailing the various restructuring maximum allowable rate increases and establish options that appeared to be feasible and describing customer notification procedures when rate in- the types of legislative and policy changes required creases are made. to implement each option. A PSC report to the Leg- islature in February, 1996, advised that any conver- In addition to regulation of incumbent local ex- sion from regulated to competitive markets must change companies, the PSC regulates the entry of be contingent on a series of electric industry and competitive local exchange carriers into intrastate regulatory reforms. The PSC indicated that it in- local and toll telecommunications markets. These tended to proceed incrementally through the re- companies generally provide a wide range of ser- structuring process. The Commission's view at that vices including local, long distance, and internet time was that full retail competition would occur access. The level of regulation for the competitive only if reforms in the industry's generation, trans- local exchange carriers is typically lower than for mission, and retail sectors were first implemented. the incumbent local exchange companies and is In 1997, disruptions to the state's electric power specifically set forth in statute, administrative code, supply shifted the state's restructuring efforts to or PSC order. For example, the PSC does not regu- focus on reliability, as opposed to deregulation. late the rates of competitive local exchange carriers. Electric industry restructuring has caused the PSC to expand its activities beyond traditional rate The federal Telecommunications Act of 1996 regulation to include new responsibilities related to sets forth the interconnection rights and obligations electric transmission, affiliated interests, independ- of both the incumbent local exchange companies ent power producers, renewable energy portfolios, and the competitive local exchange carriers. Under and strategic energy assessment. the Act, the PSC must approve interconnection agreements reached through voluntary negotia- Transmission Divestiture tions between the parties, as well as mediate and arbitrate disputes over interconnection agreements. Previously, individual electric utilities owned In addition, the federal Act authorizes the PSC to and operated electric transmission lines and facili- regulate the terms and conditions of competitive ties in their service territory. State law changes in entry into rural telephone company exchanges. 1997 and 1999 authorized the transfer of ownership and control of the high-voltage transmission lines Restructuring of Electric Utilities held by Wisconsin-based public utility companies operating principally in the eastern part of the state While the telecommunications industry was to a transmission company now called the Ameri- being deregulated, the Public Service Commission can Transmission Company (ATC). Public utilities examined whether similar principles could be could make this transfer before September 30, 2000, applied to the electric industry. The Commission's while electric cooperatives and municipal utilities efforts were prompted, in part, by federal law had until September 30, 2001, to make the transfer. changes allowing wholesale electric generators to The public utility companies, electric cooperatives, compete with electric utilities in supplying power and municipal electric utilities received stock in and requiring owners of electric transmission lines ATC to compensate them for their divested assets. to let any generator transmit power over their lines. In turn, ATC provides these entities with equitable access to the transmission grid at fair rates. In addi- In late 1994, the PSC opened a docket to con- tion, ATC is responsible for constantly monitoring sider approaches to restructuring electric utility the flow of electricity across the transmission grid

14 as well as the planning, construction, operation, contract. The PSC must allow a utility to recover in maintenance, and expansion of the grid. Although rates all costs related to a leased generation con- the PSC oversaw the transfer of utility infrastruc- tract. ture to ATC, ATC's creation diminished the Com- mission's authority since the Federal Energy Regu- The initial effect of these provisions was to latory Commission regulates the transmission and authorize the Wisconsin Energy Corporation, the wholesale sales of electricity. However, the PSC parent company of Wisconsin Electric Power has retained oversight of the construction of Company, to form a nonutility affiliate to be an transmission facilities. In western Wisconsin, Xcel electric power generating company. The nonutility Energy and Dairyland Power Company continue to affiliate builds and owns electric power generating maintain their own transmission infrastructure. facilities, which are then leased back to Wisconsin Electric. Wisconsin Electric operates the new Affiliated Interests and Leased Generation facilities to produce electric power for its customers, much as it operates the generating State law authorizes public utilities and the facilities that it directly owns. This ownership and affiliated interests of those utilities to enter into lease arrangement allows the Wisconsin Energy long-term, leased generation contracts with one Corporation to build generating facilities outside of another. Generally, an affiliated interest is a person its public utility affiliate (Wisconsin Electric), or company with an ownership interest in a public thereby taking advantage of less regulated utility. Also, it can be a company in which a public financing and contracting options than would exist utility has an ownership interest. if the public utility constructed the facility.

Under a leased generation contract, a utility's Siting of Power Plants and Transmission affiliated interest agrees to construct or improve Facilities electric generating equipment and associated facilities. The public utility then leases the land, State law prohibits the construction of large equipment, and facilities and operates the facilities. electric generating facilities and high-voltage The lease must be at least 20 years in length for transmission lines unless the PSC has issued a gas-fired facilities and 25 years for coal-burning certificate of public convenience and necessity facilities. After this initial lease, the public utility (CPCN). The requirement extends to all generating has the right to renew the lease or purchase the facilities with a capacity of 100 megawatts or more facilities at fair market value. The project must be and transmission facilities of at least one mile in at least a $10 million improvement in order to length that are designed for operation at 100 qualify as a leased generation contract. kilovolts or more. Unlike other PSC regulatory activities, the siting portion of the CPCN State law requires PSC approval of leases and requirement also applies to electric cooperatives lease renewals between public utilities and affili- and merchant companies. ated interests. The Commission must find that the lease will not have a substantial, anticompetitive The PSC determines the information to be effect on electricity markets for any class of cus- contained in applications and, within 30 days of an tomers. Also, state law prohibits the PSC from in- application's submittal, the Commission must creasing or decreasing the retail revenue require- determine if the application is complete. A public ments of a utility on the basis of any income, ex- hearing must be held on each application, and state pense, gain, or loss incurred or received by the util- law requires the Commission to take final action on ity's affiliated interest due to its ownership of a completed application within 180 days of its equipment and facilities under a leased generation submittal, although the PSC may request a court-

15 ordered extension of up to 180 additional days. The replaced in 1997 with a standard pertaining only to PSC certification process is coordinated with eastern Wisconsin public utilities. This requirement Department of Natural Resources permitting has been replaced by the state's current renewable requirements. energy portfolio standard.

Before issuing a CPCN, the PSC must The renewable energy portfolio standard determine that the proposed facility meets a requires electric utilities and cooperatives to sell a number of statutory standards. These standards minimum, specified amount of electricity from relate to electric energy reliability, service renewable resources to their customers by certain efficiency, future electricity needs, wholesale dates. Prior to a 2005 law change, the standard was market competition, the environment, and existing extended so that any electric utility or cooperative land use and development plans. Some facilities, was required to generate an escalating percentage such as merchant plants, are specifically excluded of its retail electricity sales through renewable from certain standards, and other standards are resources, increasing to 1.2% by the end of 2005 specifically limited to high-voltage transmission and 2.2% by the end of 2011. In 2005, those lines and PSC-regulated public utilities. Based on benchmarks were repealed. Instead, for 2006 its findings, the PSC may approve, deny, or modify through 2009, current law prohibits each utility and proposed facilities. cooperative from decreasing its renewable percentage below its average renewable percentage For electric generating facilities, construction in 2001 through 2003. Relative to that average, each must begin within one year of the latest of: (a) the utility and cooperative is required to increase the date the Commission issues the certificate; (b) the amount of renewable energy it sells by an date on which the electric utility has been issued additional two percentage points by 2010 and by every required federal and state permit, approval, an additional six percentage points by 2015. If a or license; (c) the date on which every deadline has utility or cooperative provides more renewable expired for requesting administrative review of energy than required, it generates a renewable such permits and licenses; or (d) the date on which resource credit that it may retain for future use or the electric utility has received the final decision, sell to another utility or cooperative. after exhausting every proceeding for judicial review. The PSC may grant an extension of this State law establishes a goal for the renewable deadline upon a showing of good cause by the resource program of realizing 10% of all electric electric utility. If construction is not begun within energy consumed in the state being renewable this one-year period, the original certificate energy by 2015. By June 1, 2016, state law directs becomes void. the Commission to report to the Legislature and Governor on whether or not the goal has been met. For smaller facilities not meeting the CPCN Further, the PSC is required to submit biennial threshold of 100 megawatts or 100 kilovolts, the reports to the Legislature and Governor evaluating PSC may require a certificate of authority. the impact of the renewable resource requirements on electric rates and revenues. Other PSC duties Renewable Energy Portfolios relating to the program involve granting extensions to the percentage requirements for utilities and The PSC has administered a renewable energy cooperatives, receiving annual reports from policy since 1994, when state law directed the utilities and cooperatives identifying their Commission to encourage public utilities to renewable percentages, and promulgating rules develop and demonstrate technologies using governing the calculation and sale of renewable renewable sources of energy. That provision was resource credits. Violations of the renewable

16 resource standards are subject to penalties enforced Funding for the program is provided through a by actions of the Attorney General. requirement that each of the state's investor-owned utilities spend an amount equal to 1.2% of their Strategic Energy Assessment annual operating revenues on energy efficiency and renewable resource activities. The PSC may State law directs the PSC to prepare a biennial require utilities to expend additional amounts, if report that evaluates the adequacy and reliability approved by the Joint Committee on Finance. An- of the state's current and future electrical supply. nually, the Commission must prepare a statement Each Strategic Energy Assessment covers a seven- describing the programs, and the utilities must dis- year period and must identify the projected tribute the statement to their customers. demand for electric energy and assess whether sufficient electric capacity and energy will be The energy efficiency and renewable resource available to the public at a reasonable price. Also, program is actually a combination of three pro- the Assessment must identify and describe electric grams. First, individual utilities may administer generation and transmission facilities planned for programs limited to large commercial, industrial, construction, existing and planned renewable institutional, or agricultural customers in their ser- resource generating facilities, plans for assuring vice territory. Second, large energy customers may that there is adequate ability to transfer electric administer and fund their own efficiency program, power into the state, and activities to discourage and any amounts expended are credited against inefficient and excessive power use. In addition, their utility's expenditure requirement. Third, pub- the Assessment must assess factors related to lic utilities are required to contract with one or competition, purchased generation capacity and more persons to administer a statewide program. energy, and regional bulk-power, as well as That program must address the energy needs of consider other factors. residential, commercial, agricultural, institutional, and industrial energy users and local governments, Other PSC Programs reduce the energy costs of local governments and agricultural producers by increasing the efficiency Energy Efficiency and Renewable Resource of their energy use, address barriers to the manu- Program (FOCUS on Energy). The PSC assists in facture or sale of energy efficient products or ser- the administration of utility public benefit pro- vices, and include initiatives for research and de- grams. As part of the restructuring of electric and velopment regarding the environmental and eco- natural gas public utilities in the 1990s, certain nomic impacts of energy use. functions performed for the benefit of the public were transferred from the utilities. These functions The PSC has oversight of the programs and its included providing energy assistance to low- costs are funded from the 1.2% spending require- income households, promoting energy conserva- ment. The Commission must approve the pro- tion, efficient energy systems, and renewable en- grams offered as utility-administered programs ergy sources, and evaluating and mitigating the and large-customer programs. For the statewide environmental impacts of energy production and programs, the Commission must approve the con- use. Initially, these programs were administered tract between the public utilities and the program through the Department of Administration (DOA), administrator(s) and ensure that 10% of the funds but 2005 Wisconsin Act 141 reorganized the utility for all three programs are spent to reduce the en- public benefits programs. Since July 1, 2007, the ergy costs incurred by local governments and agri- energy efficiency and renewable resource program cultural producers. Each year, the PSC must pre- has been administered by the private sector with pare a report to the Legislature on program ex- oversight provided by the PSC. penses and effectiveness and contract for the

17 preparation of a financial and performance audit of Universal Service Fund. The PSC administers a the programs. At least once every four years, the variety of programs relating to the accessibility and Commission must conduct a formal evaluation of affordability of telecommunications service. These the energy efficiency and resource programs and programs are funded by telecommunications set or revise goals, priorities, and measurable tar- providers through assessments imposed by the gets for the programs. PSC. The assessments are deposited in the universal service fund (USF). The PSC contracts Retail electric cooperatives and municipal utili- with a private firm to administer the fund. ties are not required to participate in the energy efficiency and renewable resource programs. In- The USF was established to ensure that all state stead, they are required to create commitment to residents receive essential telecommunications ser- community programs with the goal of achieving vices and have access to advanced telecommunica- environmentally sound and adequate energy sup- tions capabilities, such as the internet. The PSC is plies at a reasonable cost. However, retail electric required to appoint a USF Council consisting of cooperatives and municipal utilities may partici- representatives of telecommunications providers pate in the statewide energy efficiency and renew- and consumers of telecommunications services to able resource programs, as an alternative to com- advise the Commission regarding the administra- mitment to community programs. tion of the fund. With the Council, the PSC is required to establish programs funded from the USF Pipeline Safety Program. Both the federal and that ensure the delivery of essential services and state governments impose regulations regarding advanced service capabilities anywhere in the state. pipeline safety. These regulations cover the design, Essential services include: (a) single party service construction, operation, inspection, repair, and with touch-tone capability; (b) line quality capable maintenance of pipelines, the training and testing of carrying facsimile and data transmissions; (c) of pipeline employees and contractors, and the equal access; (d) emergency services number capa- maintenance of pipeline company records. The bility; (e) a statewide telecommunications relay ser- Office of Pipeline Safety (OPS) in the U.S. vice for the hearing impaired; and (f) blocking of Department of Transportation has certified the long distance toll services. To implement this gen- Public Service Commission to regulate, inspect, eral statutory directive, the PSC may promulgate and enforce intrastate gas pipeline safety administrative rules establishing the various USF- requirements in Wisconsin. OPS has retained funded programs. authority over safety requirements for interstate gas pipelines and for intrastate and interstate The fund supports 13 programs, with 2008-09 liquid pipelines in Wisconsin. PSC activities appropriations totaling just over $32.0 million. The include completely inspecting every natural gas PSC administers eight of the programs, and these company at least once every three years, reviewing programs were funded by a single appropriation of every natural gas company's maintenance records $6.0 million annually. at least once every year, inspecting in-state gas pipeline construction plans, making unscheduled The following programs are administered by inspections of pipeline construction projects, and the PSC: advising natural gas companies about safety matters. The federal government reimburses the • Telecommunications Equipment Pur- state for up to 80% of its costs for performing the chase Program provides vouchers to disabled per- pipeline safety program. sons to be used to purchase special telecommunications equipment;

• Lifeline Program pays the portion of basic Educational Telecommunications Access (TEACH) telephone service charges exceeding $15 per month program administered by DOA for educational for low-income individuals; entities' access to new data lines for direct internet access and video links; $2.2 million to the Badger- • Link-Up America Program provides a Link program administered by the Department of waiver of certain regulated service charges when Public Instruction (DPI) to pay for contracts with low-income residential customers initiate or move vendors who provide statewide access to reference telephone service; databases of magazines and newspapers; $5.5 million to the Aid to Public Library Systems program • High Rate Assistance Credit Program administered by DPI for supplemental aid pay- reimburses telecommunications providers for ments; $1.1 million to the University of Wisconsin credits they extend to residential customers when (UW) System to reimburse DOA for BadgerNet the total rate for residential service exceeds a telecommunications services provided to UW specified percentage of the median household campuses; and $108,000 to fund a contract between income for a county in their service area; DPI and the National Federation of the Blind to provide the Newsline electronic information ser- • Medical Telecommunications Equipment vice, which gives telephone access to audio ver- Program provides grants to nonprofit medical clin- sions of newspapers for sight-impaired individu- ics and public health agencies to purchase tele- als. Although listed separately, the Newsline pro- communications equipment that promotes techno- gram is funded from DPI's BadgerLink appropria- logically advanced medical services, enhances action. Prior to the 2007-09 biennium, the Universal cess to medical care in rural or underserved areas, Service Fund had accumulated a carryover balance or enhances access to medical care to underserved of $9.2 million. The balance was used on a one-time populations or persons with disabilities; basis to supplant GPR funding under the Aid to Public Library Systems program. As a result, that • Public Interest Pay Telephone Program program's supplemental aid appropriation was provides subsidies to telecommunications compa- increased to $14.0 million for 2007-08. nies for the operation of pay telephones in loca- tions where there is a public need even though the Wireless 911 Services. In 2003, the Legislature telephones are not commercially feasible; created a three-year grant program to reimburse local units of government and wireless telecom- • Access Program or Project by Nonprofit munications providers for costs related to tracking Groups provides grants to nonprofit groups to the telephone number and the location of callers partially fund programs or projects that facilitate using wireless telephones to make emergency calls. affordable access to telecommunications and The grant program has been funded through sur- informational services; and charges on consumers' wireless telecommunications bills, imposed between December 1, 2005 and • Two-Line Voice Carryover provides a November 30, 2008. The PSC promulgated rules second telephone line to certain hearing- or speech- requiring wireless telecommunications providers impaired customers who use telecommunications to impose a surcharge on their customers' bills relay service. based on the Commission's estimate of the costs of providing grants to local governments and wireless The remaining five programs funded with USF telecommunications providers. The surcharge was assessments are administered by other state agen- uniform for all customers. The surcharges have cies and comprise over 80% of the 2008-09 USF ap- been 83 cents per month, 92 cents per month, and propriations. These include: $17.3 million to the 43 cents per month over the course of the fund's

19 life. Effective July 1, 2008, the PSC set the surcharge accept or deny the application. Before issuing an at "zero" as the fund had a balance sufficient to pay environmental trust financing order the Commis- all outstanding grants. sion must: (a) specify the amounts that may be recovered by the utility through environmental con- These surcharges covered local governments' trol charges and indicate the time period over costs for the following: (a) necessary network which customers may be assessed those costs; (b) equipment, including database equipment, com- require customers residing in the utility's service puter hardware and software, and radio and tele- territory to pay the environmental control charges phone equipment used within a wireless public for the entire length of the order, regardless of safety answering point; (b) training operators of a whether the customers subsequently obtain service wireless public safety answering point; (c) network from a different utility during that period; (c) iden- costs; (d) collection and maintenance of data used tify the revenue stream under the proposal that to identify callers and their location; and (e) relay- may be used to retire or secure environmental con- ing messages to emergency call centers. trol equipment bonds; and (d) include a formula for making adjustments to the environmental con- To encourage countywide and regional coop- trol charges to prevent over- and under-collections eration, no more than one grant could be awarded of the charges and to ensure the timely recovery of per county. In addition, the PSC provided supple- relevant costs (referred to as a "true-up" mecha- mental grants to local units of government to en- nism). The PSC must review this true-up mecha- courage multi-jurisdictional grant applications. nism at least annually. Wireless telecommunications providers also were reimbursed for costs related to enhancing the sys- A utility that issues bonds pursuant to an tems necessary to operate the wireless public safety environmental trust financing order must deposit answering point. State law sunsets the grants and the bond proceeds into an account that is used other program expenditures on April 1, 2009. solely for paying the environmental control and financing costs. A financing order remains in effect Environmental Trust Financing. State law es- until the environmental trust bonds are paid in full, tablishes an alternative means for public utilities to including all financing costs, even in the case of finance the construction, installation, or placement bankruptcy by the utility. Each year, the utility of equipment or technology that reduces or pre- must provide customers with an explanation of the vents environmental pollution. This includes fi- environmental control charges. The utility's right to nancing used to retire an existing plant or facility collect environmental control charges continues in an effort to reduce, control, or eliminate envi- until all environmental control costs and related ronmental pollution, but does not include financ- financing costs have been fully recovered. The PSC ing for the payment of monetary penalties, fines, or may not consider environmental control charges as forfeitures assessed against a public utility. costs or revenue of the utility.

After a public utility applies to the PSC for an To date, no utility has used environmental trust environmental trust fund financing order, the financing. Commission has 120 days to determine whether to