Exhibit 13
(Reproduced by Allegheny Energy for Edgar Filing)
STATE OF WEST VIRGINIA
STATE TAX DEPARTMENT
P.O. Box 2589
Charleston, WV 25328-2589
Telephone (304) 558-8730
Fax (304) 558- 8733
CECIL R. UNDERWOOD JOSPEH M. PALMER
Governor Commissioner
October 5, 2000
John A. Mairs
Jackson & Kelly PLLC
Attorneys at Law
P.O. Box 553
Charleston, WV 25322
Re: Business and occupation tax treatment of leased
generation capacity as an offset against distribution
tax base.
Dear Mr. Mairs:
This letter is in response to your correspondence of
October 3, 2000. In your letter you refer to a lease
agreement under which Potomac Edison Company would lease
electricity generation capacity from Allegheny Energy Supply
Company, LLC.
The Tax Department has reviewed the proposed lease
agreement. It is to be an operating lease (see section 3.5
of the lease), with a 1 year term subject to renewal
(section 8.2).
Under the proposed lease, the electricity generating
company, Allegheny Energy Supply Co., LLC, will own the
generating unit, but will lease to the distributing company,
Potomac Edison Co., a fixed amount of 425 MW of generating
capacity, equivalent to 29 percent of Potomac's former
ownership interest in the named facilities. See section
3.1.1.of the proposed lease. It was determined pursuant to
a telephone conversation between you and a Tax Department
staff member that the 29% number was deliberately chosen
because 29% is the number necessary to offset the
distribution tax base of Potomac Edison Co. and eliminate
the distribution tax.
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11-13-1.Definitions.
(b) Terms defined
(3) "Taxpayer" means any person liable for any tax hereunder.
11-13-2o. Business of generating or producing or
selling electricity on and after the first day of June, one
thousand nine hundred ninety-five; definition; rate of tax;
exemptions; effective date
(b) Rate of tax. Upon every person engaging or
continuing within this state in the business of generating
or producing electricity for sale, profit or commercial use,
either directly or indirectly through the activity of
others, in whole or in part, or in the business of selling
electricity to consumers, or in both businesses, the tax
imposed by section two ( 11-13-2) of this article shall be
equal to:
(1) For taxpayers who generate or produce electricity
for sale, profit or commercial use, the product of
twenty-two dollars and seventy-eight cents multiplied
by the taxable generating capacity of each generating
unit in this state owned or leased by the taxpayer,
subject to the modifications set forth in subsection
(c) of this section; Provided, That with respect to
each generating unit in this state which has installed
a flue gas desulfurization system, the lax imposed by
section two of this article shall, on and after the
thirty-first day of January, one thousand nine hundred
ninety-six, be equal to the product of twenty dollars
and seventy cents multiplied by the taxable generating
capacity of the units, subject to the modifications set
forth in subsection (c) of this section: Provided,
however, That with respect to kilowatt hours sold to or
used by a plant location engaged in manufacturing
activity in which the contract demand at such plant
location exceeds two hundred thousand kilowatts per
hour in a year, in no event shall the tax imposed by
this article with respect to the sale or use of such
electricity exceed five hundredths of one cent times
the kilowatt hours sold to or used by a plant engaged
in such a manufacturing activity; and
(2) For taxpayers who sell electricity to consumers in
this state that is not generated or produced in this
state by the taxpayer, nineteen hundredths of one cent
times the kilowatt hours of electricity sold to
consumers in this state that were not generated or
produced in this state by the taxpayer, except that the
rate shall be five hundredths of one cent times the
kilowatt hours of electricity not generated or produced
in this state by the taxpayer which is sold to a plant
location in this state of a customer engaged in
manufacturing activity if the contract demand at such
plant location exceeds two hundred thousand kilowatts
per hour per year or if the usage at such plant
location exceeds two hundred thousand kilowatts per
hour in a year. The measure of tax under this
subdivision (2) shall be equal to the total kilowatt
hours of electricity sold to consumers in the state
during the taxable year that were not generated or
produced in this state by the taxpayer, to be
determined by subtracting from the total kilowatt hours
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of electricity sold in consumers in the state the net
kilowatt hours of electricity generated or produced in
the state by the taxpayer during the taxable year. For
the purposes of this subdivision, net kilowatt hours of
electricity generated or produced in this state by the
taxpayer includes the taxpayer's pro rata share of
electricity generated or produced in this state by a
partnership or limited liability company of which the
taxpayer is a partner or member. The provisions of
this subdivision (s) shall not apply to those kilowatt
hours exempt under subsection (b), section two-n [11-
13-2n(b)] of this article. Any person taxable under
this subdivision (s) shall be allowed a credit against
the amount of tax due under this subdivision (2) for
any electric power generation taxes or a tax similar to
the tax imposed by subdivision (1) of this subsection
(b) paid by the taxpayer with respect to such electric
power in the state in which such power was generated or
produced. The amount, of credit allowed shall not
exceed the tax liability arising under this subdivision
(2) with respect to the sale of such power.
In essence, under the statute, the business and
occupation tax on electric power generation is imposed on
taxable generating capacity of each generating unit in this
state "owned or leased by the taxpayer."
The leasing of generating capacity by Potomac Edison
falls within the statutory requirement for generation that
offsets distribution by an owner or lessor of the generating
unit. Thus, under the lease agreement submitted to the Tax
Department for review, the electricity distribution in KWH
of Potomac Edison would be offset by the generation capacity
in KWH leased by Potomac Edison in computation of the
business and occupation distribution tax base.
Sincerely,
/s/ Mark Muchow
Mark Muchow
Chief Administrator
For Revenue Operations
