Matter of Astoria Gas Turbine Power LLC v Tax Commn. of City of N.Y.

Matter of Astoria Gas Turbine Power, LLC v Tax Commn. of City of N.Y. 2006 NY Slip Op 07392 [7 NY3d 451] October 17, 2006 Rosenblatt, J. Court of Appeals Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected through Wednesday, December 06, 2006

[*1] In the Matter of Astoria Gas Turbine Power, LLC, Respondent,
v
Tax Commission of City of New York et al., Appellants.

Argued September 6, 2006; decided October 17, 2006

Matter of Astoria Gas Turbine Power, LLC v Tax Commn. of City of N.Y., 14 AD3d 553, affirmed.

{**7 NY3d at 453} OPINION OF THE COURT

Rosenblatt, J.

Pursuant to article 18 of the Real Property Tax Law, real property located in a special assessing unit is classified in a way{**7 NY3d at 454} that affects the owner's tax liability. Astoria Gas Turbine Power, LLC (AGTP) brought this RPTL article 7 proceeding challenging the [*2]classification of its power plant equipment as "utility real property" falling within class three of RPTL 1802 (1). AGTP contends that the equipment should be treated as class-four, general commercial real property. Equipment is properly designated class-three property if it belongs to "persons and corporations subject to the supervision of the state department of public service" (RPTL 1801 [c]). We conclude that because AGTP is not subject to such supervision, its equipment should be classified as class-four property. I.

During the past three decades, both Congress and the New York State Legislature have sought to deregulate the electric utility industry. In 1996, aiming to lower consumer costs, encourage economic development, and continue safe and reliable service, the New York State Public Service Commission (PSC) ordered a restructuring of the industry (see Re Competitive Opportunities Regarding Elec. Serv., 1996 NY PSC Op No. 96-12, 168 PUR4th 515). Two years later, in accordance with that order, the PSC conditionally approved the plan of Consolidated Edison Company of New York (Con Ed) to divest its New York City electric generating fossil-fueled capacity to unregulated entities (see Re Consolidated Edison Co. of N.Y., Inc., 1998 NY PSC Case 96-E-0897, 188 PUR4th 149).

In 1999, Con Ed transferred its 614-megawatt Astoria Gas Turbines in Astoria, Queens (the equipment) to AGTP's parent company, NRG Energy Inc. For tax year 2001-2002the period in issuethe Department of Finance of the City of New York (DOF) classified the equipment as class-three "utility real property." Claiming that its property was misclassified, AGTP brought this proceeding against DOF and the Tax Commission of the City of New York (collectively, the City). Both sides sought partial summary judgment. Supreme Court ruled with the City, concluding that its classification of the property was correct. The Appellate Division reversed, granted AGTP's motion and directed the City to reclassify the equipment as class-four property on the 2001-2002 assessment roll.[FN1] We now affirm. {**7 NY3d at 455}II.

The City contends that RPTL 1802 (1) and 1801 (c) contemplate a classification system based on the character of the property itself. At the threshold, we note that the proper classification of the equipment implicates a pure statutory analysis of RPTL 1802 (1) and 1801 (c), and we need not defer to the City's determination (see Lorillard Tobacco Co. v Roth, 99 NY2d 316, 322 [2003]). Because classification of commercial property hinges on whether a company [*3]is "subject to the supervision of the state department of public service" (RPTL 1801 [c]), we conclude that the Legislature intended classification to depend on the nature of the enterprise, and not the nature of the property.

The issue turns on AGTP's relationship with the PSC. In exchange for compliance with strict regulation by the PSC, traditional public utilities are generally afforded certain economic advantages. For instance, public utilities have historically exercised monopoly power, protecting them against competition. In addition, public utilities typically are afforded governmental franchises permitting them to place equipment on public rights-of-way or otherwise use public land. Given public utilities' competitive and financial advantages, the PSC establishes rates at which they can sell their product.

In fixing a public utility's classification for tax purposes, RPTL 1802 (1) and 1801 (c) take into account that the public utility is virtually guaranteed to earn a reasonable rate of return. In light of the economic advantages afforded to public utilities, New York's tax scheme has treated them differently than other types of entities. Thus, the language "subject to the supervision of the state department of public service" has been used repeatedly in this State's tax statutes to distinguish between noncompetitive public utilities and other market-driven business organizations (see New York Steam Corp. v City of New York, 268 NY 137, 147 [1935]; Cable & Wireless v City of N.Y. Dept. of Fin., 190 Misc 2d 410, 416 [Sup Ct, NY County 2001]).

Here, the PSC maintains "light regulation" over AGTP covering "matters such as enforcement, investigation, safety, reliability and system improvement" (Re Consolidated Edison Co. of N.Y., Inc.'s Plans, 1999 NY PSC Case 96-E-0897, 1999 WL 716539, *16, 1999 NY PUC LEXIS 383, *47). This light regulation also gives the PSC authority to limit AGTP's{**7 NY3d at 456} power in the market[FN2] and any actions that contravene the public interest.

As against these few exceptions, however, AGTP is exempt from the vast [*4]majority of the provisions of the Public Service Law that apply to retail sellers of electricity.[FN3] Most importantly, the PSC does not establish rates in AGTP's wholesale electricity generation market. As the Appellate Division aptly noted, the PSC's reserved authority over market power issues does "not involve the intense rate supervision imposed upon traditional electric utilities by the PSC."[FN4]

Because AGTP is subject to lightened governmental regulation, it cannot be considered a public utility, and should not be classified like one under RPTL 1802 (1). Unlike a utility, AGTP is not assured a reasonable rate of return, but is at the mercy of volatile competitive market forces based on supply and demand. Further, AGTP possesses no governmental franchises or property interests in public streets. Thus, in conformance with the Legislature's initiative to deregulate the electric utility industry, AGTP is a competitive entity like those whose real property is properly placed in class four.

In short, the PSC's regulation of AGTP is insubstantial when compared to a public utility's and does not subject the company to the "supervision of the state department of public service" as contemplated by the Legislature. As a result, the equipment should be designated class-four property.{**7 NY3d at 457}

Accordingly, the judgment appealed from and order of the Appellate Division brought up for review should be affirmed, with costs.

Chief Judge Kaye and Judges Ciparick, Graffeo, Read and R.S. Smith concur; Judge Pigott taking no part. [*5]

Judgment appealed from and order of the Appellate Division brought up for review affirmed, with costs. Footnotes

Footnote 1: This Appellate Division order is brought up for review by the City's appeal from Supreme Court's subsequent amended judgment.

Footnote 2: Pursuant to PSC order, AGTP is subject to certain market mitigation measures such as price caps. The measures are designed to prevent market power abuse during the transition to a fully competitive market but do not function as price controls such as those historically imposed on traditional public utilities (see Re Consolidated Edison Co. of N.Y., Inc., 1998 NY PSC Case 96-E-0897, 188 PUR4th 149; Re Consolidated Edison Co. of N.Y., Inc.'s Plans, 1999 NY PSC Case 96-E-0897, 1999 WL 716539, 1999 NY PUC LEXIS 383).

Footnote 3: AGTP is exempt from the provisions of Public Service Law articles 1 ("The Department of Public Service"), 2 ("Residential Gas, Electric and Steam Utility Service"), 4 ("Provisions Relating to Gas and Electric Corporations; Regulation of Price of Gas and Electricity"), and 6 ("Provisions Affecting Two or More Kinds of the Public Service and the Persons and Corporations Furnishing Such Service") "that adhere, by their terms, to the retail sale of electricity" (Re Consolidated Edison Co. of N.Y., Inc.'s Plans, 1999 NY PSC Case 96-E-0897, 1999 WL 716539, *15, 1999 NY PUC LEXIS 383, *45).

Footnote 4: Matter of Astoria Gas Turbine Power, LLC v Tax Commn. of City of N.Y. (14 AD3d 553, 558 [2d Dept 2005], citing AT&T Info. Sys. v City of New York, 137 AD2d 7 [1st Dept 1988], affd for reasons stated in op by Rosenberger, J., at App Div 73 NY2d 842 [1988]).