A resolution to terminate the tax agreement between the City of Middletown and NRG, owner of the power plant on River Road, will be tabled at the Council meeting on April 5. It appears that NRG is waving the white flag and has requested a one-month delay of Council action in order to terminate the tax agreement by mutual consent with the City.
Pending such a mutual consent agreement, that will presumably be ratified at the May 3 Council meeting, below are the details of the tax agreement for reader information.
So, public testimony at the April 5 meeting will not be needed, though it will be allowed as the item remains on the agenda.
Many thanks to all who participated in and supported our campaign.
The tax agreement with NRG is unfavorable to Middletown. Until the proposed turbine is built and becomes operational— something that could not possibly happen before 2024, at the earliest—property taxes paid to the city are frozen at the 2019 level of $1.78 million per year. The city is losing over $200,000 per year in taxes while the agreement remains in effect for a project that is not getting built anytime soon.
But it the proposed turbine should ever be built — an increasingly unlikely outcome, due to market conditions — the tax agreement represents an unconscionable giveaway to NRG. Why would Middletown give a tax break to a company that is going to pollute our air more and stand in the way of meeting the state’s climate goals?
What would the actual tax revenue from the project be?
Under the terms of the agreement, taxes paid to the city would depend on the “forward capacity market price” for each year. You don’t need to understand what that means. Simply stated, the taxes paid to the city each year would vary between $2.36 million to $3.41 million per year, but would most likely be at the lower end of that range. Over a 25-year period, the total paid to the city would be somewhere between a minimum of $59 million and a maximum of $85.25 million. Assuming the forward capacity market rises over the next five years and NRG or its successor built the plant, we estimate total tax revenue over 25 years of no more than $65 million — and that’s being optimistic and contrary to current trends and predicted future trends in the capacity market.
But with no tax agreement, the taxes paid would depend on different factors — namely, the rate of depreciation assigned by the assessor’s office and the tax mill rate for each year. Assume for our purpose here a constant mill rate of .0358 for 25 years. The depreciation could be 75% of initial value over 25 years, or it could be an accelerated depreciation of 75% of initial value over 17 years. So, without this tax agreement, the total taxes received by the city over 25 years would be between $82.5 million and $123 million.
Summary — Financial impact of the Tax Agreement.
Prior to turbine operation: $200,000 tax loss per year
After turbine operation: $700,000 – $2.3 million tax loss per year (depending on depreciated rate applied by the assessor’s office.)
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For more details on the tax agreement and the calculations cited above, read more below:
In June 2019, the City of Middletown entered into a tax payment agreement for the proposed new combustion turbine that appears unjustifiably favorable to NRG, amounting to a significant tax subsidy for the project. In the 3 years prior to 2019, the taxes on the NRG plant rose from $1.43 million per year to $1.78 million per year, an average increase of $114,276 per year, or a 7.3% increase per year.
Assuming that, without the tax agreement, the taxes due on the unmodified plant would have continued to rise at the same rate, Middletown would have received an additional $228, 552 in the current year, and would receive an additional $245,236 more in the coming fiscal year 2022. But instead, property taxes remain frozen at the 2019 level until the proposed plant goes into operation. But given the marketplace for power capacity, it’s becoming more and more unlikely that the plant will ever be built —at least not for a number of years?
Of course, if the plant ever does get built, the city will receive more tax revenue due to the investment of over $300 million (the costs of the new turbine, according to NRG). But how much would the tax revenue go up, according to the tax agreement? And how would that potential tax revenue (based on the agreement) compare to what the taxes would be without the agreement
This is where it gets complicated, and where the tax agreement is shown to be unfavorable to the City and its taxpayers, and overly generous to NRG.
Consider what tax revenue the city would receive without such a tax agreement. These taxes could be projected based on a depreciation schedule, by which the assessed value declines over a 25 year period to 25% of its initial value. In this case, the taxes received over a 25-year period would be $123 million.
An accelerated depreciation rate, reducing the assessed value to 25% over a 17-year period, would strongly favor NRG, resulting in $82.5 million in taxes received over a 25-year period.
How do these above amounts compare to what the tax agreement provides?
The tax agreement states that the taxes owed to the city will vary according to the annual Forward Capacity Auction price. In other words, future tax revenue according to the agreement is uncertain, but lower than what the taxes would be without this agreement. The tax agreement payment schedule provides for different annual taxes if the auction price is below $6.25, in which case the taxes will be $2.36 million per year; or if the auction price is above $7.76, in which case the taxes will be $3.41 million per year. If the auction price is between those amounts, the taxes would vary between $2.62 million and $3.15 million per year.
Note: The forward capacity auction price is the amount of money a power plant receives for simply being ready to run. An auction price of $4, which is the minimum NRG would need in order to clear the auction, would produce $27 million per year in revenue to the company, without producing any power whatsoever. That would just be for being ready to run. Sale of power would yield revenue to the plant owner on top of that.
Given the fact that the auction price in recent years has been far below the range anticipated in the tax agreement (the auction price was $3.50 in 2019, $2 in 2020, and $2.61 in 2021) it appears that the tax revenue produced by the agreement would be at or near the minimum level, at least in the first 5 years or so.
So, under the terms of the tax agreement, once the new turbine becomes operational, the annual taxes would vary in the range described above. Over a 25-year period, the total taxes would be a minimum of $59 million, and a maximum of $85.25 million (if the market changed dramatically upward and stayed there for 25 years). Again, we can safely predict that the tax revenue would start out at the minimum level, and mostly like remain at the minimum or in the lower part of the range, due to the over-abundance of unused generation capacity in our region. Therefore, we estimate that the tax agreement would likely yield no more than $65 million over a 25-year period.
Another significant advantage of the tax agreement for NRG is that its total 25-year tax bill would be postponed, or paid in later years, allowing NRG the use of that money and the privilege of paying it back later, with cheaper dollars. Furthermore, if the plant went into bankruptcy due to lack of need, the city would not realized even the reduced projected revenue.
Conclusion: Only in the unlikely scenario of an upward spike in the forward capacity auction price from $2.61 to $7.76 and the further unlikely case in which the market remains at that level for 25 years, would the agreement bring slightly more revenue to the city than the most accelerated, pro-NRG rate of deprecation. In the meantime, prior to the turbine being installed and prior to the termination of the tax agreement, taxes on the existing plant are frozen at the 2019 level and the city is losing over $200,000 in revenue per year, and that lost revenue becomes an even greater loss every year.