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F I S C A L I M P A C T R E P O R T

SPONSOR Pinto

ORIGINAL DATE

LAST UPDATED

1/27/06

HB

SHORT TITLE Navajo Nation Electric Generation Tax Credit

SB 464

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(2,517.0) Recurring General Fund

(315.0) Recurring Small Cities

Assistance Fund

(315.0) Recurring Small Counties

Assistance Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB 82.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Indian Affairs Department (IAD)

Energy Minerals and Natural Resources Department (EMRND)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 464 creates the intergovernmental compensating tax credit, which may be claimed by

a taxpayer who has a compensating tax liability from construction or operation of a coal-fired

electric generating facility on Navajo Nation land, so long as construction of the facility com-

mences before December 31, 2007.

The amount of the credit shall be determined annually and be the lesser of 1) the total amount of

possessory interest tax, business activity tax and ad valorem tax paid to the Navajo Nation for the

coal facility, or 2) the amount paid to the Navajo Nation pursuant to an agreement under which

the Navajo Nation grants a tax exemption for the coal facility in exchange for a fixed annual tax

payment, or 3) 85 percent of compensating tax liability from the construction or operation of the

Senate Bill 464 – Page

2

coal facility. The total amount of the credit for each coal facility is capped at $60 million (See

Technical Issues below).

The effective date of these provisions is July 1, 2006.

FISCAL IMPLICATIONS

Navajo Nation’s Diné Power Authority has selected Sithe Global Power to develop, finance,

construct and operate two 750 megawatt coal-fired generating facilities called “Desert Rock” 30

miles southwest of Farmington. The total cost of this facility is estimated at $2.2 billion.

Sithe is currently negotiating an agreement with the Navajo Nation in which Sithe would pay the

Navajo Nation $12.6 million over four years of construction ($3.1 million per year in FY08-

FY11), $164.5 million over the first ten years of operation ($16.5 million per year in FY12 to

FY21), and $354.3 million over the 11

th

to 26

th

years of operation ($20.8 million per year in

FY22 to FY37) in lieu of Navajo Nation taxes.

Assuming that the $3.1 million per year Sithe pays to the Navajo Nation during the construction

phase will be less than 85 percent of compensating tax liability in FY08-FY11, but that 85 per-

cent of compensating tax liability will be less in later years when the facility is in operation, the

amount of the credit will total about $3.1 million per year in FY08- FY11 and about 1 million

per year for decades thereafter until the total credit reaches the $60 million cap.

Eighty percent of the compensating tax revenue loss will accrue to the state general fund, while

10 percent will accrue to each the small cities and small counties assistance funds.

SIGNIFICANT ISSUES

Businesses that choose to locate on Navajo Nation land are subject to both Navajo Nation and

New Mexico taxes. This dual taxation increases the cost of locating businesses on Navajo Nation

land.

Sithe states that the purposes of the Desert Rock project are to improve the existing southwestern

states power system, deliver competitively priced and reliable power, generate electricity from

Navajo Nation coal resources, reduce dependence on natural gas-fired facilities, and support Na-

vajo Nation economic development.

Water use and emissions from any coal facility must be considered, since the southwest faces

severe water concerns and coal facilities are known to emit mercury, greenhouse gases and other

toxins into the surrounding environment. According to Sithe, by using air cooling instead of wa-

ter cooling, the Desert Rock facility will use about 25 percent as much water as a conventional

coal facility. Sithe expects the facility to use about 4,500 acre feet of water per year, which is

enough to supply a city of roughly 4 million people. This water is expected to be obtained from

Navajo groundwater sources.

Sithe reports that Desert Rock will also have a “high-efficiency super-critical boiler” that will

make it 10 times cleaner than older coal facilities. Although two other coal plants in northwest-

ern New Mexico currently emit a combined 40,000 tons of sulfur-dioxide (SO2) per year, the

Desert Rock project is expected to emit about 3,500 tons of SO2 per year when operations begin

Senate Bill 464 – Page

3

in 2010. The nationwide average SO2 emissions for coal-fired generators were 0.94 pounds of

SO2 per million Btu in 2004; Desert Rock expects to emit only 0.06 pounds per million Btu.

This is well below the Clean Air Act limit of 0.26 pounds per million Btu that will take effect in

2015.

Construction of Desert Rock is expected to create an average of 1,000 jobs per year for four

years, with total construction wages of about $400 million. Once Desert Rock operations begin

in 2009 or 2010, the facility is expected to create 200 permanent power plant jobs and 200 per-

manent mining jobs.

TECHNICAL ISSUES

Section D caps the aggregate credit that that may be claimed for each coal facility at $60 million.

Although representatives of Sithe believe the bill is meant to cap the credit at $60 million over

the lifespan of a facility, it is technically unclear if the $60 million is an annual cap or an aggre-

gate cap on the entire lifespan of a facility. Amend Section D to clarify the time period to which

this $60 million cap applies.

Although the bill states that construction of a coal facility must commence by December 31,

2007 for a facility to qualify for the credit, it puts no limit on how long ago construction could

have commenced. This means any existing coal facilities on Navajo Nation land, such as the

Four Corners Power Plant, will be able to claim the credit for their operations or any improve-

ments to existing facilities.

EMNRD notes that the bill does not define commencement of construction, which could be in-

terpreted to include activities such as assessment studies or other planning. The bill should be

amended to define commencement of construction as the building of a permanent structure of a

power plant that has been planned, evaluated, designed, and permitted in accordance with all re-

quirements of agencies having jurisdiction.

The definition of “Navajo land” makes it unclear whether individual or tribal trust allotments

outside the reservation’s exterior boundaries are included. There are also fee lands owned by

non-Indians that fit the description found in this bill. TRD suggests defining Navajo land as

“tribal trust land or land reserved for the Navajos pursuant to executive order.”

TRD suggests adding the word “compensating” before the word “tax” in page 1, line 24 of the

bill to clarify that the credit applies against compensating tax liability.

TRD also notes that the bill does not clearly indicate how the credit may be claimed once it is

approved. It looks as though TRD would approve and track the credit but the bill should state

this explicitly.

POSSIBLE QUESTIONS

Economic Questions:

What shares of the 1,000 jobs generated by construction of Desert Rock are expected to be filled

with Navajo Nation or New Mexico residents.

Senate Bill 464 – Page

4

What market would electricity produced at Desert Rock reach. Would new infrastructure be

necessary to bring that electricity onto the grid.

Environmental and Cultural Questions:

How will the Desert Rock project affect visibility in the region surrounding the facility.

The Desert Rock project will use 4,500 acre feet of water per year from Navajo groundwater

sources. How will other users of Navajo groundwater be impacted by Desert Rock’s useage.

Will the planned Desert rock project impact cultural sites on Navajo Nation land.

SS/yr