An illustration of an atom is one of the four symbols emblazoned on Maricopa County's official government seal. It is there to reflect the importance of nuclear energy to the county, home of the nation's largest nuclear-powered electrical generating facility.

And that facility is especially important to the financial well-being of the county's governments.

The seven utilities that own and operate the Palo Verde Nuclear Generating Station are among Maricopa County's eight largest property taxpayers. The utilities, five of them based out of state, pay Maricopa County and its political subdivisions about $150 million a year in local property taxes.

But the utilities' local tax burden has been falling steadily thanks to a series of tax breaks granted not by the county, but by the state government.

Even though the county government is in desperate financial straits, it cannot set the taxable value for Palo Verde, its most important asset. By law, that responsibility falls to the state Department of Revenue and the legislature--both of which have treated utilities very kindly through the years.

Over the last decade, the legislature has phased in a series of property-tax breaks for utilities that have reduced local property-tax exposure at Palo Verde by $100 million a year.

Last month, the legislature decided to phase in another round of property-tax reductions for utilities, a move that will cut taxes for Palo Verde by another $25 million annually before the turn of the century.

While the legislature has been passing out massive tax reductions, the state Department of Revenue has been caving in to the utilities' demands to reduce the taxable value of the plant. And the lower the value, the lower the property taxes paid.

The revenue department's breaks are nowhere near the size of the legislative tax cuts. But the aggressiveness with which the utilities, led by Arizona Public Service Company and Salt River Project, have pursued value reductions from DOR is stunning. And the results of those efforts have been disastrous for local governments.

When it comes to cutting property taxes, it appears that Palo Verde's operators will say just about anything. In fact, they have asserted that almost half the multibillion-dollar plant was built solely to protect the environment.

Three years ago, a cadre of lawyers and nuclear engineers representing Palo Verde walked into the revenue department's tax-value section and announced that nearly 40 percent of Palo Verde's $6.3 billion cost could be attributed entirely to environmental protection.

The lobbying team told state tax officials that the utilities--which have historically fought environmental regulation--were now claiming that they voluntarily spent nearly $2.3 billion to protect the environment.

The percentage of environmental spending the lobbyists wanted to claim was nearly four times greater than the average for nuclear power plants nationwide. It was nearly twice as large as the amount Palo Verde's owners had claimed in previous years.

The Palo Verde utilities weren't making this extraordinary claim to earn Earth Day accolades. The utilities hoped to take advantage of a 50 percent property-tax break granted to companies that design and construct facilities "solely" to protect the environment.

The stakes were high.
Whenever an additional 1 percent of Palo Verde's value was classified as environmental protection equipment, the plant's owners paid $717,000 less in annual property taxes to Maricopa County and other governments within the county's boundaries.

And the utilities waited until just the right moment to strike.
The lobbyists delivered their high-pressure sales pitch in the middle of a 30-day period when the Department of Revenue must receive and rule on property-tax appeals each year. It was clearly an attempt to surprise and overwhelm the revenue department.

"We were caught off guard," says Cheryl Murray-Leyba, administrator of the department's valuation section. "We didn't have a nuclear engineer on our staff to study it and respond within a two-week period."
So the department struck a compromise, agreeing to set aside 30 percent--or $1.8 billion--of the plant as environmental equipment in 1991. This resulted in an immediate $5.78 million loss to Maricopa County taxing entities, including public schools. The cost to county government alone was $1.25 million.

The revenue department and the utilities then entered into a lengthy series of negotiations. Each side hired independent consultants to evaluate the power plant. The utilities, led by APS, reduced their environmental claims slightly, saying 38 percent of the power plant should be classified as environmental facilities.

Still, APS was making some strange assertions about Palo Verde.
Among other things, APS argued that $625 million spent on the power plant's massive containment buildings and control facilities had no purpose other than the protection of the environment.

Such facilities are designed to prevent radioactive releases into the atmosphere should a nuclear plant suffer a catastrophic reactor failure. APS, however, was arguing that the safety of workers and the public played absolutely no role in the decision to build a containment dome for Palo Verde.

The nuclear plant operators also included $84 million in back-up diesel generating equipment--equipment that would provide lights in case of a power failure--as a purely environmental expenditure.

The revenue department countered with a series of its own studies. The final study concluded that only $515 million--or 8.7 percent--of the nuclear facility should be considered solely as environmental expenses.

The consultant rejected the utilities' odd claim that the containment dome be classified as an environmental facility, saying its primary purpose was to protect lives in the event of an accident.

"That portion of the containment [structures] designed to prevent the release of large amounts of radiation in the event of a major accident cannot be viewed as being designed and constructed solely for environmental reasons," the Overland Consulting Company concluded.

Rather than vigorously supporting the consultant's report and going to court, if necessary, to hold the line on the nuke's environmental tax break, the revenue department once again compromised.

In a settlement signed just three months ago, the state agreed to allow 22 percent of the plant--or $1.36 billion in taxable value--to be classified as environmental.

The difference between the consultant's recommendation and the compromise DOR accepted translates into a $9.8 million annual property-tax loss to Maricopa County governments.

Murray-Leyba says the revenue department was pleased with the settlement because Palo Verde has traditionally classified 22 percent of its plant as environmental facilities. But others familiar with the negotiations say Maricopa County got the short end of the stick.

A former high-ranking revenue department official, who asked not to be identified, says the department had the documentation necessary to beat the utilities in court and bring nearly $10 million a year in new revenue to Maricopa County taxing entities.

But, the former official says, the Department of Revenue has always been afraid to challenge the utilities aggressively. "By tradition, there is an establishment of accommodation that leads to favorable treatment of the taxpayer," he says.

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John Dougherty
Contact: John Dougherty