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Is AES deal a bargain?

Even if its controversial payment-in-lieu-of-taxes arrangement takes effect, AES Corp. will still be paying more money to local governments and schools than the owner of any other privately owned coal-fired power plant in the state.

Figures compiled by The Buffalo News from municipalities that host major private-sector power plants in New York showed that there are only three plants in the state that pay more than the $19.6 million AES paid this year to the Town of Somerset, the Barker Central School District and Niagara County.

Right now, AES Somerset is fourth on the property tax scale out of 21 plants examined by The News. With its PILOT, which is being challenged in court by the local taxing entities, two other plants would move ahead of the Somerset plant.

All of those higher-taxed plants are downstate and burn natural gas or oil to generate electricity.

The Niagara County Industrial Development Agency granted a 12-year tax break to AES that would reduce the company's tax load to $17.3 million next year, and $15.8 million by 2011.

Even those amounts came as a surprise to some officials elsewhere in the state.

"That's outrageous," said Paul Goldman, counsel to the Greene County IDA. "Fifteen million dollars on a 675-megawatt plant is a huge number."

Five years ago, Goldman's agency granted a natural gas-burning power plant, the Athens Generating Station, a 20-year PILOT, under which that 1,080-megawatt plant will never have to pay more than $5.25 million a year.

"There's a lot of people who are gutless and afraid to do the right thing," Goldman said. "People in New York take a myopic view and want to tax everything to the bottom line."

Michael J. Fogarty, assessor in the Rockland County Town of Haverstraw, which hosts two major power plants, said that so far as he knows, every power plant in the state has been involved in a lawsuit over its assessment. He blames Albany for not thinking the impact through when it deregulated electricity plants in the 1990s.

"I think most of these plants are in litigation. This is the result of the separation of transmission from generation," Fogarty said. "Whether these should have PILOTs and not be on the assessment rolls goes back to Albany."

He said the state provided little or no guidance on how to deal with power plant issues. "Each of the municipalities was left on their own."

"Since deregulation there's no rhyme or reason," said Larry Farbstein, a consultant to the Town of Haverstraw and the North Rockland Central School District, which were recently big losers in a lawsuit over power plant assessments.

A report by Girasole Appraisal Co. of Niagara Falls, commissioned by the Harris Beach law firm when it represented the Niagara County IDA, analyzed power plant PILOTs around the state and found them to be completely inconsistent.

"These payments seem to have nothing to do with the construction cost, the type of fuel [used to generate electricity] or the value of the facility, but more with the motivations of the host community," the Girasole report concluded.

One radical example of a motivated municipality was the Town of Lockport, whose IDA gave the Fortistar co-generation plant off Junction Road a complete tax exemption in 1991, except for special district levies.

Town Attorney Daniel E. Seaman said that deal, which was recently renewed to run through 2012, was an effort to preserve Delphi Thermal and Interior's Lockport plant, which at the time of the original tax break was still Harrison Radiator Division of General Motors Corp.

The 200-megawatt natural gas-burning power plant was selling almost all of its output to the nearby auto parts plant.

"It effectively kept Delphi in Lockport for all those years," Seaman said. "They had a long-term contract for electricity and steam. General Motors received the benefit of cheaper electricity for many years."

The state Office of Real Property Services provides appraisals of the market value of power plants, but town assessors still have the final say. The result, except in cases where a PILOT has been worked out, is usually a court challenge.

The AES dispute is merely a continuation of the fight the Somerset plant's builder, New York State Electric & Gas Corp., conducted for years against the town, even after it sold the plant to AES in 1999.

At the end of 2004, NYSEG and the town, county and school district reached a settlement of a suit over the utility's demands for tax refunds for 1996 through 1998.

The taxing entities in effect admitted the Somerset plant was overassessed and paid NYSEG a total of $6.3 million, which they had to borrow.

It was something of a win for the localities, because NYSEG had sought $22 million in refunds.

AES battled Somerset in court over the plant's assessment and, in 2003, State Supreme Court Justice Richard C. Kloch Sr. brokered a settlement in which the assessed value was set at $400 million.

But the next year, the town hiked the figure to $470 million and the sides were off to court again.

>Moving targets

AES Somerset President Kevin R. Pierce said: "The assessment when we got there was $600 million. It went down to $400 million, but we paid more in taxes."

Now the assessment stands at $666.6 million, and the taxing entities are more dependent on AES tax money than ever.

The Barker School District, for example, collects 78.4 percent of its property tax revenue from AES. The PILOT would cost the school more than $1 million a year, which led to a threat by Superintendent Steven J. LaRock to lay off 24 employees, including 15 teachers.

But Pierce portrayed AES' acceptance of the PILOT as something of a favor to the host communities.

"We knew from the start it would be too painful for the town, county and school district if we went to a competitive tax rate," he said.

LaRock said, "The reality of this situation has been, this plant has a value. When there are two independent assessments of this plant and they're within $50 million of each other, and both over $1 billion, I'm going to say that until they produce something that proves they're worth what they say they're worth, what they're paying is fair."

He was referring to a private appraisal firm hired by the town, and to the state appraisal by the Office of Real Property Services.

Their appraisals are based in part on the plant's profitability, which Joe Hesch, a spokesman for Real Property Services, said is done because there aren't enough power plant sales to establish comparability.

Somerset Supervisor Richard J. Meyers has a difference of opinion with his Town Board and attorneys. He wants a PILOT arrangement with AES.

"I don't like the way the PILOT was reached. I don't have a problem with the PILOT, per se. I understand why it was done, because of the history between AES and the town. I just wish the IDA had shown more openness," Meyers said.

As for the lawsuit, Meyers said, "If we win, I'd like to see us go back to the table and negotiate. This is going to be appealed no matter what, and once the final decision is made, I don't want to deal with it again."

>Playing with fire

March 22, Kloch upheld the IDA's right to grant the PILOT but left open the question of whether it followed proper procedures.

In his remarks from the bench, Kloch estimated that if he placed AES' assessment back at $400 million, the town, county and school would owe AES $19 million in tax refunds.

He warned that Mirant Corp. won huge tax refunds because of a ruling late last year in a suit over the assessments of its Bowline plant.

"Maybe rational people will look at what happened in Rockland County," Kloch said. "Those people played with fire. They got burned."

Meyers said: "Our attorney assures the board we're a different situation than Rockland County. . . . I wish I could get a second opinion."

Goldman, of the Greene County IDA, said an out-of-court settlement worth only $20 million was offered in the Mirant case, but was turned down by a local town supervisor. He blamed personalities for getting in the way of the deal.

"We just paid Mirant back $224 million," said Jim Johnston, business administrator for the North Rockland Central School District. "To borrow that, over 30 years, we'll pay $438 million [in principal and interest]. What do we get for that? We get to pay back Mirant and we don't get to buy a single textbook.

"Do I sound angry?"

And Johnston said Mirant is suing again, because a village in his school district just raised the plant's assessment again.

"Sometimes the town wins and sometimes the town loses," Goldman said. "It teaches you to be reasonable."

e-mail: tprohaska@buffnews.com

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