Rural Columbia River Gorge counties saw plenty of dollar signs when wind farm developers began erecting turbines in their breezy, rural backyards.
The investments slapped tens of millions of dollars onto sagging tax rolls and promised to revive budgets for services such as schools, health care and economic development.
But the anticipated windfall has suddenly lost some of its heft.
A state-level change in the way the projects are valued has worked to pull down assessments, and, in turn, has wiped out hundreds of thousands of property tax dollars that county officials had hoped to pencil into future budgets.
“This is very serious for our counties and our taxing districts,” Judge Laura Pryor of Gilliam County wrote in an e-mail newsletter to rural colleagues. “What we have all thought of as an industry of benefit, may not be of much benefit. They don’t provide any jobs and now they may not provide much revenue either!”
The frustration has prompted counties to begin sorting through the impact and consider working together to pressure state officials to reconsider the formula.
Wind farm developers have been critical of property taxes in Oregon, which they say unfairly treat capital-intensive businesses such as theirs. They generally approve of the tax changes, although they say they’re still assessing the impact.
Oregon Department of Revenue officials say the revamped formula, applied to the most recent 2006 tax year, relies heavily on a project’s income potential and better reflects a project’s worth. They admit that property assessments generally dropped under the formula’s application, but not to the degree county leaders had feared.
“There’s a lot of misunderstanding out there,” said Grant Merrill, manager of the revenue department’s utility unit.
The revisions are controversial because wind farms represent big investments with huge tax consequences. The industry has developed so quickly that tax assessors have scrambled to design methods that accurately reflect a wind farm’s value throughout the 20- to 30-year life assumed by accountants.
Officials in Sherman, Gilliam and other rural gorge counties have welcomed the wind farms and economic benefits they bring. The projects don’t generate many jobs, but they involve capital investments of tens, even hundreds, of millions of dollars each. Once on the tax rolls, a wind farm can increase a rural county’s tax base by 10 percent or more and do so with little corresponding demand on services.
But the tax changes have touched off unease that could affect the industry’s rapid-fire growth and tarnish the relationships that developers and rural communities have carefully cultivated.
“They won’t be very popular if they don’t return something to the counties,” said Mike McArthur, executive director of Association of Oregon Counties, a wheat farmer and former head of the Sherman County Board of Commissioners.
Tax breaks add to pain
Gilliam and Sherman county officials are particularly concerned about the wind farms that lie in enterprise zones. The designation, designed to encourage development in economically faltering areas, suspends all property taxes for three years.
Under the new assessment formula, wind farms hold their highest value in the early years. That means when a project in an enterprise zone again hits the tax rolls, the assessment can reflect a considerably lower value.
The gorge has seen a boom in wind farm development in the past eight years. Since 1998, eight projects have risen on the Oregon side of the Columbia River, boasting a total capacity of 438 megawatts, or enough power to light 145,000 homes annually.
All are located in Sherman, Gilliam or Umatilla counties, but many more are in the works, including expansions at existing sites and new ones in Morrow, Union and Wasco.
Four of the projects in operation lie in enterprise zones. The newest, the 100.5-megawatt Leaning Juniper wind farm in Gilliam County, came online during the summer and will begin its three-year tax-abatement period next year.
Gilliam County might offer the best test case of the changing dollar signs, although timing differences make a clean evaluation difficult.
Condon I and Condon II, owned by energy company AES Corp. of Arlington, Va., received three-year, 100 percent property tax breaks when they began operating in 2001 and 2003, respectively. Both are back on the tax rolls, valued at a combined $32.81 million.
The year before, they were assessed at $47 million. If that value had carried through into the 2006 tax year, the county would have reaped $562,300 in tax revenue, instead of the $392,500 imposed under the state’s new formula, according to estimates by the Gilliam county assessor.
“It’s a significant loss of revenue,” said Pryor. “There’s got to be a benefit to breaking your neck to accommodate them.”
Pryor wants the gorge counties to band together and assess the damage. Maybe enterprise zones are no longer worthwhile, she suggests, or maybe the revamped formula needs another revamp.
“Everyone needs to understand what we’re risking in this whole situation,” she said. “Everyone needs to be on the same page.”
In Sherman County, the 50-turbine Klondike II project lies in an enterprise zone and just this year began its three-year tax abatement period. Gary Thompson, who heads the county commission, said he might not have agreed to the designation if he’d known that the state would change the assessment formula.
“With a tax deferment, you’ve cut your neck off, you’ve lost,” he said.
This year, Klondike II was assessed at $93.9 million. Without the abatement, developer PPM Energy of Portland would have faced a tax bill of $1.55 million. Instead, it agreed to a community fee of $850,000 this year, and similar payments for the next two, Thompson said.
Still, Thompson acknowledged, “that’s a good chunk of money.”
The county’s total tax base this year is $3.67 million.
Several bigger projects are in the works in Sherman County, and Thompson said he’s looking at various ways to assure the county of stable cash flows.
The state’s Strategic Investment Program might be the best alternative, he said. Although the SIP would give the wind farm developer a 15-year tax break for assessments in excess of $25 million, it would require annual community service fees of at least 25 percent of the company’s property tax savings.
The only wind farm with an SIP designation so far is the 104-megawatt project that Horizon Wind Energy, a subsidiary of investment banker Goldman Sachs, expects to begin building by year’s end in Union County.
Chris Taylor, Horizon’s director of development in the Northwest, said his company might not have committed to Elkhorn without the property tax break.
“Taxes are a big cost,” he said. “They can and do affect the competitive nature of a wind farm,” he said.
Union County Commissioner John Lamoreau said he’s pleased with the arrangement and hopes for more wind farm deals. Under the SIP, Horizon will pay the county $200,000 in Elkhorn’s first year of operation, with gradually decreasing payments thereafter, Lamoreau said.
“The way I look at it, it’s money we otherwise never would have received,” he said. “It’s something versus nothing.”
Still, unease remains. Gilliam County’s Pryor retires at the end of the year. But if a developer were to approach her with another wind -farm proposal, she said, “We’d have a heck of a different conversation than the last time around.”
“If they said, ‘OK, then, we’ll go across the river to Washington,’ I’d say, ‘Scare me some more.’ ”
Matching market value
State officials say they talked with county officials and developers before they made the changes, and they’re comfortable with the results, which are designed to mirror the way the market would value such projects.
In the past, the state’s assessments relied almost wholly on a wind farm’s costs – the capital investment in the turbines, towers, substations and the like. Depreciation, or the loss of value over time, was spread across a 20-year timeframe.
In the new method, depreciation occurs more quickly in the early years in recognition of a project’s large front-end costs and the federal tax code’s depreciation schedule, said Mike Olson, principal appraiser-analyst for the state Department of Revenue.
The biggest change, Olson said, has to do with the new formula’s reliance on the cash flow, or income, that the wind farms generate. In most cases, the long-term power-purchase contracts that utilities have signed with developers serve as the basis for that income figure.
“We try to look very hard at the cash flows of a project because appraisal theory says that’s a good indicator,” Olson said.
The land is valued separately by the counties. Wind farm developers in the gorge don’t own the land. Instead they lease it, often paying farmers several thousand dollars annually for each turbine put up on their property.
State revenue officials say they’re open to some fine-tuning, should better information become available. But, Olson said, “We think we’re nearing what the market says.”
By Gail Kinsey Hill
Gail Kinsey Hill: 503-221-8590, email@example.com
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