BACKGROUND
Counsel represents Jonesport Power L.P. ("JPLP"), located in Calmody County,
Virginia, and Mid-Atlantic Energy Partnership ("MAEP"), located in the City of Placide,
Virginia. Both entities are independent (i.e., non-public utility) power producers.
JPLP is a cogenerator. Cogeneration facilities are defined in § 201 of the Public
Utilities Regulatory Policies Act (PURPA) as (in substance) facilities that sequentially
produce both electrical and thermal energy from the same source. See 16 U.S.C. § 796(18).
MAEP is an exempt wholesale generator, which is defined in 15 U.S.C. § 79z-5a as
any person determined by the Federal Energy Regulatory Commission to beengaged directly, or indirectly through one or more affiliates as defined in
section 79b(a)(11)(B) of this title, and exclusively in the business of owningor operating, or both owning and operating, all or part of one or more eligible
facilities and selling electric energy at wholesale. . . .
Until recently, the generating equipment of both entities was classified for property
tax purposes as machinery and tools by the respective localities. Calmody County assessed
JPLP's equipment at 10% of original cost, while the City of Placide assessed M AEP's
equipment at 20% of original cost.
However, as a result of certain amendments to the taxation provisions of the Virginia
Code, this generating equipment is now subject to centralized assessment by the State
Corporation Commission. The equipment is currently being taxed by both localities at thereal estate rate, pursuant to Va. Code Ann. § 58.1-2606(A), which provides as follows:
Notwithstanding the provisions of this section and §§ 58.1-2607 and 58.12690, all local taxes on the real estate and tangible personal property of public
service corporations referred to in such sections and other persons with1

property assessed pursuant to this chapter shall be at the real estate rateapplicable in the respective locality.
This has resulted in abrupt and very substantial property tax increases for both JPLP and
MAEP.
Both Calmody County and the City of Placide, recognizing the financial burden thishas imposed on the two independent power producers, and also recognizing that such abrupt
tax increases were not an intended consequence of the switch to centralized assessment, haveindicated a willingness to consider the enactment of ordinances which would create separate
classifications or subclassifications, for property tax purposes, for MAEP's and JPLP's
generating equipment. Upon reclassification, taxing such equipment at a lower rate would
clearly be permissible under Va. Code Ann. § 58.1-2606(C), which provides that
"Notwithstanding any of the foregoing provisions, generating equipment which is reported
to the Commission shall be taxed at a rate not to exceed the real estate rate applicable in therespective localities."
However, the localities have questioned whether they may permissibly create aclassification that would apply only to the generating equipment of independent power
producers such as MAEP and JPLP, and would not apply to the equipment of large public
utilities. Commonwealth Electric & Gas ("CEG") has generating facilities in both Calmody
County and the City of Placide, and the taxing jurisdictions would experience a substantial
revenue loss if they had to extend the more favorable tax rates to public utilities as well.

2

ISSUE PRESENTED
Under Virginia law, may a local taxing authority create a separate classification or
subclassification, for property tax purposes, consisting of the generating equipment of
independent power producers, without having to extend the favorable tax rate afforded sucha classification to the generating equipment of public utilities as well?

CONCLUSION AND DISCUSSION
Virginia statutory and case law make abundantly clear that the creation of a separate
classification or subclassification, for property tax purposes, consisting of the generating
equipment of cogenerators and exempt wholesale generators such as JPLP and MAEP, which
would not include the generating equipment of public utilities such as CEG, would bepermissible.
As a general matter, Virginia allows different rates of taxation on different classes ofproperty. Va. Code Ann. § 58.1-3008 provides as follows:
58.1-3008. Different rates of levy on different classes of property
The governing body of any county, city or town in laying levies on taxable realestate, tangible personal property and merchants' capital may impose different
rates of levy on real estate, merchants' capital, tangible personal property or
any separate class thereof authorized under Chapter 35 (§§ 58.1-3500 et seq.),
and machinery and tools, or it may impose the same rate of levy on any or allof these subjects of taxation. Such rates shall conform to the requirements set
forth in such Chapter 35.

3

Moreover, the Virginia Code expressly recognizes that generating equipment of thetype at issue here may be separately classified for property tax purposes. See Va. Code Ann.
§ 58.1-2606(C). See also Va. Code Ann. § 58.1-3506(A)(7), which provides as follows:§ 58.1-3506. Other classifications of tangible personal property for
taxationA.
The items of property set forth below are each declared to be a separate
class of property and shall constitute a classification for local taxation separate
from other classifications of tangible personal property provided in thischapter:....
7.
Generating equipment purchased after December 31, 1974, forthe purpose of changing the energy source of a manufacturing plant from oilor natural gas to coal, wood, wood bark, wood residue, or any other alternative
energy source for use in manufacturing and any cogeneration equipment
purchased to achieve more efficient use of any energy source. Such generating
equipment and cogeneration equipment shall include, without limitation, such
equipment purchased by firms engaged in the business of generating electricity
or steam, or both.
(Emphasis added.)Indeed, Va. Code Ann. § 58.1-2600 separately defines a "cogenerator" as "a qualifying
cogenerator or qualifying small power producer within the meaning of regulations adopted
by the Federal Energy Regulatory Commission in implementation of the Public Utility
Regulatory Policies Act of 1978."
While Title 58.1 of the Virginia Code does not include any express reference to theproperty tax treatment of exempt wholesale generators such as MAEP, the case law makes
clear that the generating equipment of exempt wholesale generators, as well as that of4

cogenerators such as JPLP, may properly be separately classified from the generating
equipment of public utilities such as CEG.
It has been long recognized that legislative classifications for tax purposes areconstitutionally permissible, so long as the classifications are not arbitrary. See, e.g., East
Coast Freight Lines v. City of Richmond, 194 Va. 517, 74 S.E.2d 283 (1953); RichmondLinen Supply Co. v. City of Lynchburg, 160 V a. 644, 169 S.E. 554 (1933) (ordinanceimposing $300 license tax on nonresident laundry doing business in city, when license tax
on local laundries was $50, not unconstitutionally arbitrary). While taxation must be uniform
within a particular classification, it need not be uniform as between or among different
classifications. R. Cross, Inc. v. City of Newport News, 217 Va. 202, 228 S.E.2d 113 (1976).
Indeed, it has been said that classifications for tax purposes "are to be sustained
whenever there is any fair basis for them. . . . [E]quality in taxation . . . is a dream unrealized[and] differences in methods may be in itself a basis for classification." Richmond Linen
Supply, 169 S.E. at 556; accord Commonwealth v. Whiting Oil Co., 167 Va. 73, 187 S.E.
498, 500 (1936) (classification for purpose of taxation is lawful if it rests on "any reasonablebasis"); City of Portsmouth v. Citizens Trust, 216 Va. 695, 698, 222 S.E.2d 532 (1976); cf.
Southern Railway v. Commonwealth, 211 Va. 210, 176 S.E.2d 578 (1970) (fact thatassessment ratios of other short line railroads were not increased to 40% at same time suchratio was imposed on plaintiff did not constitute denial of equal protection, where suchassessment on plaintiff's property was not "out of line generally" with assessment of otherrailroad properties in Virginia at that time).

5More recent cases have held that the determinative criterion is whether a "rational
basis" exists for different tax treatment. See, e.g., Chesterfield Cablevision, Inc. v. Countyof Chesterfield, 241 Va. 252, 401 S.E.2d 678 (1991). "Unless a 'suspect classification' isinvolved, the legislature may constitutionally treat different subjects differently for the
purpose of taxation (1) if the difference is real, (2) if the distinction has some relevance tothe legislative purpose, and (3) if the differing treatments are 'not so disparate, relative to thedifference in classification, as to be wholly arbitrary.'" 401 S.E.2d at 680 (quoting in part
City of Portsmouth v. Citizens Trust, 222 S.E.2d at 534).
Applying the foregoing to the issue before it, the Chesterfield Cablevision court
employed a functionality analysis in reaching its conclusion that the county acted properly,
and with a rational basis, in imposing a license tax on cable television service providers forthe privilege of doing business in the county, while exempting broadcast television stations
from the same tax. It quoted the United States Supreme Court in Fortnightly Corp. v. United
Artists, 392 U.S. 390, 88 S. Ct. 2084, 2089 (1968), as follows:
The function of CATV systems has little in common with the function ofbroadcasters. CATV systems do not in fact broadcast or rebroadcast.
Broadcasters select the programs to be viewed; CATV systems simply carry,
without editing, whatever programs they receive. Broadcasters procure
programs and propagate them to the public; CATV systems receive programs
that have been released to the public and carry them by private channels to
additional viewers.
A similar rational basis test and functionality analysis were employed by the Virginia
Supreme Court in Cox Cable Hampton Roads, Inc. v. City of Norfolk, 247 Va. 64, 439 S.E.2d366 (1994). There, the court upheld the validity, against an equal protection challenge, to a6

city ordinance imposing a 7% tax on service billings by cable television providers, which was
not applicable to operators of satellite TV systems. After noting that "[i]f the methods andcharacter of businesses differ, such differences may be a valid basis for a tax classification,"
439 S.E.2d at 368, the court looked to the functional differences between the two types of
television service providers:
We hold that a rational basis exists because Cox Cable and SM ATV vendors
utilize different transmission methods to supply their programs, and thisdifference justifies the tax distinction. Cox Cable's franchise enables it to use
utility facilities along the City's streets in its transmission system. Thus, it canfurnish television service without the necessity of the additional equipment
SMATV viewers must provide upon their premises. Additionally, Cox Cable
can also offer local programming through its system while SMATV vendors
cannot.
In our opinion, these differences provide a rational basis for the
distinction between the taxation of Cox Cable's billings to its subscribers andthe nontaxation of SMATV vendors' billings to their subscribers. Accordingly,
we conclude that the City's tax did not violate Cox Cable's rights under the
Equal Protection Clause.
Id. at 368-69.
Unfortunately, there is little or no reported Virginia case law applying the rational
basis test and the functional analysis to the taxation of independent power producers vis-a-vis
taxation of public utility power producers. Cf. Hopewell Cogeneration Ltd. Partnership v.
State Corp. Commission, 249 Va. 107, 453 S.E.2d 277 (1995) (State Corporation
Commission's disallowance, in utility rate case, of consideration of certain items paid toindependent power producers under power purchase contracts not governed by utility's rateschedule and not approved by Commission or FERC, while not imposing such disallowance
as to contracts that were so governed or approved, was not arbitrary, capricious, or an abuse
7

of power); City of Richmond v. Commonwealth, 188 Va. 600, 50 S.E.2d 654 (1948)(upholding validity of placing real and tangible personal property of public service
corporations, including electric utilities, in separate tax classification from that of properties
of individuals and other private corporations).
There are cases from other jurisdictions which address this issue, although for themost part indirectly or obliquely. In City of Idanha v. Consumer Power, Inc., 495 P.2d 294,
300 (Or. Ct. App. 1972), the court upheld the validity of a municipal licensing/occupational
tax ordinance applicable to all public utilities supplying or selling electrical energy within
the city, but expressly not applicable to other public utilities.
There are substantial distinctions between the services offered, businessorganization employed, and regulations imposed by other governmental
agencies upon an electric utility as compared with a bus company, a telephonecompany or cable television company. Whether it is wise or expedient, based
upon such difference, to classify an electric utility in a class by itself is alegislative question to be determined by the lawmakers.
In Appalachian Power Co. v. State Tax Department of West Virginia, 466 S.E.2d 424(W. Va. 1995), the court upheld the validity, against an equal protection challenge, of anelectrical generation tax which was imposed upon entities that generated electrical power
for sale, but which did not apply to manufacturers who generated power strictly for their own
use. After initially noting that the proper test is whether the enactment is "rationally related"
to a legitimate state interest (i.e., essentially the same as the "rational basis" test in the
Virginia cases discussed above), the court elaborated on its holding:Thus, the challenged provisions impose the generation tax on all entities who
generate electricity to the extent of their "net generation." As we have noted,"net generation" is determined by subtracting station use from the total8

electricity generated. Plaintiffs' complaint appears to be that equal protection
is denied because for some electrical producers the deductible is the same as
the total amount they produce. Thus, one could argue that the deductible
effectively creates a classification between companies who generate electricity
for resale and companies who generate electricity strictly for their own use at
the generation site. We see no troubling discrimination here. The Legislature
has simply seen fit to tax one activity--generation of electricity for resale--andto not tax another--generation of electricity for self-use. This distinction iscommonplace.
Id. at 446.
In North Georgia Electric Membership Corp. v. City of Calhoun, 450 S.E.2d 410 (Ga.
1994), the court upheld the validity of a municipal gross receipts tax imposed on secondary
suppliers of electric power "which [are] not otherwise paying a franchise fee pursuant to afranchise agreement." The court concluded (without elaborating on its rationale) that thisconstituted a permissible subclassification.
In In re Opinion of the Justices, 81 So. 2d 277 (Ala. 1955), the Alabama Supreme
Court opined that a bill then pending in the state legislature which provided for a tax on the
gross receipts of operators of electric or hydroelectric public utilities, but which exempted
distributors and sellers of electricity whose business activities were not subject to regulationby the Alabama Public Service Commission, was not presumptively violative of the Equal
Protection Clause of the Fourteenth Amendment. "Statutory discrimination between classes
must be presumed to be relevant to permissible legislative purpose and will not be deemed
to be a denial of equal protection if any state of facts could be conceived which would
support it." Id. at 283. Because "no factual situations are presented," id., the court did not
discuss the application of this general principle to any particular controversy.

9Clearly, a functional analysis similar to that in the cable television and other cases
discussed above would provide a sound basis for a property tax subclassification of electricalgenerating equipment owned by independent power producers such as MAEP and JPLP, notapplicable to the equipment of public utilities such as CEG (although JPLP is a cogenerator
while MAEP is an exempt wholesale producer, the functional analysis as to both, vis-a-vis
CEG, is essentially the same).
Unlike CEG, JPLP and MAEP are not franchised utilities and are not subject to theregulatory jurisdiction of the State Corporation Commission. Neither of the two entities sells
the power it generates at retail. Instead, they sell power and generating capacity to public
utilities such as CEG pursuant to long-term, fixed-price contracts. Thus, lacking a retailcustomer base, they cannot pass along to such customers any part of the greatly increased
property tax burden they have incurred as a result of the centralized assessment scheme.
CEG and similar public utilities can generally pass along increased taxes, in whole or in part,
under Virginia's statutory and administrative rate regulation scheme.
Moreover, the technical specifications of the two entities' generating equipment also
differ in very substantial ways from that of CEG (we defer to counsel and his clients inproviding the particulars of these technical specifications, some of which, as to JPLP, were
outlined in counsel's draft letter to Jonathan L. Quincey, Calmody County Attorney).
Taken together, all these factors indicate that the instant situation manifestly meets thethree-part test for a "rational basis" for separate tax classifications outlined in Chesterfield
Cablevision, Inc. v. County of Chesterfield.

10

The functional differences between theindependent power producers and CEG are patently "real." Those differences are not only
relevant to, but are indeed the very basis of, the legislative purpose in the proposed enactmentof the classification ordinances by Calmody County and the City of Placide. That is, because
MAEP and JPLP do not sell their power at retail, they cannot (unlike CEG) pass along tocustomers any part of the increased tax burden that has resulted from centralized assessment,
and thus they are disproportionately affected by the new assessment regime. Finally,
enactment of such ordinances by the localities would not result in such disparate tax
treatment of the independent power producers and CEG as to be "wholly arbitrary."11