PROPERTY TAXES do not have to be paid in Arizona on certain utility property whose cost is reimbursed by customers.

Utilities collect from customers for the cost of extending power lines and gas and water mains to a customer’s property so that the customer can receive service. The customer pays the cost. The payment is called a “contribution in aid of construction.” The utility pays taxes on the payment. It does not put the equipment for which the customer paid into its rate base. Its rate base is the sum of its investments on which state regulators allow it to earn a return.

Arizona Public Service and the Salt River Project both pay property taxes in Arizona. Salt River does so voluntarily, since it is exempted from taxes as a government agency. The state tax department billed Arizona Public Service in 2003 for property taxes on $2.8 billion in assets. It did the same for the Salt River Project on $2.4 billion in assets. Both utilities appealed, arguing that they should not have to pay property taxes on so-called CIAC assets — or assets whose cost customers paid through contributions in aid of construction. After a roller coaster ride through the appeals process, an Arizona appeals court said in mid-January that it agrees with the two utilities. The case is Arizona Department of Revenue v. Salt River Project, et al. The utilities had won an earlier appeal to the state board of equalization, but then lost in the state tax court.

Arizona said it follows the uniform system of accounts used by the Federal Energy Regulatory Commission for property tax purposes. FERC does not let a utility count CIAC property when reporting its total investment in plant and equipment because the utility did not pay the cost.

Interties that connect independent power plants to the utility grid might also be considered CIAC property under this logic.