Utility Rate Relief from Federal Tax Reduction
On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017 ("TCJA"), which contains provisions reducing the corporate tax rate and revising the federal tax structure. These new federal requirements affect the a) current operating tax expense, b) accumulated deferred income taxes (ADIT) and c) depreciation accounting used by utilities. Most of the provisions of the TCJA went into effect on January 1, 2018. Consequently, state commissions and ratepayer advocates have started to press rate-regulated utilities to explain how (and when) the benefits of lower tax rates will flow back to the ratepayers. The TCJA slashed the federal corporate income tax rates from 35% to 21% beginning in the 2018 tax year (a 40% decrease). Because income taxes are a major component of utility revenue requirements, any downward adjustment to tax rates will yield an immediate benefit to utilities' bottom lines. Absent a corresponding adjustment to rates, utilities would reap an unearned windfall. On February 12, 2018, the PUC opened a docket M-2018-2641242 to determine the effects of the TCJA on the tax liabilities of utilities and the feasibility of reflecting such impacts in rates. To that end, the PUC instructed certain utilities to answer a number of questions:
-Net effect of the TCJA on: (i) federal income tax expense; (ii) net operating losses; (iii) deferred tax liabilities; and (iv) riders/surcharges?
-Methods to flow benefits to ratepayers?
-Alternatives to rate reductions?
-What test year should be used to quantify the impacts of the new the 21% tax rate?
-Are there any other changes made in the TCJA that will impact utilities?
The Commission will also be looking to ascertain how the reduction in federal taxable income will reduce the utilities annual CNI state taxes paid and reflecting that rates charged to ratepayers. Additionally, interested parties may submit comments addressing: (1) whether the PUC should adjust current rates to reflect the reduced income tax expenses of public utilities; (2) if so, the appropriate negative surcharge or other methodologies that would permit immediate modifications to rates; and (3) the effective date of the surcharge or other methodology. IECPA filed comments in this initial PUC docket on 3/9/18 and will be working to ensure the full cost reduction benefits are reflected in credits and rate reductions for large energy users.
The Pa. PUC issued the attached Temporary Rates Order and accompanying Table this afternoon, indicating rate decreases to be effective 1 July for the affected utilities (those with pending base rate cases are, indeed, required to address the reductions in the context of their individual rate cases). I've also attached statements by Chairman Brown and Vice Chairman Place.
The Pennsylvania Public Utility Commission today issued an Order, requiring a “negative surcharge” or monthly credit on customer bills for 17 major electric, natural gas, and water and wastewater utilities, totaling more than $320-million per year. The refunds to consumers are the result of the substantial decrease in federal corporate tax rates and other tax changes under the Tax Cuts and Jobs Act of 2017, which impacted the tax liability of many utilities.
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- Utilities filed request for reconsideration; First Energy requested to have a portion of the tax savings not be treated as a regulatory liability (the amount for the period 1 January to 15 March 2018 – the date of the Commission’s first Temporary Rates Order). Regarding the latter, they argue that regulatory liability treatment for the savings accrued during that period amounts to retroactive rate making, so they are willing to treat that amount in a “memorandum account” to be addressed with the actual regulatory liability (the 15 March to 30 June amount) in their next rate case or similar proceeding.
- Commission issued orders on 6.14.18. With respect to the four FirstEnergy electric utilities, the Commission granted their request to treat tax savings accruing from 1 January to 15 March as a “separate memorandum account” instead of as a deferred regulatory liability. In so doing, the Commission indicates that it is not pre-judging final disposition nor is it taking a position on FE’s retroactive ratemaking argument. Rather, the Commission indicates that “disposition of this account . . . will occur in [their] next base rate proceedings [or in a separate proceeding if no rate case is timely filed].” In this manner, the Commission is not reaching any determination at this time about whether those savings will be retained by FE or if they will be credited back to ratepayers – the issue is being left open by the Commission for future adjudication.