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States begin to examine utility rate impacts of federal tax reform law


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States begin to examine utility rate impacts of federal tax reform law

States have started to press electric and gas utilities to explain how lower corporate tax rates approved by Congress and signed into law by President Donald Trump will benefit ratepayers.

The Tax Cuts and Jobs Act of 2017 lowers the corporate income tax rates to 21% from 35% beginning in the 2018 tax year. When Congress approved the bill, Edison Electric Institute President Tom Kuhn touted the legislation as a "America's electricity customers and for investment in critical energy infrastructure," according to a Dec. 20 statement. Edison Electric Institute advocates on behalf of U.S. investor-owned utilities.

Oklahoma Corporation Commissioner Bob Anthony raised the topic of the federal tax reform legislation this past fall during a proceeding for American Electric Power Co. Inc. subsidiary Public Service Co. of Oklahoma, he said in a Dec. 28 interview. He also posted the issue as an agenda item at the commission's Nov. 30 meeting.

In his 29 years at the commission, Anthony called the experience of dealing with tax reform "deja vu," a term he used in a Dec. 20 post in The Bulletin, a publication of the National Association of Regulatory Utility Commissioners. "This is not new. We've dealt with it before," he said, thinking back to the Tax Reform Act of 1986, the last major federal tax legislation, which dropped corporate income taxes to 34% from 46%.

When the 1986 law was implemented, Anthony recalled having to look at the rates of 12 utilities. With the latest tax reform legislation, Anthony said Oklahoma Attorney General Mike Hunter asked the agency to start with five utilities. In applications filed with the commission on Dec. 22, Hunter requested that rates be lowered for customers served by OGE Energy Corp. subsidiary Oklahoma Gas and Electric Co., Public Service of Oklahoma, CenterPoint Energy Inc. subsidiary CenterPoint Energy Oklahoma Gas, Arkansas Oklahoma Gas Corp. and ONE Gas Inc. affiliate Oklahoma Natural Gas Co. (Oklahoma Corporation Commission Docket PUD 201700568-201700572)

It is not surprising to see proceedings start cropping up across states, Anthony said. In his Dec. 20 post to the National Association of Regulatory Utility Commisioners, for which he serves as a board member, he urged utility commissioners to "act immediately." One big difference from the Tax Reform Act of 1986, he said, is that states "only had about two to three weeks notice from when the president signed to when the bill takes effect." He recalled that in 1986, states had months to prepare for the implementation of the new law.

"On your electric bill, any consumer ... [is] paying a component for corporate income tax," Anthony said. For reductions in corporate income taxes, the "company gets to keep the difference unless the utility commission changes the rate structure to say, 'No, there is no cost to be paid for by the consumer so the tariff ought to come down.' But you cannot do it retroactively."

As to the benefit ratepayers might see, Anthony said, "The impact on public utility rates from the tax reform should result in significant rate reductions for consumers." His staff estimates that Oklahoma consumers will see greater than $100 million a year in savings.

Other states begin taking action as well

Utilities regulators in Kentucky, Michigan and Montana on Dec. 27 separately issued orders providing guidance to utilities. "Since ratepayers are required to pay through their rate the tax expenses of a utility, any reduction in tax rates must be timely passed through to ratepayers," the Kentucky PSC said in a news release. The commission issued orders to AEP subsidiary Kentucky Power Co., Duke Energy Corp. subsidiary Duke Energy Kentucky Inc. and PPL Corp. subsidiaries Louisville Gas and Electric Co. and Kentucky Utilities Co. to respond to a complaint by the Kentucky Industrial Utility Consumers about their rates. (Kentucky PSC Case 2017-00477)

A second order directs those four utilities plus three other natural gas utilities — Atmos Energy Corp., Delta Natural Gas Co. Inc. and NiSource Inc. subsidiary Columbia Gas of Kentucky Inc. — and water utilities Kentucky American Water Co. and Water Service Corp. of Kentucky to begin tracking any tax savings. (Kentucky PSC Case 2017-00481)

The Michigan Public Service Commission ordered regulated utilities to use regulatory accounting treatment for any impacts of the new law including current and deferred tax impacts. The order applies to 13 utilities including subsidiaries of the state's two largest investor-owned utilities, CMS Energy Corp. and DTE Energy Co., and they have until Jan. 19, 2018, to file comments. (Michigan PSC Case U-18494)

The Montana Public Service Commission ordered regulated utilities to calculate changes to their tax liability and come up with proposals by the end of March 2018 on how to apply those benefits to ratepayers, the commission said in a release.

The Montana PSC decision initially applies to NorthWestern Corp. doing business as NorthWestern Energy, which sells electricity and gas to customers in western Montana, and MDU Resources Group Inc. division Montana-Dakota Utilities Co., whose service territory covers eastern Montana. Other gas providers including Energy West Inc. and MDU's gas utility division will have their rates adjusted during rate cases pending from September, the Montana PSC said.

Montana Commissioner Roger Koopman, in a statement, said utilities basically have four options how to apply the net benefits. "They can issue customer refunds, use the money as a source of zero cost financing for capital projects, direct the funds to offset large, unusual expenses, or propose some combination of these three applications," Koopman said, though he suspects the commission will be "strongly inclined" toward ratepayer refunds.