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FERC moves to ensure electric utility rates reflect tax changes

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FERC moves to ensure electric utility rates reflect tax changes

The Federal Energy Regulatory Commission on March 15 acted to ensure that certain jurisdictional electric utility, natural gas and oil pipeline rates reflect the corporate income tax changes required by the tax reform bill passed by Congress in late 2017.

Whether those decreased rates will be reflected in retail consumers' bills is another matter, however, as Chairman Kevin McIntyre said that decision mostly will be made by state regulators. And one commissioner, Robert Powelson, expressed concern over reports that some electric distribution companies were going to use the tax savings to fund activities such as tree trimming.

"I don't think that's a good use of these tax savings," Powelson said.

The recent tax change impacts the rates charged by electric utilities, interstate natural gas pipelines and oil pipelines that are set based on the cost of service, which includes an income tax allowance. Thus, when the tax expense decreases, so does the cost of service.

Before Congress reduced the federal corporate income tax rate from up to 35% to 21% in late December 2017, that rate had not been cut in more than 30 years. The commission responded to the Tax Reform Act of 1986 by issuing a new rule that, among other things, established an abbreviated filing procedure allowing electric utilities to propose a new rate reflecting the decrease in the federal income tax rate.

But things have changed since that law was enacted in 1987, and, given the historic nature of the new law, state attorneys general, consumer advocates and the Edison Electric Institute all asked FERC to detail how electric utilities should go about adjusting rates to pass on the benefits of tax reform to consumers.

FERC responded by issuing a series of orders, some targeted specifically at electric transmission companies and others at natural gas and oil pipelines.

FERC's orders

The orders involving electric utilities noted that unlike in 1987, most electric utilities now recover their cost of service using formula rates, and most formula rates adjust automatically on an annual basis to reflect changes in costs, including the corporate income tax rate. Thus, FERC noted that those utilities do not need to take any action to reflect the change in the corporate income tax rate.

However, some utilities use either stated transmission rates or transmission formula rates that include a fixed line item for the federal corporate income tax rate, and action accordingly is needed to ensure that the reduced tax rate is reflected in those utilities' transmission revenue requirements.

FERC therefore issued two orders (FERC dockets EL18-72 at al.; EL18-62 et al.) directing 48 utilities with stated transmission rates or transmission formula rates with a fixed line item of more than 21% for the federal corporate income tax component either to propose to revise the transmission rates to reflect the change in the corporate tax rate or to show cause as to why they should not be required to do so. The utilities have 60 days to respond to those orders.

For those electric utilities with formula rates that will adjust automatically, the new rates will take effect when those adjustments occur pursuant to existing processes. For the other 48 utilities, FERC said the refund effective date will be the date the orders are published in the Federal Register.

In addition, FERC issued a notice of inquiry (RM18-12) seeking comment on other impacts the recent tax law may have on all FERC-jurisdictional rates. In particular, the agency wants feedback on the complicated issue of accumulated deferred income taxes, or ADITs, which are taxes collected by electric utilities and pipelines but not yet owed by those utilities to the Internal Revenue Service. Since the ADITs already collected reflect the old corporate rate and not the new one, FERC is asking how it should address the excess and other related issues.

FERC also wants input on the topic of bonus depreciation — a tax incentive given to companies to encourage certain types of investments. The new tax law prohibits the use of bonus depreciation for assets acquired as part of the furnishing or sale of electrical energy, water or sewage disposal services; gas or steam through a local distribution system; or transportation of gas or steam by pipeline. FERC wants to know whether, and if so how, it should act to address bonus depreciation-related issues.

Comments on the NOI are due 60 days after its publication in the Federal Register.

Before voting on the series of orders during FERC's March 15 regular open meeting, McIntyre cited the historical nature of the recent tax bill and said the orders simply reflect the agency fulfilling its core responsibility of ensuring just and reasonable rates. He also praised the commission for acting quickly in "FERC time." He recalled that FERC took 246 days to respond to the 1986 act, but here it acted just 83 days after the recent law was signed.

Commissioner Cheryl LaFleur noted that while some of the changes needed to comply with the new tax are fairly simple, including reducing the corporate income tax rate component of existing rate structures, dealing with issues such as ADITs and bonus depreciation may be "extremely complicated."

Responding to questions posed by Commissioner Neil Chatterjee, staff said it "expects that it has identified" most of the utilities that do not have formula rates that will adjust automatically.

Staff also acknowledged that FERC generally disfavors utilities adjusting rates to reflect changes in a single cost item because increases in one cost item may be offset by decreases in other cost items. Here, however, staff said focusing on a single cost item — the corporate tax rate — is appropriate because the needed changes are limited in scope and may allow the economic benefits to flow back to consumers more quickly.

S&P Global Market Intelligence's coverage of the orders addressing natural gas and oil pipelines can be found here.