West Virginia's public staff and consumer advocate division are calling on investor-owned electric utilities to begin returning federal tax savings to ratepayers in August.
The Public Service Commission of West Virginia in January required all privately owned utilities to record their monthly tax savings as a regulatory liability as part of its investigation into the impact of federal tax reform. Regulators ordered the regulatory liability treatment to protect utility customers as they determined the best way to reflect cost-of-service savings and federal tax benefits in rates.
The staff in a July 2 memo to the PSC recommended that the commission "implement base rate reductions" effective Aug. 1 to feed back the savings utilities have calculated from the lower 21% corporate tax rate on a prospective basis. In addition, the staff recommended that the PSC implement a "negative surcharge" to reflect the reduction in revenue requirements tied to changes in income tax expense for Jan. 1-Aug. 1. This surcharge would be in effect for one year.
Staff added that it reserves the right to true-up these amounts in the utilities' base rate proceedings.
The consumer advocate division of the PSC submitted testimony July 2 in which it recommended that savings related to the Tax Cuts and Jobs Act be applied in two phases.
The first phase would pass on the reduction in revenue requirements beginning Jan. 1 as "refunds or rate reductions" until the effective date of a permanent rate change. The second phase would require each utility to "justify and support" its categorization of excess accumulated deferred income taxes, or EADIT, as "protected" or "unprotected," as well as determine the appropriate amortization period or other refund application for the unprotected deferred income taxes.
American Electric Power Co. Inc. utilities Appalachian Power Co. and Wheeling Power Co. in May filed for a $114.6 million, or 7.85%, rate increase in West Virginia. The companies said the filing reflects the federal tax overhaul, which reduced their revenue request by about $52 million.
Appalachian Power and Wheeling Power also filed a proposal to use additional federal tax savings to offset about $132 million in unrecovered fuel and vegetation management costs.
Ralph Smith, a witness for the consumer advocate division, wrote that the utilities have testified that tax reform results in a federal income tax expense that is about $31.5 million lower in 2017 and $40.8 million lower than their last base rate case. In addition, Appalachian Power and Wheeling Power have identified $690.4 million of protected EADIT and $242 million of unprotected EADIT.
The utilities, however, plan to retain some of the tax savings because they are "earning less than their authorized rate of return, and would continue to do so, after accounting for the [Tax Cuts and Jobs Act] savings."
Smith recommended that the PSC still require the federal income tax savings for Appalachian Power and Wheeling Power "be applied for the benefit of West Virginia customers."
"The 2017 federal income tax reform was an extraordinary, one-time event that was beyond the control of utility management," Smith wrote. "Moreover, because single-issue ratemaking already occurs for other types of costs ... the fact that a particular utility may be under-earning its most recent authorized rate of return is not a convincing reason to disregard the regulatory liabilities related to the accumulation of [Tax Cuts and Jobs Act-based] savings."
Further, Smith recommended the savings from the lower tax "be credited to customers immediately" with the regulatory liability from deferred savings amortized over 12 months.
FirstEnergy Corp. utilities Monongahela Power Co. and Potomac Edison Co. have indicated that the impact of tax reform on their 2014 base rate case would reduce their revenue requirement by about $25.6 million. The companies propose to return this money to customers on an annual basis. The consumer advocate division also recommended that the utilities return the deferred savings of Jan. 1-Aug. 1 over a period of 12 months.
The FirstEnergy companies also identified an unprotected EADIT asset balance of about $26.1 million for Mon Power and a little more than $2 million for Potomac Edison, testimony shows. The companies propose to amortize this balance over a period of 10 years.