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Ariz. regulators tell utilities to pass tax breaks through to customers

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Ariz. regulators tell utilities to pass tax breaks through to customers

Arizona regulators ordered utilities to apply for approval of an accounting mechanism that would let them pass along the benefits of federal business income tax breaks to their customers.

Under the Tax Cuts and Jobs Act of 2017, the federal income tax for corporations was cut from 35% to 21%. As a result, the Arizona Corporation Commission opened a proceeding aimed at adjusting the rates of electric, natural gas, water, sewer and telecommunications utilities.

The commission on Feb. 6 unanimously adopted an order proposed by agency staff that mandated utilities file within 90 days a tax expense adjustment mechanism or rate case to provide the benefits of their tax cuts to customers. The commissioners also adopted Commissioner Justin Olson's amendment to the order to allow small entities with minimal impacts from the tax cut to wait until their next rate cases to pass through benefits.

Pinnacle West Capital Corp. subsidiary Arizona Public Service Co., or APS, said it already has filed to implement the tax exempt adjustment mechanism. That is because the commission already authorized the utility to create the mechanism when it approved APS's last rate case on Aug. 18, 2017, in accordance with a multiparty rate settlement agreement APS brought to the commission. The authorization was contingent upon passage of the then-pending tax cut legislation.

As a first step, APS said it would reduce its rates by about $119 million to reflect the impact of the new law on marginal tax rates.

Fortis Inc.'s UNS Energy Corp. subsidiaries said that due to capital expenditures to serve customers and the passage of time since their last test year, their rate of return already is below what the commission authorized. Despite those concerns, Tucson Electric Power Co., UNS Electric Inc. and UNS Gas Inc. previously said they intended to propose bill credits "to share large portions of their estimated federal income tax reductions with customers."

Southwest Gas Corp. cautioned the commissioners to consider other ramifications to the tax law rather than just single-issue ratemaking. "Traditional ratemaking sets rates following the examination of all utility expenses and revenues — not just a single item of expense or revenue," so the tax cut should be considered with all other components of the utility's cost of service, Southwest said in comments filed in the docket.

During the meeting, the commissioners heard numerous pleas from representatives of tax-exempt cooperatives and other community-owned utilities, as well as competitive telecom providers including subsidiaries of AT&T and Verizon Communications Inc., who asked that their companies be exempt from the order. The telecom providers said they are competitive and have market-based rates for which a tax expense adjuster should not apply, while the cooperatives said they are tax-exempt so the new tax law does not apply to them.

Olson said the Arizona Constitution requires the commission to regulate competitive telecom providers in order to keep their rates within maximum and minimum allowances. Commission Utility Division Director Elijah Abinah said the commissioners may need to adjust the maximum and minimum limits once the impact of the tax cuts for each company is determined.

According to Olson, the commission must acknowledge that a significant expense for the companies has been reduced. Telecom companies can state their cases to the commission if the agency later proposes to change their authorized rate limits, he said.

The commission agreed to give co-ops 180 days to file statements that the new federal tax law will have no effect on them, but it declined their pleas to be exempted from tax reform rate adjustment proceeding after agency staff said it could not categorically provide assurance the law would have no impact on the co-ops.