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US industry, customers at odds on timing of returning extra tax collections

Comments submitted to the Federal Energy Regulatory Commission on the rate implications of last year's historic tax overhaul appear to show some consensus that any accumulated deferred income taxes collected by electric utilities and pipelines in excess of actual tax liabilities should flow back to ratepayers. However, industry and consumer views diverged on how quickly to return the excess balances.

The power sector agreed that any excess ADIT should flow back to ratepayers while cautioning against one-size-fits-all solutions and too hastily forcing refunds that could end up increasing rates paid by consumers.

Signed into law Dec. 22, 2017, the $1.5 trillion sweeping tax reform package reduced the federal corporate tax rate to a flat 21% from a maximum 35%. As a result, states and others were quick to seek FERC intervention to prevent utility customers and pipeline shippers from overpaying for service given that the change in the tax code decreased the income tax allowance included in FERC-jurisdictional cost-of-service rates charged by electric, gas and oil companies.

FERC responded with a batch of orders March 15 aimed at ensuring that the benefits of the tax package flow to consumers. Among those orders was a notice of inquiry seeking comment on the effect of tax reforms on FERC-jurisdictional rates. In particular, the agency wanted feedback on how to deal with ADIT — monies companies collect from customers in anticipation of paying the Internal Revenue Service. Some have expressed concern that the change in the federal corporate tax rate has created a discrepancy between the balance of ADIT that companies hold and their tax liability.

Power companies want flexibility

The power sector was fairly aligned in its push for flexibility in dealing with the new tax law given the varied circumstances under which power companies operate. Exelon Corp. for instance, said that its transmission-owning companies had already made Federal Power Act Section 205 filings so that their "rates will automatically adjust to ensure proper deferred tax flowthrough."

Because "deferred taxes and their flow-through in transmission rates have significant financial consequences for utilities and their customers," Exelon argued that allowing each company to address their specific rate situations through Federal Power Act Section 205 proceedings was the proper path for FERC to take.

Utilities' ADIT accounts reflect the difference in funds collected from rates to cover income tax expenses and the actual amount they owe the IRS. The amounts diverge as FERC ratemaking policies require income taxes included in rates to be calculated based on straight-line depreciation while the IRS allows utilities to use accelerated depreciation, which generally lowers a company's tax liability during the early years of an asset's life but increases it as the asset ages.

Balances in ADIT accounts are subtracted from a utility's rate base, lowering charges to customers while depreciation is low, with that reduction diminishing as depreciation increases with an asset's life as part of a process called tax normalization.

The Edison Electric Institute, or EEI, stressed the benefits consumers see from utilities' use of accelerated depreciation, which the group likened to "an interest-free loan from the government in the amount of the deferred taxes." This "interest-free capital" is invested in "critical and smart energy infrastructure … that provide customers with continued reliable service, new services, and access to more customer solutions," EEI said.

Those benefits, EEI said, make ensuring that customers are not overpaying for service “more involved than simply requiring the return of excess ADIT balances."

For one, because ADIT balances are invested in infrastructure, there are no actual cash or savings accounts to simply fund returns. Instead, some utilities may have to finance the return of excess ADIT, and those finance costs would ultimately be borne by the customer, EEI said.

Further, the return of excess ADIT not subject to normalization requirements, referred to as unprotected ADIT, "has the effect of increasing rate base," which may increase rates for consumers, EEI pointed out.

Such factors should be kept in mind when determining the period over which unprotected excess ADIT balances must be returned, the group said. Instead of mandating a time period, FERC may be better off allowing utilities to "propose their own return periods for unprotected ADIT,” and establishing a process for review of those timetables, EEI said.

Joint comments from the American Public Power Association and American Municipal Power also sought the flowback of excess ADIT but called for a more formal process, in which FERC would mandate filings from utilities explaining how they intend to incorporate the tax changes into their cost-based rates.

"Following such utility filings, each utility and its customers should be permitted to engage in discussions aimed at reaching agreement on the flowback period for unprotected excess ADIT," American Public Power Association and American Municipal Power contended. "If agreement is not reached, the commission should establish the flowback period giving consideration to all relevant factors, but affording special weight to the fact that ADIT balances are customer-contributed funds that should be returned without unnecessary delay," their filing added. (FERC docket RM18-12)

Jasmin Melvin and Maya Weber are reporters for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.