The American Public Power Association recently weighed in on a proceeding at the Federal Energy Regulatory Commission on the effects of the Tax Cuts and Jobs Act of 2017 on the accumulated deferred income taxes (ADIT) reflected in “public utility” transmission rates.
FERC refers to electric utilities it regulates as “public” utilities; however, these are not municipal utilities, but rather investor-owned utilities.
The Association’s Jan. 22 comments respond to a notice of proposed rulemaking (NOPR) issued by the Commission in November (Docket No. RM19-5). The proposed reforms outlined in the NOPR are intended to ensure that ratepayers receive the benefits of the Tax Cuts and Jobs Act of 2017 and that public utility transmission formula and stated rates are just and reasonable and not unduly discriminatory or preferential in the wake of the Tax Cuts and Jobs Act of 2017’s enactment.
As described in the NOPR, “ADIT arises from timing differences between the method of computing taxable income for reporting to the IRS and the method of computing income for regulatory accounting and ratemaking purposes.” As a consequence of the Tax Cut and Jobs Act’s reduction in the corporate income tax rate, “a portion of an ADIT liability that was collected from customers will no longer be due from public utilities to the IRS and is considered excess ADIT, which must be returned to customers in a cost of service ratemaking context,” FERC explained.
In its comments, the Association noted that it previously submitted joint comments with American Municipal Power, Inc. on the FERC Notice of Inquiry (NOI) that preceded the NOPR “and the proposals contained in the NOPR concerning treatment of ADIT are consistent with many of the recommendations included in the APPA/AMP NOI comments.”
The Association said it supports most of the principal features of the NOPR, particularly the Commission’s proposal to require compliance filings by all public utility transmission providers with transmission rates under an open access transmission tariff, a transmission owner tariff, or a rate schedule to revise their rates, as necessary, to account for ADIT-related effects of the Tax Cuts and Jobs Act of 2017.
“For transmission formula rates, it is appropriate to include mechanisms to ensure rate base neutrality and to adjust the income tax allowance for amortized excess or deficient ADIT,” the Association told FERC. A formula rate worksheet tracking excess or deficient ADIT will provide necessary transparency to formula rate customers, it said.
The Association said it also concurs with the Commission’s proposal not to adopt a “one-size-fits-all” approach to implementing any required formula rate changes.
“It is reasonable, moreover, not to require public utilities with stated rates to make adjustments to ensure rate base neutrality at this time, provided that customers ultimately receive the full benefit of any excess ADIT regulatory liability attributable” to the Tax Cuts and Jobs Act of 2017, the public power trade group went on to say.
Although the Tax Code specifies the period over which certain excess ADIT balances must be flowed back to customers, other deferred tax balances – “unprotected” ADIT – are not subject to any particular amortization period. The Association said it also supports the Commission’s proposal not to adopt a generic amortization period for unprotected excess or deficient ADIT under formula and stated rates. It said FERC is correct that the appropriate amortization period “depends on the specific facts and circumstances for each public utility.”
While case-by-case consideration of this issue is appropriate, the Commission should make clear that it will scrutinize proposals to adopt lengthy amortization periods for excess unprotected ADIT, the Association argued.
The Association noted that in its NOI comments with AMP, the Association and AMP said that “[s]pecial care should be taken in that circumstance to avoid the inequity that would result from unduly delaying the return to customers of funds they have provided to utilities to meet greater future tax liabilities than the utilities actually will incur.”
Association strongly supports decision to refrain from generic reforms for public power
Meanwhile, the Association said it strongly endorses the Commission’s decision to refrain from proposing any generic reforms as to non-public utilities.
In the NOI, the Commission inquired as to the “effects of the Tax Cuts and Jobs Act on Commission-jurisdictional rates of non-public utilities,” presumably referring to the fact that the transmission revenue requirements of some non-public utilities are included in jurisdictional RTO and ISO transmission rates, the Association said.
As the Association and AMP explained in their comments on the NOI, non-public utilities, such as public power and cooperative utilities, generally are exempt from federal, state, and local income tax, and the revenue requirements for non-public utilities recovered in FERC-jurisdictional rates do not include income tax expense or generate ADIT.
Thus, the Tax Cuts and Jobs Act of 2017 “should have no effect on the revenue requirements of non-public utilities, and the NOPR appropriately determines not to take any generic action as to the rates of these utilities,” the Association said in its NOPR comments.
Association details concerns
At the same time, while generally supportive of the NOPR, the Association’s comments expressed some concerns with the proposed rule. Those concerns relate both to certain aspects of the NOPR’s proposed implementation and its overall scope.
The Association urged the Commission to clarify and revise certain aspects of the proposed rule to ensure that ratepayers receive the benefits of the Tax Cuts and Jobs Act.
Specifically, the public power trade group recommended that the Commission clarify or revise the NOPR in several respects including, among other things:
- The Commission should clarify that, where the full amount of Tax Cuts and Jobs Act-related excess ADIT for a public utility with a stated rate is greater than the amount of excess ADIT calculated based on the ADIT in the utility’s last rate case, the full amount of excess ADIT ultimately must be returned to customers;
- The Commission should confirm that customers should receive the full amount of any excess ADIT balance associated with the Tax Cuts and Jobs Act, even though the effective date of new rates may be after January 1, 2018;
- The Commission should confirm that that the NOPR would not authorize public utilities to recover past period deficient ADIT for which recovery should have been sought earlier under long-standing FERC rules; and
- The Commission should confirm that future proposals to return/recover excess/deficient ADIT will require submission of a Federal Power Act section 205 filing, and transmission formula rates should be required to state this filing requirement.
The comments also recommended a number of clarifications to the NOPR intended to provide interested parties with clearer information on the ADIT-related effects of the Tax Cuts and Jobs Act on utilities’ books.
Finally, the Association urged FERC to take steps to ensure that cost-based rates that are not addressed by the proposed rule or previous Commission orders remain just and reasonable following enactment of the Tax Cuts and Jobs Act.
“The Commission should direct show cause filings for such cost-based rates, or, at a minimum, require informational filings detailing” the Tax Cuts and Jobs Act-related impacts on these rates, it said.