Electricity Markets

FERC moves to address tax law changes for energy sector

The Federal Energy Regulatory Commission on March 15 took a number of actions to address changes in the income tax rates for the electric transmission and natural gas and oil pipeline companies that it regulates, stemming from the Tax Cuts and Jobs Act of 2017.

The approach taken by the Commission differed by industry.  “FERC’s actions today recognize the specific regulatory and operating parameters that must be addressed differently for each of the industries it regulates,” the Commission said in a news release.

FERC took specific action to address the impact of the tax law’s reduction of the corporate tax rate on electric utility and gas pipeline rates.  FERC also noted that it was issuing a notice of inquiry (NOI) seeking information regarding whether and how the Commission should address more complex aspects of the tax law, including its effect on accumulated deferred income taxes and bonus depreciation (Docket No. RM18-2).

President Trump signed the Tax Cuts and Jobs Act of 2017 into law in December 2017.

In a presentation made at the Commission’s monthly meeting, Jonathan Taylor, who works in FERC’s Office of General Counsel, noted that the Tax Cuts and Jobs Act reduces the federal corporate income tax rate from a maximum 35 percent rate to a flat 21 percent rate.

This means that all “public” utilities, interstate natural gas pipelines, and oil pipelines subject to federal corporate income taxes will compute those taxes owed to the Internal Revenue Service based on a flat 21 percent tax rate.

FERC refers to electric utilities it regulates as “public” utilities; however, these are not municipal utilities, but rather investor-owned utilities.

Some of the Commission-jurisdictional rates charged by public utilities, interstate natural gas pipelines, and oil pipelines are set using cost of service, which includes an income tax allowance. Thus, when the tax expense decreases, so does the cost of service.

Electric utilities

Taylor noted that most public utilities use transmission formula rates to recover their cost of service, and most transmission formula rates include an input for the utility’s cost of paying the corporate income tax, which is adjusted annually.

“Under this common arrangement, the utility’s cost of paying the reduced income tax rate would be reflected in a public utility’s transmission revenue requirement without requiring a revision to the formula rate,” he said. Therefore, no filing would need to be made to change the corporate income tax rate.  In adopting this position, FERC appears to have rejected calls by some in the industry to require utilities to adjust their formula rates immediately, rather than waiting for the tax expense reductions to flow through the normal operation of the formula rates, which can take some time.

At the same time, FERC issued two waivers that allow investor-owned Public Service Company of Colorado and certain transmission owners within the Midcontinent Independent System Operator to allow for mid-year rate adjustments to reflect the new law.

Some public utilities, though, use transmission formula rates that include a fixed line item for the federal corporate income tax rate or they use stated rates. “Absent a revision to those types of rates, the reduced tax rate would not be reflected in a public utility’s transmission revenue requirement,” Taylor said.

FERC therefore issued “show cause” orders that address such situations. In the orders, the Commission, pursuant to section 206 of the Federal Power Act, directs 48 individual public utilities with stated transmission rates or transmission formula rates with a fixed line item of 35 percent for the federal corporate income tax component either to propose revisions to the transmission rates under their open access transmission tariffs or transmission owner tariffs to reflect the change in the federal corporate income tax rate, or to show cause why they should not be required to do so. The utilities named in the orders to show cause must submit their responses within 60 days.

Natural gas and oil

FERC also issued a notice of proposed rulemaking that addresses the rates of interstate natural gas pipelines. In the proposed rulemaking, the Commission proposes to require interstate natural gas pipelines to make a one-time informational filing with the Commission, called the FERC Form No. 501-G, that is designed to collect financial information to evaluate the impact of the Tax Cuts and Jobs Act and also of a FERC Revised Policy Statement on Treatment of Income Taxes, which was acted on at the Commission meeting.

Adam Aldean, also of FERC’s Office of General Counsel, noted that under the proposed rule, each interstate natural gas pipeline, in addition to filing the Form No. 501-G, would have the following four options: (1) file a limited Natural Gas Act section 4 filing to reduce the pipeline’s rates; (2) make a commitment to file a general Natural Gas Act section 4 rate case in the near future; (3) file a statement explaining why an adjustment to its rates is not needed; or (4) take no action other than filing the Form 501-G informational filing.

The Commission proposed to provide separate procedures for intrastate natural gas pipelines performing interstate service pursuant to section 311 of the Natural Gas Policy Act of 1978 and Hinshaw pipelines performing interstate transportation pursuant to a limited jurisdiction certificate, Aldean noted. Under the proposed rule, these pipelines would have to file a new rate election for interstate service if their rates for intrastate service are reduced to reflect the Tax Cuts and Jobs Act.

Comments on the proposed rule will be due 30 days after publication in the Federal Register.

The Commission said it will address tax changes for the oil pipelines it regulates in the 2020 five-year review of the oil pipeline index level.

Notice of inquiry

Although the Commission is adopting specific approaches for certain public utilities and interstate natural gas pipelines focused on the corporate tax rate reduction, FERC also issued a generic NOI that seeks comment on other effects of the Tax Cuts and Jobs Act on all Commission-jurisdictional rates.

The NOI “is a vehicle to help the Commission build a record to determine whether additional action is needed,” noted Kristen Fleet with FERC’s Office of Energy Market Regulation.

“Of particular interest, the Commission seeks comments on the topic of accumulated deferred income taxes, which are the dollar amounts of taxes that public utilities, interstate natural gas pipelines, and oil pipelines collected from customers in anticipation of paying the Internal Revenue Service. Due to the tax rate change, the current balance of accumulated deferred income taxes does not accurately reflect the current tax liability,” she said. As detailed in the NOI, commenters are invited to address a host of considerations related to this topic.

“Also of particular interest, the Commission seeks comments on the topic of bonus depreciation,” Fleet said. “Generally, bonus depreciation is a tax incentive given to companies to encourage certain types of investment. A company that purchases a qualified business property and places it into service within a taxable year can take a first-year deduction in addition to any depreciation deduction available.”

The Tax Cuts and Jobs Act prohibits the use of bonus depreciation for assets acquired in the trade or business 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, Fleet noted.

The Commission is seeking comment on the effect of the bonus depreciation change under the Tax Cuts and Jobs Act, and whether, and if so how, it should take action to address bonus depreciation-related issues.

Comments on the NOI will be due 60 days after publication in the Federal Register.