Electricity Markets

Public power weighs in on tax cut law implementation

Among the prerequisites for ensuring that the effects of the Tax Cuts and Jobs Act of 2017 (TJCA) result in just and reasonable rates for Federal Energy Regulatory Commission-jurisdictional utilities should be a requirement that those utilities make a filing showing that their existing jurisdictional cost-based rates will properly and fully reflect the TCJA’s effects without modification, or, if not, what modifications each utility proposes in order to achieve that result.

That was one of the key messages delivered in May 21 comments that were submitted by the American Public Power Association and American Municipal Power in response to a notice of inquiry issued by FERC in March.

On March 15, FERC 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 TJCA. The approach taken by the Commission differed by industry. 

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 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, or ADIT, and bonus depreciation (Docket No. RM18-12).  The recent comments by the Association and AMP responded to this notice of inquiry.

The Association and AMP focused most of their comments on the implications of the tax law related to the manner in which ADIT and bonus depreciation are reflected in the determination of just and reasonable rates for Commission-jurisdictional services.  

While the NOI and concurrent show cause orders recognize the significant effect of the TJCA on the determination of just and reasonable rates, additional Commission actions are needed to ensure that the law is fully and properly reflected in jurisdictional charges, the Association and AMP said.

Most notably, the Association and AMP believe that all “public” utilities should be required to make filings with the Commission that set forth in detail their plans for implementing all pertinent provisions of the tax law in their cost-based rates, “especially their plans for flowing back to customers the ADIT balances that have become excess to the utilities’ needs and for reflecting the effect of changes in the bonus depreciation rules.”

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

The filings should reflect that unamortized excess ADIT balances will be applied as a rate base offset (reduction) consistent with Commission policy, which recognizes that such amounts are customer contributed funds on which a public utility is not entitled to earn a rate of return, the Association and AMP argued.

“To the extent a public utility’s existing rates or formulas must be modified to properly implement the flowback of these amounts, the utilities should formally propose the necessary modifications,” they told FERC. In the alternative, the utilities should show cause why their existing cost-based rates should not be modified to accomplish the necessary flowback of excess ADIT. 

Moreover, the filings should be supported by detailed workpapers showing the calculation of excess ADIT amounts -- both “protected” and “unprotected” -- and demonstrating the operation of the utility’s plan for flowing those excess ADIT amounts back to customers.

After the filings are made, the utilities and their customers should be allowed to engage in discussions aimed at reaching agreement on the flowback period for unprotected excess ADIT. 

“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,” the Association and AMP said.

Rates for reactive power service

Meanwhile, the public power entities noted that the NOI poses a somewhat open-ended question about the TCJA’s effects on jurisdictional rates, specifically, whether, and if so how, FERC should take further action to address the change in the federal corporate income tax rate.

The NOI suggests three areas for comment:

  • Whether, in addition to the transmission rates addressed in the concurrently issued show cause orders, there are other jurisdictional transmission rates or non-transmission rates that should be revised to address the change in the federal income tax rate;
  • The effects (if any) of the TCJA on Commission-jurisdictional rates of non-public utilities; and
  • If there are any other effects of the Tax Cuts and Jobs Act, and whether, and if so how, the Commission should address them.

AMP and the Association said that among the most notable cost-based rates that have not yet been addressed by the Commission’s actions in response to the TCJA are the rates for reactive power service under Schedule 2 of open access transmission tariffs. 

“There are dozens, perhaps hundreds, of reactive power revenue requirements for taxable entities on file at the Commission,” AMP and the Association said.  Most of these filings are in the Midcontinent ISO and the PJM Interconnection, and virtually none of the reactive revenue requirement filings that have been approved or accepted by the Commission are formula based. Those filings generally include an annual fixed charge rate applied to the supplier’s investment in the reactive equipment to determine the annual reactive revenue requirements which includes an income tax component for taxable entities. 

Generators in MISO and PJM, for example, are paid for reactive service based on a reactive investment cost of service method of determining annual reactive revenue requirements. 

For taxable entities that own generation, a federal tax rate of 35% has been embedded in reactive cost of service studies for years. “While some public utilities have made filings at the Commission to adjust the reactive rates to reflect the new 21% corporate tax rate, the Commission should act to ensure that these cost-based rates are adjusted promptly, particularly since the impact of the tax rate change can be significant.”

AMP and the Association estimate that the total amount of reactive revenue requirements in PJM and MISO alone that are currently being charged under OATT Schedule 2 are around $325 million for PJM and around $174 million for MISO.

Therefore, just in the two regional transmission organizations, there is approximately $500 million in reactive revenue requirements currently in effect. 

While not all these reactive revenue requirements are related to taxable entities, the vast majority of them are. 

“Conservatively assuming three-quarters of the $500 million total as a proxy for the amount charged by taxable entities (or $375 million) suggests that those revenue requirements are now overstated and being over-collected by at least $23.3 million on an annual basis based on the 6.2% average reduction discussed above (i.e., 6.2% of $375 million),” the Association and AMP said.

FERC and customers “must have an opportunity to evaluate such potential cost reductions on an individual utility basis, and, accordingly, the Commission should require public utilities to submit show cause filings for all their cost-based rates, whether formula or stated.”

Public power and cooperatives

The NOI also seeks comment on effects of the tax law on Commission jurisdictional rates of non-public utilities.

AMP and the Association said that FERC is presumably referring to the fact that the transmission revenue requirements of some non-public utilities are included in jurisdictional RTO and ISO transmission rates. 

Non-public utilities, such as public power and cooperative utilities, generally are exempt from federal, state, and local income tax. 

“And as far as APPA and AMP are aware, the revenue requirements for non-public utilities recovered in FERC-jurisdictional rates do not include income tax expense, nor do these nonpublic utilities generate ADIT.  Thus, the TCJA should have no effect on the revenue requirements of tax-exempt entities.”

The public power entities therefore said that FERC should not take any action with respect to the non-public utility revenue requirements included in jurisdictional rates in the wake of the TCJA.  In particular, the Commission should not require non-public utilities to make any show cause, informational, or other filings regarding the impact of the TCJA on their revenue requirements.

AMP and the Association noted that they have also identified additional issues relating to the TCJA’s impact on FERC-jurisdictional rates that the Commission should address, namely, tax gross-ups and the effects of other income tax rates on FERC-jurisdictional rates.