By - Jim Vess

Regulators eye customer rate cuts as utilities get a revenue boost from new federal tax law

Energize Weekly, January 10, 2018

The federal tax overhaul may provide a windfall in tax cuts and write-offs for utilities. Now, utility commissions and state officials around the country are looking to see if some of that money ought to flow back to customers.

On Jan. 4, Oklahoma Corporation Commission administrative judges recommended that five Oklahoma utilities pass along savings they receive from new federal corporate tax rates to their customers.

The move was prompted by an application from Oklahoma Attorney General Mike Hunter requesting rates be lowered for customers of the utilities—Oklahoma Gas & Electric, Public Service Company of Oklahoma, Oklahoma Natural Gas, CenterPoint Energy and Arkansas Oklahoma Gas—which his office estimates are in line for more than $96 million in tax savings.

At the end of December, the three members of the South Dakota Public Utilities Commission voted unanimously to give the state’s regulated utilities until Feb. 1 to provide estimates of revenue impacts of the cut in the federal corporate income tax to 21 percent from 35 percent.

In addition to the cut in the tax rate, utilities will be able to deduct the cost of capital projects from taxes in the first year rather than over time. The industry also managed to preserve the ability to deduct state and local taxes from their federal tax bill.

“It would appear this is going to be a significant amount of money that is going to be returned to customers,” South Dakota Commissioner Gary Hanson told the Daily American.

Regulators in Kentucky, Michigan and Montana have also issued orders to utilities to track and report their savings under the new federal tax rules. In Delaware the state’s public advocate, Andrew Slater, is urging regulators to do the same.

“Since ratepayers are required to pay through their rates the tax expenses of a utility, any reduction in tax rates must be timely passed through to ratepayers,” the Kentucky commission said in its order.

The commission was prodded by complaint filed by the Kentucky Industrial Utility Customers (KIUC), which represents that state’s large electric customers in rate cases. The complaint argued that the rates of the four utilities operating in the state would no longer be “fair, just and reasonable,” as required by law, once the federal tax cut takes effect.

The Kentucky order directs the four utilities—Duke Energy Kentucky, Kentucky Power Co., Kentucky Utilities Co. and Louisville Gas & Electric Co. (LG&E)—to respond within 10 days to the KIUC complaint and to begin tracking the tax savings.

The second order directed three natural gas utilities—Atmos Energy Corporation, Delta Natural Gas Company and Columbia Gas of Kentucky—and two water utilities—Kentucky American Water and Water Service Corporation of Kentucky—to begin recording their estimated tax savings.

The same day the Kentucky commission issued its order, the Michigan Public Service Commission ordered all rate-regulated utilities to report the impact of the federal tax law on their customers.

“While regulatory accounting isn’t always the most headline-grabbing topic, the guidance the Commission is providing in today’s order is important because it maximizes our future options as we sort through the totality of impacts the new federal tax law will,” Commissioner Rachael Eubanks said in a statement. The order covers 13 gas utility companies.

“The information we receive in this docket will be incredibly useful in understanding the magnitude of the expected reduction in federal taxes that the utilities pay, which is likely to be significant,” Eubanks said. “It will also provide broader input regarding the appropriate avenue for how to extend benefits to customers.”

The Montana Public Service Commission also directed four utility companies under its jurisdiction to “calculate the change in tax liability: expected by each company under the new tax law and come forward by the end of March with a proposal for how to apply those benefits.”

“Consumers are currently paying more in taxes through utility rates than the actual tax expense that utilities will incur next year,” Montana Commission Chairman Brad Johnson said in a statement. “The Commission wants to ensure that this money is not simply captured by shareholders, but instead is directed in a way that provides a long-term benefit to the consumer.”

The Montana commission also noted that consumers have paid tax expense on future tax liabilities due to other federal policies, such as bonus depreciation. The lower rate that will be applied to those liabilities in future tax years will create another benefit for customers.

The commission’s staff estimated that the total tax benefit to Montana’s utility customers will amount to tens of millions of dollars annually.

“Utilities basically have four options,” Commissioner Roger Koopman said. “They can issue customer refunds, use the money as a source of zero cost financing for capital projects, direct the funds to offset large, unusual expenses, or propose some combination of these three applications.

“I suspect the commission will be strongly inclined toward ratepayer refunds,” Koopman said.

The Delaware Public Service Commission has not yet taken action, but the Division of Public Advocate filed a petition with the regulator seeking a rate reduction from regulated utilities as a result of new tax law.

“We have a responsibility to the customers of each regulated utility to safeguard against unjust and unreasonable rates,” Slater said in a statement. “We believe, with the federal corporate tax changes, all additional money should flow back to the ratepayers and ask the Commission, and utilities, to approve reimbursement for this federal change.”

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