Federal Income Tax Reform

Several states have already reacted to the recently passed Tax Cuts and Jobs Act of 2017 (TCJA), which was signed into law by President Trump on December 22, 2017. Most of the provisions of the TCJA became effective as of January 1, 2018. Some states have opened proceedings to review the impact of the TCJA on utility rates, while others have signaled an intent to monitor how utility revenue requirements and rates may be impacted as a result of changes to the federal tax code, especially those reducing the corporate tax rate and revising the federal tax structure. The modified federal tax schedules affect the current tax expense and deferred tax accounting methods used by many corporate employers, including utilities. Significant changes to business income taxes will stem from the following provisions in the bill:

1. A decrease in the top federal income tax rate for corporations from 35% to 21%; and
2. A reduction of 20% in the businessrelated income recognized by owners of pass-through companies, subject to wage limits.

Following are brief descriptions of how certain states are responding to the changes.

Arizona

Commissioner Justin Olson with the Arizona Corporation Commission stated in a recently issued letter to the commission and the state’s utilities that the TCJA represents the most comprehensive federal tax reform in over 30 years. He asserted that the changes will impact every regulated utility that maintains a corporate tax liability as an element of its revenue requirement.

Pointing out that the commission “has anticipated this legislation for several months,” he drew attention to the fact that the commission had included an adjustment provision in a recent Arizona Public Service Company (APS) rate case that was designed to account for the ensuing tax changes should tax reform be approved. Most notably, the APS rate settlement reflected a requirement that should significant federal income tax reform legislation be enacted and become effective prior to the conclusion of the utility’s next general rate case, and should such legislation materially impact the company’s annual revenue requirement, APS is to create a rate adjustment mechanism to enable the pass-through of income tax effects to customers.

Because corporate income taxes are a common component of utility rates, and because the TCJA lowers the maximum corporate tax rate for most companies, the effect of the passthrough would most likely entail a reduction in the rates billed customers. Re Federal Income Tax Reform Rate Adjustment, AU-00000A-17-0379, docketed Dec. 20, 2017 (Ariz.C.C.).

Kentucky

In two separate rulings, the Kentucky Public Service Commission ordered the state’s four largest energy utilities, three large natural gas local distribution companies, and two major water companies to begin tracking the tax savings they are projected to accrue under the TCJA.

The commission acknowledged that while it would be virtually impossible to calculate the exact amount of TCJA-related savings and resulting rate reductions with any precision at the present time, the named utilities still should use their “best estimates” to ascertain the amount to be recorded. The commission’s action had been prompted in part by a complaint filed by Kentucky Industrial Utility Customers (KIUC), an organization that represents mostly large electric users in rate cases before the commission.

In its petition, KIUC argued that the rates of the state’s four largest electric utilities would no longer be “fair, just and reasonable” once the TCJA-based tax cuts take effect. It thus had advocated for utility rate cuts to mirror the corporate tax cuts. Kentucky Industrial Utility Customers, Inc. v. Kentucky Utilities Co., et al., Case No. 2017-00477, Dec. 27, 2017 (Ky. P.S.C.); Re Impact of the Tax Cuts and Jobs Act on the Rates of Atmos Energy Corp. et al., Case No. 2017- 00481, Dec. 27, 2017 (Ky.P.S.C.).

Michigan

The Michigan Public Service Commission ordered all rateregulated utilities to report on the impact the TCJA is anticipated to have on ratepayers. In addition, the commission stated that it expects to open a separate contested case proceeding to address the effects of the TCJA. In a move that echoed those of other states, the Michigan commission authorized each utility to begin using regulatory accounting, so as to be able to compare what their regulatory assets and liabilities would be both with and without the TCJA. Re Alpena Power Co. et al., Case No. U-18494, Dec. 27, 2017 (Mich.P.S.C.).

Ohio

Upon passage of the TCJA, Chairman Asim Haque of the Ohio Public Utilities Commission released a statement on the tax bill. In recognition that the reduction in the maximum corporate tax rate could cause utility rates to exceed the cost basis upon which they were originally predicated, he said that the commission would launch a proceeding in early 2018 to study the impacts of the TCJA on consumers and Ohio’s regulated utilities. The statement indicated an intent to solicit input from all stakeholders and the public.

South Dakota

Similar to the Arizona commission, the South Dakota Public Utilities Commission issued a directive requiring all utilities to account for changes in their respective tax liabilities, as of January 1, 2018, by using regulatory accounting. That approach relies on separate accounts for regulatory assets and liabilities.

The commission told utilities that they must track all calculated differences resulting from the TCJA and compare those figures to what would have been recorded if the TCJA did not go into effect. South Dakota utilities were instructed to prepare and file comments regarding the general effects of the TCJA on their costs of service. They also were tasked with developing a possible mechanism for adjusting rates.

Emphasizing that consumer protection is one of its top priorities, the commission stated that it wanted to assure that refunds or some other rate adjustment would be implemented in the future to ensure that consumers receive all of the benefits of the tax change. In addition, the commission ruled that any utility collecting federally approved transmission tariff rates through an adjustment clause must inform the commission of any proceeding being conducted by the Federal Energy Regulatory Commission addressing how federal income taxes will be adjusted.

The state commission related that it is likely that, in the near future, it will open a separate docket for each of the state’s major energy utilities through which interested parties can voice their concerns about the potential effects of the TCJA on utility rates. Re Staff’s Request to Investigate the Tax Cuts and Job Act on South Dakota Utilities, GE17-003, Dec. 29, 2017 (S.D.P.U.C.).