Federal Tax Cuts Lead to Lower Revenue Requirement in Missouri

Although evidentiary hearings had already occurred and the record closed by the time the federally promulgated Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law by President Trump last December 22, the Missouri Public Service Commission opted to go ahead and account for some of the tax changes in the natural gas rate case for which the hearings had been held.

The proceeding revolved around Spire Missouri Inc., the post-merger company surviving the acquisition by Spire of two natural gas local distribution companies, Laclede Gas Company (LGC) and Missouri Gas Energy (MGE). In a filing that predated its name change to Spire Missouri, LGC had asked for a total of $58.1 million in rate relief, with a little more than half of that amount ($29.5 million) designated for recovery through the company’s infrastructure system replacement surcharge (ISRS). For its part, MGE, in a joint application, requested $50.4 million in additional revenues. Similar to its sister affiliate, MGE had structured its rate proposal so that some of the rate increase ($13.4 million) would be recouped via its own ISRS.

In January, the commission tasked Spire with submitting an affidavit in which the company was to detail, to the best of its ability, any change in its cost of service resulting from the TCJA. The commission said that because the TCJA lowers the maximum corporate income tax rate from 35% to 21%, it was obvious that the tax expense element reflected on the record was no longer valid. Spire was the lone utility in the state to be issued such a directive. The commission explained that its order to incorporate the effects of the TCJA in new rates was relevant only to Spire at the current time because it was the sole investor-owned utility with a rate docket before the commission that was already in the late stages of being processed. The commission remarked that because Spire generally files a rate case only every four years, if the changes were not assimilated into the current proceeding, it would be a long time before the opportunity to do such would arise again.

The commission underscored the fact that income tax liability is a significant expense for utilities, such that addressing the tax implications for Spire now will assure that consumers can begin to see the benefits from the tax code revisions almost immediately rather than having to wait several years until Spire files its next general rate case. The commission added that current recognition of the lower tax expense will minimize the potential for the subject company to overearn.

The commission found that it should not be that much of an administrative or accounting burden for the company to review its tax calculations and adjust them accordingly to show the new rate of 21% versus 35%. The commission deemed the difference to be a known and measurable expense such that it would be lawful to recognize the change as a post-test-period adjustment. Given that such a reduction in tax expense will translate into a revenue requirement that is millions of dollars lower than what had been anticipated, the commission held that the changes should be implemented in rates as soon as possible.

The commission stated that it was clear that absent such a decrease, Spire’s accumulated deferred income tax reserve would be grossly overstated. To allow that situation to continue unmodified until the company’s next rate case would not comport with the public interest and would be a dereliction of duty on the part of the commission, it said. While the commission’s discussion of the TCJA and its impact on rates took center stage in the commission’s final decision, the order also addressed the standard suspects in rate cases, that being capital structure and rate of return on equity (ROE). Interestingly, however, the matter of credit card processing fees was a hotly contested issue in the Spire proceeding just as it had been in the Minnesota Power case highlighted above.

With regard to cost of capital, Spire had moved to apply an ROE of 10.35% to a capital structure that features 54.2% equity and 45.8% longterm debt. Several parties expressed dissatisfaction with the proposed structure, finding it too equity-heavy. Some disputed the structure for not including a component for short-term debt. They also advised against any ROE value surpassing 10%, alleging that such a high ROE would be out of line with utility ROEs on a nationwide basis.

The commission, though, found Spire’s presentation on capital struc ture to be the most persuasive, pointing out that the company had documented that the debt/equity ratio recommended was, in fact, the company’s actual capital structure. The commission further noted that the short-term debt element that some parties urged the commission to include would be inapt in Spire’s situation. It elaborated that short-term debt for natural gas utilities often relates to supply inventories. In Spire’s case, however, the amount of short-term debt suggested by the party propounding its recognition would far outweigh the value of the company’s actual gas inventories. Moreover, the commission observed that Spire carries its gas inventory in rate base. As a result, the commission said it saw no reason to establish a separate component for short-term debt in Spire’s capital structure.

By contrast, the commission agreed with opponents that the 10.35% ROE put forth by the company was excessive. After reviewing the various ROE cost models presented by the parties as well as nationwide trends on utility ROEs, and upon factoring in an anticipated uptick in interest rates, the commission arrived at a final ROE of 9.8% for Spire. The commission stated that that ROE was the approximate midpoint of all the ROEs tendered by participants and was consistent with the national average. In addition, it declared it a fair and reasonable ROE in light of the growing local economy.

Turning to credit card processing fees, the commission commented that Spire’s predecessor companies, LGC and MGE, had treated such fees differently. That is, customers paying their LGC bills with a credit card were required to pay a separate transaction fee on top of the amount of the bill, while MGE customers did not have to pay the additional charge because MGE simply included the otherwise applicable fee as an expense to be recovered from all ratepayers through rates. Seeking consistency between its two divisions, Spire had asked for commission approval to change LGC’s practice on credit card fees to match that of MGE.

Those challenging the company’s proposal raised arguments similar to those brought up in the Minnesota Power proceeding, namely that allowing the company to absorb the transaction charges and treating them as a normal cost of business will compel customers not paying by credit card to subsidize those ratepayers that do. But Spire countered that elimination of the separate transaction fee for LGC customers is likely to benefit all consumers in the end and produce overall cost savings.

The company alleged that if LGC customers no longer have to pay the transaction charge in addition to the actual bill payment when using a credit card, more customers may opt to pay by credit or debit card. Spire asserted that such a scenario would mean not only that the company will receive its money sooner, but that the risk of nonpayment is shifted from Spire to the entity that issued the card. The company projected that it would see a reduction in its level of bad debt and be able to avoid bad check charges as well.

Although ruling in favor of the company on the matter, the commission admitted that there is the potential for some cross-subsidization to come into play. The commission acknowledged as well that some could view MGE’s practice as bestowing a preference on customers paying their bills by credit or debit card.

However, the commission stressed that state law governing the ratemaking process only prohibits the granting of an undue or unreasonable preference or advantage when setting rates. Given the cost-saving and riskaverting attributes of Spire’s plan, which will redound to the benefit of all ratepayers, the Missouri commission came to the same conclusion as had the Minnesota commission that it was just and reasonable to eliminate the separate transaction fee on credit card payments and treat associated costs as an ordinary cost of service recoverable through rates charged all ratepayers. Re Laclede Gas Co. and Laclede Gas Co. d/b/a Missouri Gas Energy, File Nos. GR-2017-0215, GR-2017-0216, issued Feb. 21, 2018, effective Mar. 3, 2018 (Mo.P.S.C.).