Rate Case Roundup: Colorado

In a highly contentious docket pertaining to a natural gas local distribution company’s (LDC’s) petition for rate relief, the Colorado Public Utilities Commission ended up staying a recommended decision from an administrative law judge (ALJ) and then extending the time for party motions, rebuttals, exceptions, and responses. The commission found that no formal action should be taken on the ALJ’s preliminary decision until such time as all parties had had an opportunity to weigh in on the rate impacts of recently promulgated changes to the federal tax code, which resulted in substantial reductions in income taxes for corporations. The Tax Cuts and Jobs Act of 2017 (TCJA) had been passed into law just one day after the ALJ had rendered his decision.

Even before the tax legislation was signed into law, commission staff, in anticipation of changes in tax schedules going forward, had petitioned to have the evidentiary record reopened to consider the rate implications therefrom. According to commission staff, it was obvious that the proposed drop in the maximum corporate tax rate from 35% to 21% would cause the subject utility, Atmos Energy Corporation, and all other regulated utilities, to overcollect their costs of service through rates. But the ALJ refused to reopen the record, pointing out that the record had closed more than a month before the tax law was signed and that Colorado law does not provide for reopening the record in such a manner.

The commission, however, disagreed with the ALJ. From the commission’s perspective, the TCJA was so far-reaching in the modifications it made to the tax code that it would be irresponsible of the commission to render a final decision in the LDC’s rate case without first reviewing the issue. More particularly, the commission noted that the record evidence in the case relied upon a cost-of-service analysis that was predicated on a federal income tax rate of 35% for Atmos, a rate that clearly will no longer be enforced during the rate-effective period.

Reiterating that it was “not inclined to establish new base rates for Atmos … based on federal tax provisions that are no longer in effect,” the commission ordered that a statewide inquiry be launched in which to ascertain the extent of the impact on utility rates of the revised tax schedules. The commission told its staff that the investigation should proceed “without delay” and should, among other things, look at how ratepayers should be refunded for excess tax expense included in rates.

As to the terms of the ALJ’s underlying recommended decision, the commission related that Atmos Energy had initially sought to (1) raise its base rates by $2.9 million, (2) continue its present system safety and integrity rider (SSIR) for another five years, (3) recover $472,477 in rate case expenses, and (4) earn a rate of return on equity (ROE) of 10.50%.

After considering all party positions and weighing the evidence, the only part of the company’s proposal with which the ALJ was in full agreement related to the SSIR, which the ALJ found should be extended for five more years. The law judge explained that the rider is instrumental in funding various system upgrades, improvements, and replacements that help prevent leaks and minimize the risk of explosions, thereby enhancing overall public health and safety.

But the law judge was not as receptive to the other elements of the LDC’s rate plan. More specifically, the ALJ determined that Atmos should be permitted to recover only $349,253 in rate case expense and likewise should be authorized to earn an ROE of just 9.5%.

With regard to the company’s claimed rate case expense, the ALJ determined that the recovery should be limited to those costs proven and documented through December 1, 2017, which came to a little more than $349,000. The law judge concurred, albeit it “reluctantly,” that the LDC should be permitted to recoup that amount over a one-year period.

The law judge observed that although most utilities abide by a threeyear rate cycle, with rate case expenses amortized over a like period, a more compressed time frame was warranted in the instant proceeding due to the tax cuts. That is, the ALJ said, the change in the tax code is likely to spur Atmos to file another rate application prior to the end of the otherwise applicable three-year timeline.

With respect to the company’s cost of capital, the law judge conceded that natural gas service is a capital-intensive endeavor that faces risks unlike many other businesses. Nevertheless, the ALJ agreed with opponents that the 10.5% ROE advocated by the company was clearly overstated. The ALJ said that the company had included in its ROE cost analyses certain proxy company returns that were obvious outliers that had skewed the LDC’s analytics to the high side.

As an example, the law judge pointed to Atmos Energy’s reliance on the 11.88% ROE that had been authorized Alaska-based ENSTAR. The ALJ remarked that not only was ENSTAR an inapt proxy since it is a gas transportation company, not an LDC, but that the 11.88% ROE was well above any LDC returns approved in the Lower 48.

Looking at Colorado’s local economy, current financial market conditions, continued low interest rates, and ROEs allowed other utilities in the state, the ALJ concluded that an ROE between 9.3% and 9.9% was justified. Noting that Atmos appeared to have been afforded reasonable access to capital markets under its existing 9.6% ROE, the ALJ determined that a slight adjustment to ROE was appropriate, resulting in a final value of 9.5%. Re Atmos Energy Corp., Proceeding No. 17AL-0429G, Decision No. R18-0014, Jan. 8, 2018 (recommended decision); Decision No. C18-0069-I, Jan. 26, 2018 (order staying recommended decision) (Colo.P.U.C.).