The Federal Energy Regulatory Commission (FERC) is moving quickly to ensure utilities are passing along the cost savings from the reduction of the federal corporate income tax rate from 35% to 21%, effective January 1 of this year. From the moment the tax bill was passed on December 20, 2017, officials and public service commissions from 35 states and the District of Columbia have been calling on FERC to act to direct regulated utilities to reduce their rates.

Utilities will see tax savings estimated at $1 billion this year and $5 billion over the following two years. FERC regulates the interstate transmission of natural gas, oil, and electricity and grants market-based rate authorization for sales of electric energy, capacity, and ancillary services. Electric utilities in most states rely on transmission service regulated by FERC. Regulated utilities are allowed to pass their cost of service on to customers through utility rates, and income tax is a basic component of their cost of service formula. If the cost of service, or revenue requirement, formula reflects the operating expenses accurately, then the lower tax rate should necessarily result in a lower retail rate for the transmission component of the rate. However, some utilities are being cautious to implement rate adjustments especially if they feel revenue requirement formulas are not reflective of current expenses.

Key Details

• It is rare for a utility’s operating expenses to go down, especially due to impetus for grid improvements and fallout from increasingly common extreme weather events when customers are most accustomed to dealing with rate hikes
• Two days before the tax bill was even signed into law, Massachusetts Attorney General Maura Healey called on the state’s Department of Public Utilities to reverse utilities’ planned rate hikes and return the tax savings to customers; within weeks, Massachusetts utilities agreed to lower rates or reduce rate hikes for 1.4 million customers
• AG Healey was soon joined by an unprecedented and bipartisan group of attorneys general and public advocates from 16 states in a January 9 letter requesting FERC promptly adjust public utilities’ revenue requirements; FERC received similar calls from the Organization of MISO States and Organization of PJM States
• FERC generally does not permit single-issue ratemaking, because it is very unusual for an isolated change to occur that is not offset by other changes. However, adjusting for the new corporate tax rate is limited in scope, and the economic benefits can be easily passed back to customers
• The Public Utilities Commission of Ohio (PUCO) made an early request to stakeholders on January 10 for input on how to reconcile the modifications to the federal tax code
  • A group of Ohio utility companies, including Dayton Power & Light, FirstEnergy, Duke Energy, and American Electric Power, issued an unusual joint response, arguing PUCO’s request lacked specifics and potentially violated a rule against retroactive utility refunds and fell outside the normal rate-making process
  • Ohio’s unusual reliance on electric security plans and riders, stemming from a 2008 law shielding utilities from competition, allows utilities to add various charges that all customers must pay, heavily complicating any adjustments
  • The utilities essentially said their hands are tied and that they can’t make changes outside of a rate case, which would not occur until 2024 in some cases
• Florida Power & Light intends to spend savings on repairs from Hurricane Irma, eliminating a planned surcharge that would have cost customers an average of $250
• Unregulated utilities have no obligation to return tax savings to customers
• Municipal utilities pay no federal income tax and are not impacted by the new tax law

Implications

After a period of public comment and input from all stakeholders, FERC issued the following orders at its March 15 meeting:

• Most utilities do not need to take any action if they recover cost of service using formula rates that automatically adjust on an annual basis to reflect changes in costs
  • Corporate tax rate was changed to a flat 21% starting January 1, 2018, so all annually adjusted rates reflect this change
• FERC identified 48 utilities that use stated transmission rates that treat corporate income tax as a fixed line item
  • 60-day deadline to revise their transmission rates to reflect the new tax rate or show cause as to why they should not be required to do so
  • The new rates are effective on the date of the order, so any excess money collected by utilities from the date of the order until they adjust their rates must be refunded to customers
• FERC made no determination and is asking stakeholders how it should treat two more complicated tax issues: excess accumulated deferred income tax and the new prohibition on the use of bonus depreciation—a tax incentive for companies to invest in distribution and transmission assets
• Natural gas pipelines must file a report on the impact of the tax law on their rates, and each must do one of the following: file to reduce its rates according to the reduction in cost of service, file a prepackaged uncontested rate settlement by December 31, submit a statement explaining why it does not believe it has to change its rates, or do nothing and be investigated
• Tax changes for regulated oil pipelines will be addressed in the 2020 five-year review
• FirstEnergy and Duke Energy have agreed to adjust their rates for customers in Ohio on March 1 and April 1, respectively, but are holding back on returning savings from prior months back to customers, which they may be allowed to do according to Ohio state law
• Environmental Defense Fund, Ohio Environmental Council, Natural Resources Defense Council, Sierra Club, and the Environmental Law & Policy Center have recommended that if PUCO is unable to require utilities return all tax savings to customers due to a court ruling against retroactive rulemaking, then they can require some of the money go to projects that produce savings and other public benefits “such as modernizing the utilities’ grids to allow for better incorporation of clean energy resources”

More Information

Energy News Network: Ohio Utilities Aren’t Ready To Share Federal Tax Cut with Customers

FERC: Tax Law Changes for Electricity, Natural Gas, Oil Companies

Associated Press: Fate of Utility Consumers under Federal Tax Overhaul Uneven

Daily Press: Final Revisions to Dominion Energy-Backed Bills to End 2015 Rate Freeze Advance

This report is part of ScottMadden’s VIU Minute series. To view all featured VIU Minutes, please click here.

Additional Contributing Author: Jonathan Aronoff