FERC Follows Up on Tax Reform Response

The Federal Energy Regulatory Commission (FERC, the Commission) took several actions in November to address impacts from the Tax Cuts and Jobs Act (the Tax Act). FERC had previously issued a Notice of Inquiry seeking comments on how to address the impact of the Tax Act’s reduction in the corporate federal income tax (FIT) rate from 35% to 21%1. FERC’s recent actions are intended to ensure that the benefit of the tax reductions is passed on to consumers.

First, the Commission issued a Policy Statement addressing accounting and ratemaking treatment of Accumulated Deferred Income Taxes (ADIT)2. Public utilities, natural gas pipelines, and oil pipelines collect ADIT from consumers in anticipation of paying federal taxes to the Internal Revenue Service (IRS).

Rich Bonnifield

As a result of the reduction in the corporate FIT, a portion of the ADIT liability that was collected from consumers will no longer have to be paid to the IRS and is now considered excess ADIT. The Commission provided accounting and ratemaking guidance on how public utilities, natural gas pipelines, and oil pipelines should record amortization of excess and deficient ADIT. The Policy Statement further instructs public utilities, natural gas pipelines, and oil pipelines to amortize excess or deficient ADIT associated with an asset that is retired or sold after December 31, 2017.

Jessica Bayles

Second, the Commission issued a Notice of Proposed Rulemaking to revise rates for public utility transmission providers to account for the tax changes3. The proposed rulemaking would apply differently to public utilities with transmission formula rates and transmission stated (or fixed) rates. For public utilities with formula rates, the proposed rulemaking has three requirements: 1) to preserve rate base neutrality, they must deduct excess ADIT from or add deficient ADIT to their rate bases, 2) to ensure ratepayers receive the benefits of the Tax Act, they must decrease or increase their income tax allowances by any amortized excess or deficient ADIT, and 3) they must incorporate a new permanent worksheet into their transmission formula rate to track excess or deficient ADIT on an annual basis. For utilities with transmission stated rates, the proposed rulemaking would require them to determine excess or deficient ADIT caused by the Tax Act and then return or recover this amount from customers. Comments on the proposed rulemaking will be due 30 days from publication in the Federal Register.

Third, the Commission acted on several other Tax Act impact-related items. It approved several interstate natural gas pipeline rate reduction filings made in response to Order No. 849 (which addressed the Tax Act and recent changes to FERC’s income tax allowance policy)4. It approved an accounting reclassification request from Edison Electric Institute for certain public utilities and centralized service companies that experienced stranded tax effects due to the change in the corporate FIT5. And it issued orders in 46 show-cause actions directed at public utilities whose transmission tariffs previously referenced the higher tax rate. The Commission accepted rate revisions from many of those utilities6.

The Commission also accepted the explanations provided by several public utilities regarding how the reduced FIT rate will be addressed in another proceeding pending before the Commissionor how allowing the utility’s existing rates to remain in effect will provide customers with lower transmission rates8.

Since the Tax Act took effect on January 1, 2018, the Commission has moved expeditiously to assess its impacts on FERC-jurisdictional rates and to implement the changes needed to ensure that ratepayers receive the benefits of the reduced corporate FIT on a timely basis. The Commission’s actions in November have advanced that cause. The Commission’s actions demonstrate that it appreciates the value of rate relief—sooner rather than later—and that perfection should not be the enemy of the good.

Rich Bonnifield, a partner at Stoel Rives, focuses his practice on energy law, including electricity, nuclear and natural gas matters. He has a deep understanding of the unique challenges faced by electric and gas utilities that operate in a heavily regulated industry. Jessica Bayles is an associate in Stoel Rives Energy Development group, where she focuses her practice on energy regulatory, litigation, and transactional matters. She has significant experience in complex litigation before the Federal Energy Regulatory Commission (FERC).

1 – See, e.g., North Baja Pipeline, LLC, 165 FERC ¶ 61,111 (2018) (FERC accepts limited Section 4 rate reduction filing, effective December 1, 2018, to reflect cost of service reduction resulting from impact of the Tax Act and the Revised Policy Statement).

2- Edison Electric Institute, 165 FERC ¶ 61,114 (2018) (FERC issues blanket approval for public utilities and centralized service companies that include both accumulated other comprehensive income and retained earnings in their capital structures for rate-making purposes to record a reclassification of the stranded tax effects resulting from the Tax Act).

3- See, e.g., AEP Appalachian Transmission Co.,165 FERC ¶ 61,092 (2018) (FERC accepts proposed formula transmission rate revisions in response to show-cause order and terminates Section 206 proceedings); Alcoa Power Generating Inc., 165 FERC ¶ 61,094 (2018) (FERC accepts proposed stated transmission rate revisions in response to show-cause order and terminates Section 206 proceedings).

4- See Pacific Gas and Electric Co., 165 FERC ¶ 61,131 (2018) (FERC accepts explanation that reduced corporate FIT will be addressed in pending stated transmission rate case and holds Section 206 proceeding in abeyance); DATC Path 15, LLC, 165 FERC ¶ 61,100 (2018) (same); see also Cheyenne Light, Fuel and Power Co., 165 FERC ¶ 61,099 (2018) (FERC accepts commitment to file a transmission rate case by December 28, 2018, and to address reduced corporate FIT in that proceeding).

5- See Avista Corp., 165 FERC ¶ 61,122 (2018) (FERC accepts argument supported by evidence that increased costs inherent in its stated transmission rates would more than offset the benefits of the reduced corporate FIT); Consolidated Edison Co. of New York, Inc., 165 FERC ¶ 61,125 (2018) (same); El Paso Electric Co.,165 FERC ¶ 61,126 (2018) (same).

6- See, e.g., AEP Appalachian Transmission Co., 165 FERC ¶ 61,092 (2018) (FERC accepts proposed formula transmission rate revisions in response to show-cause order and terminates Section 206 proceedings); Alcoa Power Generating Inc., 165 FERC ¶ 61,094 (2018) (FERC accepts proposed stated transmission rate revisions in response to show-cause order and terminates Section 206 proceedings).

7- See Pacific Gas and Electric Co., 165 FERC ¶ 61,131 (2018) (FERC accepts explanation that reduced corporate FIT will be addressed in pending stated transmission rate case and holds Section 206 proceeding in abeyance); DATC Path 15, LLC, 165 FERC ¶ 61,100 (2018) (same); see also Cheyenne Light, Fuel and Power Co., 165 FERC ¶ 61,099 (2018) (FERC accepts commitment to file a transmission rate case by December 28, 2018, and to address reduced corporate FIT in that proceeding).

8- See Avista Corp., 165 FERC ¶ 61,122 (2018) (FERC accepts argument supported by evidence that increased costs inherent in its stated transmission rates would more than offset the benefits of the reduced corporate FIT); Consolidated Edison Co. of New York, Inc., 165 FERC ¶ 61,125 (2018) (same); El Paso Electric Co.,165 FERC ¶ 61,126 (2018) (same).