State electric utility regulators and the Federal Energy Regulatory Commission are facing a tough issue that they haven’t had to confront for over 30 years: How to adjust consumer rates to reflect the large tax cut Congress enacted this year, slashing nominal corporate federal income taxes from 35% to 21%.
Greentech Media headlined a story, “Utilities are getting a big tax break. How much money will consumers get back?” The report says, “Nearly every state utility commission, plus Washington, D.C.’s commission, has started some type of order or investigation asking utilities to assess the impacts of the law.” Ken Costello at the National Regulatory Research Institute in Washington said at a Feb. 9 NRRI webinar, “Pressure is mounting at the state level, from both consumer groups and commissions themselves, for returning tax savings to utility customers promptly.”
Costello said he has seen estimates that the Trump-backed tax cuts will save the electric power industry $1 billion this year and $5 billion by 2020. That would be a 0.5% reduction in national electric prices.
Dave Danner, chairman of the Washington State Utilities and Transportation Commission said, “Utilities are on notice that we expect customers will reap the benefits.” Some utilities are suggesting that they would prefer to use the savings for system improvements.
There is a downside to utilities getting a big tax break. It could hurt their ability to borrow. Moody’s downgraded the outlook on 24 utilities in January from stable to negative, including Southern Co. and Duke Energy, “because the lower 21% statutory tax rate reduces cash collected from customers, while the loss of bonus depreciation reduces tax deferrals.”
The last time this issue came up was after the 1986 major income tax cut in the Reagan administration. At that time, the Federal Energy Regulatory Commission issued a rule, Order No. 475, setting up a filing procedure allowing electric utilities to propose new rates as a result of the decline in taxes.
As S&P Global reported, Phil Moeller of the Edison Electric Institute and a former FERC commissioner has asked FERC to provide guidance on how to fix rates in terms of the new tax law. “Such guidance will benefit both utilities and their customers and help ensure continued investments in a smarter, more resilient energy grid,” he wrote.
But that could turn out to be a more complex task than the commission faced in Order No. 475, as many states no longer have fixed rates, but have more flexible ratemaking. “Given the heterogeneity of rates and contracts, any generic methodology likely would not satisfy the [Federal Power Act’s] requirement that rates be just, reasonable and not unduly discriminatory,” Moeller said.
The Trump tax cuts have also caused heartburn among the nation’s interstate gas pipelines, which FERC also regulates. Don Santa, president of the Interstate Natural Gas Association of America on Jan. 30 sent a letter to FERC Chairman Kevin McIntyre, calling on the federal regulators to resist petitions from some gas utility interests, state utility regulators and consumer advocates to reduce pipeline rates to reflect the Trump tax cuts.
— Kennedy Maize