On January 10th, a group of attorney generals, state agencies and consumer advocates from 16 states filed a letter with FERC requesting that the Commission look into the impact of the recently enacted Tax Cut and Jobs Act on regulated electric, natural gas and oil pipelines. A copy of the letter can be found here.
The letter expresses concern that, as a result of the reduction in the corporate tax rate from 35 to 21 percent and as a result of ratemaking treatment associated with accumulated deferred income tax (ADIT) recovered from customer, FERC-jurisdictional rates are excessive and producing windfall to certain utilities. Citing FERC Order No. 475, a 1987 order addressing the changes resulting from the Tax Reform Act of 1986, the states “call[ed] upon the Commission to use its experience and expertise, with stakeholder input, to determine appropriate procedural mechanisms to discover information about the scope of over-collections at issue, the types of voluntary rate reductions or refunds that can be implemented by the Public Utilities in an expedited manner under existing Commission rules and precedent, and the best way to ensure that customers are not harmed by any delay in making the appropriate changes.”
These windfalls are occurring in both stated and formula rates. While formula rates typically input the prevailing federal income tax rate and will ultimately adjust (if the formula is one that contains a true-up mechanism), the level of detail to appropriately account for ADIT is typically lacking. Stated rates, or black box rates resolved through settlement, would not make any such accommodation. For example, a FERC-regulated open access transmission tariff rate may have been resolved in 2013 by settlement, and presumably predicated on the prevailing federal tax laws at that time. Such rates will not change until adjusted by a filing by that utility or a complaint by interested stakeholders (or the Commission itself). FERC’s principal statutes (the Federal Power Act, the Natural Gas Act, and the Interstate Commerce Act) provide the ability to get relief, but that relief is prospective.
Some utilities are working diligently to get ahead of the issues and provide relief to their customers. The January 10 letter cites to efforts by regulated utilities to reduce retail rates to give back customers any savings garnered from the tax change.
Undoubtedly, the Tax Cut and Jobs Act will be adding to the Commission’s significant caseload in the months and years to come, and result in a significant number of rate cases.