In a joint letter dated January 9, 2018, state attorneys general and consumer advocates from 13 states (collectively, the State Advocates)1 urged the Federal Energy Regulatory Commission (Commission) to address the rate implications of Congress’ sweeping overhaul of the federal tax code that was signed into law on December 22, 2017. Among other changes, the Law to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act) reduced the marginal federal corporate income tax rate from 35 to 21 percent. The State Advocates challenged whether entities under the Commission’s purview are charging “just and reasonable” rates in light of the significant reduction in the federal corporate income tax rate.
Natural gas pipelines, oil pipelines, and public utilities are permitted to recover their federal tax expenses along with other specified cost-of-service expenses through rates charged to their wholesale customers. The State Advocates suggested that those rates may no longer be just and reasonable if ratepayers do not realize the benefit of the Tax Cuts and Jobs Act through lower wholesale electricity transmission and pipeline transportation rates.
The State Advocates pointed out that jurisdictional entities with formula rates will not reflect the reduced tax rates for some period of time. Many public utilities rely on formula rates, a method of determining rates using a Commission-sanctioned algebraic formula with inputs for certain variable expenses, including an input for the federal corporate income tax rate. In theory, the new lower federal corporate income tax rate would be inserted into the formula rate and the charges ultimately assessed to ratepayers would reflect the reduction in taxes. However, in practice, a period of time will lapse before that reduction appears in ratepayers’ bills. Entities without formula rates may elect not to reduce their jurisdictional rates to reflect the reduction in federal tax rates without Commission intervention. In some instances, settlement agreements between jurisdictional utilities and their customers include rate moratoria that prohibit the parties to the settlement from seeking to alter the settled rates. As a result, the State Advocates are concerned that jurisdictional utilities will experience a windfall at their customers’ expense.
Rather than waiting for jurisdictional pipelines and utilities to voluntarily change their rates in response to the Tax Cuts and Jobs Act, the State Advocates encouraged the Commission to implement a comprehensive policy to address the modifications to the tax code on the rates charged by public utilities, natural gas pipelines and oil pipelines. The State Advocates referred the Commission to previous policy changes made as a result of tax reform enacted in 1986. In Order No. 475, 39 FERC ¶ 61,357 (1987), the Commission adopted a voluntary, abbreviated rate filing procedure that permitted electric public utilities to file for rate decreases under section 205 of the Federal Power Act (FPA). If a utility did not voluntarily reduce its rates through the specified procedure or through a general rate change filing, the Commission investigated the utility’s rates pursuant to section 206 of the FPA on the basis that the existing rates reflected the outdated and higher tax rate. The State Advocates recommended that Order No. 475 could serve as a template for Commission action in response to the Tax Cuts and Jobs Act.
While the Commission deliberates over this issue, state regulators have quickly jumped into the breach to demand that retail rates account for the reduced tax burden imposed on pipelines and utilities. On December 26, 2017, the Montana Public Service Commission ordered state utilities to calculate the tax savings they expect to realize and develop proposals for passing the savings on to Montana retail customers. The New York Public Service Commission has also promised that New York ratepayers would ultimately benefit from lower federal corporate income taxes. In addition, several companies have moved ahead of any policy mandate by proposing on their own to pass along tax savings to their customers in 2018. The significant monetary ramifications of the Tax Cuts and Jobs Act along with the flurry of state regulatory activity strongly suggest that Commission action on this issue is both warranted and imminent.
- The State Advocates represent California, Connecticut, Illinois, Kentucky, Massachusetts, Maryland, North Carolina, New Hampshire, Nevada, New York, Rhode Island, Texas and Virginia.
Client Alert 2018-016
