FERC Addresses IRS Required Treatment of Accumulated Deferred Income Taxes in Electric Transmission Rates
- December 21, 2018
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In an order issued June 21, 2018, FERC instituted a section 206 proceedings to examine the methodology utilized by Ameren Illinois, Ameren Transmission of Illinois, and Northern States Power Company, for calculating Accumulated Deferred Income Tax (ADIT) balances in their projected test year or annual true-up calculations for their electric transmission formula rates. In a June 2018 Order, FERC explained that in light of the IRS April 2017 Private Letter Ruling, FERC undertook a review of Commission-jurisdictional transmission formula rates and identified Ameren, NSP Companies, and other transmission owners who currently use the two-step averaging methodology to calculate the ADIT component of rate base in their projected test year calculations or annual true-up calculations for their transmission formula rates. The two-step approach involves projecting ADIT balances using the prescribed IRS proration approach (Step 1) and then averaging the beginning and ending projected ADIT amounts from Step 1 (Step 2). FERC concluded that if the IRS’s proration methodology is applied to calculate ADIT balances in forward-looking formula rates, then the additional averaging step (Step 2) is not needed need to comply with the Consistency Rule (using same methodology to project tax expenses, depreciation expenses, ADIT and rate base). Thus, the two-step averaging methodology is not necessary to comply with the IRS Normalization Rules and results in understating ADIT balances and overstating rate base and revenue requirements. Several transmission owners, in addition to Ameren and Northern States (Public Service Company of Colorado, Southwestern Public Service Company, ALLETE, Montana-Dakota Utilities Co., Northern Indiana Public Service Company, Otter Tail Power Company, Southern Indiana Gas & Electric Company, International Transmission Company, ITC Midwest, Michigan Electric Transmission Company, American Transmission Company, TransCanyon DCR, Virginia Electric and Power Company, GridLiance and Southern California Edison) filed changes which FERC approved), or were ordered to file changes, to their transmission formula rates to eliminate the second step (averaging of the prorated balances).
For the orders, please click on the link below: