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Impact of Latest FERC ADIT Order on Transmission Formula Rates

Catalyst Consulting LLC

On November 21, 2019, the Federal Energy Regulatory Commission (“FERC” or  “Commission”) issued Order No. 864, a final rule requiring public utility transmission providers with transmission formula rates to revise those rates to account for changes caused by the Tax Cuts and Jobs Act of 2017 (“TCJA”).  The TCJA’s reduction of the federal corporate income tax rate from 35% to 21% results in less federal corporate income tax expense, and therefore a reduction of accumulated deferred income tax (“ADIT”) liabilities and ADIT assets on the books of public utilities, beginning on January 1, 2018. 

FERC initially issued a Notice of Proposed Rulemaking (“NOPR”) on this topic just over a year ago, and in this Final Rule they adopted most of the rules proposed in the NOPR. 

Order No. 864 requires public utilities with transmission formula rates to do three things:

  1. Include a mechanism in the formula rate template to deduct from rate base any excess ADIT or add to rate base any deficient ADIT;
  2. Include a mechanism in the formula rate template to decrease or increase their income tax allowances by amortized excess or deficient ADIT, respectively, to return excess ADIT to, or recover deficient ADIT from, their ratepayers;
  3. Include a new permanent worksheet, populated with annual information on excess or deficient ADIT, in their transmission formula rate templates. 

FERC does not prescribe a specific approach for the mechanisms that public utilities must adopt.  This allows public utilities to propose changes to their formula rates that will be evaluated on a case-by-case basis. FERC also will evaluate proposed amortization periods for unprotected excess or deficient ADIT on a case-by-case basis.

One area in this order that differs from the NOPR is related to public utilities with stated rates rather than formula rates. FERC declined to adopt the changes proposed in its NOPR for public utilities with stated transmission rates.  Instead, FERC maintains the status quo for these utilities, so that public utilities with stated transmission rates are required to address any excess or deficient ADIT resulting from TCJA in their next rate proceeding.

The order requires each public utility with transmission formula rates to submit a filing to demonstrate compliance with the Final Rule no later than thirty days after the effective date of the Final Rule or the public utility’s next annual informational filing, whichever comes later.  If a public utility believes that its existing transmission formula rate already meets the requirements of the Final Rule, it must demonstrate that the formula rate tariff mechanisms FERC already has approved are consistent with the requirements of the Final Rule, by those same deadlines.  The Final Rule will become effective sixty days after it is published in the Federal Register.

At bottom, the Final Rule will require all public utilities with transmission formula rates to revise their formula rate templates (if they haven’t already) to reflect the required changes for ADIT.  Some utilities have already done so, notably the ITC Companies [International Transmission Company (d/b/a ITC Transmission, Michigan Electric Transmission Company, LLC, and ITC Midwest LLC in Docket No. ER16-208) and Ameren Services Company (in Docket No. ER17-2323). Since FERC does not prescribe a method in the order, many utilities will likely replicate the ITC Companies approach or the Ameren approach, since FERC accepted both of these filings.  Other methods are proposed in several open dockets before the Commission at the time of this writing.

Finally, FERC noted that any public utility transitioning from transmission stated rates to transmission formula rates will not need to make a compliance filing. Accordingly, when the public utility makes a filing under section 205 to adopt transmission formula rates, the Commission at that time will consider whether the utility’s proposal appropriately reflects the excess or deficient ADIT resulting from the TCJA.

In the long run, Order No. 864 may result in more transparent treatment of ADIT.  In the short run, however, the Final Rule will significantly boost the number of transmission formula rate revisions being filed at FERC over the next six months. Both of these effects will likely be under-appreciated by utility rate departments across the country.

John Wolfram's picture

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Discussions

Matt Chester's picture
Matt Chester on Dec 2, 2019 2:20 pm GMT

Thanks for the overview, John-- some really interesting stuff going on it seems. 

In the long run, Order No. 864 may result in more transparent treatment of ADIT.  In the short run, however, the Final Rule will significantly boost the number of transmission formula rate revisions being filed at FERC over the next six months. Both of these effects will likely be under-appreciated by utility rate departments across the country.

Do you foresee the impacts coming through as expected or might there be any unforeseen consequences or anything of that sort? 

John Wolfram's picture
John Wolfram on Dec 2, 2019 2:49 pm GMT

Matt: the key here is that treatment of ADIT within transmission formula rates -- or any kind of utility rates for that matter -- is a topic that is a half-inch wide and a mile deep.  In other words ADIT rate treatment is well understood by very few across the utility space at large.  The impact on customer rates can vary by utility and is not likely to create many unforseen consequences.  The compliance effort comes at a cost (for attorneys and consultants, not to mention internal sunk costs for utility rate and tax department staffs) which is part of why I think the utilities in general will not be very enthused about it.  Thanks.

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