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FERC Issues Final Rule Related to Impacts from the Tax Cut and Jobs Act of 2017

FERC issued its final rule in RM19-5, Order 864, Public Utility Transmission Rate Changes to Address Accumulated Deferred Income Taxes (attached).  In this final rule, FERC is requiring public utility transmission providers with transmission formula rates under an Open Access Transmission Tariff, a transmission owner tariff, or a rate schedule to revise those transmission formula rates to account for changes caused by the Tax Cuts and Jobs Act of 2017:  1) to include a mechanism in those transmission formula rates to deduct any excess accumulated deferred income taxes (ADIT) from or add any deficient ADIT to their rate bases; 2) to incorporate a mechanism to decrease or increase their income tax allowances by any amortized excess or deficient ADIT, respectively; and 3) to incorporate a new permanent worksheet into their transmission formula rates that will annually track information related to excess or deficient ADIT.  For transmission stated rates, FERC finds that a public utility’s next rate proceeding is the most appropriate place to address excess or deficient ADIT resulting from the Tax Cuts and Jobs Act.  Last, this final rule does not address ancillary services or non-transmission rates for services provided under an OATT or other tariff.    

 

As for the required worksheet, it will increase the transparency surrounding the adjustment of rate bases and income tax allowances to account for excess or deficient ADIT by public utilities with transmission formula rates.  FERC is requiring that the worksheet in compliance filings be populated, in order to assist the FERC in analyzing the worksheet’s function and help FERC assess whether the worksheet provides adequate transparency.

 

Any Rate Base Adjustment Mechanism proposed in compliance with this rule must apply to any future changes to tax rates that give rise to excess or deficient ADIT.  FERC also found that any such mechanism should apply to state and local tax rate changes that give rise to excess and deficient ADIT.  This general applicability will reduce the burden on public utilities with transmission formula rates in the long-term by avoiding the need for such public utilities to propose a new mechanism after every income tax rate change.  The same goes for the amortization of excess or deficient ADIT, in that the mechanisms proposed by transmission owners need to apply to future changes in tax rates that give rise to excess or deficient ADIT, including state and local tax income rates.  FERC found that with the ADIT Worksheet, it is no longer necessary to require an FPA section 205 filing prior to including excess and deficient ADIT in transmission formula rates.  Specifically, the ADIT Worksheet will provide transparency and allow for FERC and customer review of the public utility’s calculation of excess and deficient ADIT, as well as the associated amortization schedule for returning or recovering excess and deficient ADIT.

FERC asserts that the full regulatory liability for excess ADIT should be captured in transmission formula rates, beginning on the effective date of any proposed tariff provision.  In other words, the full amount of excess ADIT resulting from the Tax Cuts and Jobs Act must be returned to transmission formula rate customers.

FERC did not adopt the proposal in the proposed rule to require public utilities with transmission stated rates to (1) determine the excess and deficient income tax caused by the Tax Cuts and Jobs Act’s reduction to the federal corporate income tax rate and (2) return this amount to or recover this amount from customers.  Instead, FERC orders that to maintain the status quo under Order No. 144, Order No. 475 and 18 CFR 35.24, under which public utilities with transmission stated rates should address any excess or deficient ADIT caused by the Tax Cuts and Jobs Act in their next rate case.

FERC is require each public utility with transmission formula rates to submit a filing to demonstrate compliance with the final rule including revisions to its transmission formula rates, as necessary, within the later of (1) 30 days of the effective date of this final rule or (2) the public utility’s next annual informational filing following the issuance of this final rule.  We find that this schedule for compliance filings will reduce the burden on public utilities by allowing them flexibility to align the compliance requirement with their annual informational filing deadlines.  However, we note that this compliance filing schedule represents the deadline to submit a compliance filing and that public utilities may choose to make their compliance filings earlier.  Additionally, on compliance, we expect public utilities with transmission formula rates to make their proposed tariff sheets effective on the effective date of this final rule.

A public utility transitioning from stated rates to formula rates will not need to make a compliance filing for their stated rates.  Accordingly, when the public utility makes a filing under section 205 to adopt transmission formula rates, FERC at that time will consider whether the utility’s proposal appropriately reflects the excess or deficient ADIT resulting from the Tax Cuts and Jobs Act.

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