Most US taxpayers are by now conscious of the passage of President Trump’s signature tax legislation which dramatically reduces the corporate tax rate from 35% to 21%. What many folks may not know is that the rates they pay to their local utility include recovery for the income tax expense of those utilities. This raises the question that some states, notably Kentucky and Oklahoma, have already begun to address: “How do regulators make sure that utility rates promptly reflect the substantial reduction in tax liability?” In Oklahoma, the Attorney General has called upon the Oklahoma Corporation Commission to address the tax savings issue which he estimates to total $100 million statewide. The Kentucky Public Service Commission already has ordered utilities to track their savings due to the tax change and to timely pass these savings on to customers. Montana and Michigan are taking similar actions.
It appears that the Pennsylvania Public Utility Commission (“PUC”) is preparing to address the issue as well. On January 5, 2018, the PUC opened Docket Number M-2018-2641242, with a case description of “THE TAX CUTS AND JOBS ACT: TAX REFORM BILL SIGNED INTO LAW ON DECEMBER 22, 2017”. The matter has been assigned to the Bureau of Technical Utility Services (“TUS”). So far there is no indication of the priority of this effort or what direction the PUC might take. It is clear, however, that the legal landscape in Pennsylvania, as it relates to utility ratemaking, may provide more of a challenge than regulators face in other states. In Pennsylvania, with few exceptions, utility rates are set prospectively and must always avoid the pitfall of “single issue ratemaking.” Single issue ratemaking is where a utility, or a customer, seeks to adjust rates based upon a change, often a dramatic change, that impacts an isolated cost center, without subjecting the whole of expenses, revenues, and allowed percentage of return on investment, to scrutiny and/or adjustment. The PUC and courts have consistently rejected this approach and instead have required utility rates to be set in consideration of all expenses, revenues, and authorized return. Consequently, it may prove to be a challenge for the PUC to reach the goal of having rates promptly reflect the reduced tax rate, while avoiding on one hand a claim of single issue ratemaking and on the other hand the time-consuming and costly process of adjusting each utility’s rates through either a PUC-initiated or utility-initiated general rate proceeding.
A utility’s costs of setting new rates are generally borne by ratepayers and are thus “baked into” the new rates, and so any plan to change rate should include a cost-benefit analysis of making a utility go through the process on a single ratemaking issue versus making a utility adjust rates to include not only new tax rates but all other changes to revenues, expenses and allowed return/profit. For small and mid-sized utilities, the cost of the ratemaking process—which can involve multiple parties, voluminous discovery, PUC staff data requests, expert witnesses, and potential hearings, often approaches, and sometimes exceeds, the amount of the dollar adjustment to rates: upward or downward. What is clear is that the PUC will have much to consider in determining the best way to approach the issue.