The 2018 Federal Tax Cut’s Effect on Utility Rates: A Summary View

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John Slagboom Associate Energy Analyst for ENGIE Impact

Last December, the 115th Congress passed H.R.1, the Federal Tax Cuts and Jobs Act, which lowered corporate tax rates from 35% to 21%. Because of the decreased tax rates, utility providers across the nation are lowering their existing rates and proposed rate increase requests. There are many exceptions to this movement, especially in deregulated states where the increased revenue can be passed directly to shareholders instead of customers.

On March 18, the Federal Energy Regulatory Committee (FERC) issued a notice of inquiry to collect information on electricity, natural gas, and oil companies with the intent to investigate whether the Commission should address any changes to deferred tax assets and bonus depreciation. This inquiry was sparked by requests for Commission action to ensure that the financial benefits from the Federal Tax Cuts and Jobs Act are passed down to customers. Electric transmission rates, natural gas transportation rates, and a few oil pipeline rates are within the jurisdiction of FERC. These rates are based on the cost of service, which compromises all incurred expenses, including income taxes. As such, FERC is directly responsible for ensuring that the utilities within its jurisdiction adjust their rates for the benefit of their customers with a reasonable consideration for capital returns.

States are also taking actions to review the Federal Tax Cuts and Jobs Act’s impacts on utility rates. In a letter to FERC, several state advocates prompted the Commission’s notice of inquiry and requested that the Commission ensure that utility rates and tariffs at the level of national transmission reflect the reduction in federal income taxes. Several state public utility commissions (PUCs) have required utilities within their jurisdictions to show the effects of the tax cut on revenue requirements, calculate excess tax liabilities, and—to varying degrees by state—extend the increase in revenues to their customer base. Massachusetts’ Department of Public Utilities recently ordered utility providers within the state to determine new rates to reflect the tax cuts by May 1, 2018. Kentucky’s PSC, Oklahoma’s Attorney General, and Indiana’s office of Utility Consumer Counselor have all opened rate case investigations. These are just a few examples of the many states taking actions in response to the tax cut.

The most common reaction of utility providers across the country has been to either reduce rates and tariffs, or, if the utility was filing for a rate increase with a PUC, as in the case with PG&E, to request a reduced amount. Some utilities, notably in Kentucky, have been disputing the state PUC’s rate reduction orders. Others, such as Southern California Edison, have determined that multiple factors will dictate rate increases in 2018, 2019, and 2020, albeit at a lower rate than what was initially proposed. Commercial and industrial rate reductions have typically been between 1%-3%, with some outliers. However, the bulk of energy savings extended by vendors has been to residential consumers with reductions ranging from 1%-5%.