On March 15, 2018, the Federal Energy Regulatory Commission issued an inquiry on the effect of the Tax Cuts and Jobs Act of 2017 on public utilities’ FERC-jurisdictional rates (Notice of Inquiry). Of particular interest to the Commission is whether, and if so how, the Commission should address changes pertaining to accumulated deferred income taxes (ADIT) and bonus depreciation.

The Tax Cuts and Jobs Act, which President Trump signed into law on December 22, 2017, reduces the federal corporate tax rate from a maximum of 35% to a flat 21%.  The reduction in the federal corporate tax rate will likely result in excess ADIT balances because the amount of ADIT that a public utility has recorded in its books will exceed the amount the public utility needs to pay its future federal income tax obligations. The Commission explains that these excess ADIT balances must be returned to customers in the cost-of-service ratemaking context and therefore invites comments on a number of issues pertaining to ADIT.

• Effect on Rate Base – the Commission seeks comment on whether, and if so how, public utilities should make adjustments so that rate base may be adjusted by excess or deficient ADIT. Specifically, the Commission encourages commenters to address whether public utilities with formula rates could add a line item to their formulas’ rate base adjustment calculations such that rate base would be decreased by any excess ADIT and increased by any deficient ADIT, and whether public utilities with stated rates could make adjustments to ensure that regulatory liabilities and regulatory assets are treated comparably to the ADIT liability and asset accounts.

• Flow-Back or Recovery of Plant-Based ADIT – the Tax Cuts and Jobs Act requires public utilities to flow back excess ADIT associated with utility plant assets no more rapidly than over the life of the underlying assets. The Commission seeks comment on how public utilities will implement the Average Rate Assumption Method or the alternative Reverse South Georgia Method to adjust the tax allowance or expense included in cost-of-service rates to reflect amortization of excess and deficient plant-based ADIT.

The Tax Cuts and Jobs Act also prohibits the use of bonus depreciation for assets acquired in the trade or business of the furnishing or sale of electrical energy. The Commission therefore seeks comment on whether, and if so how, it should take action to address bonus depreciation-related issues. The Commission directed commenters to address the practical application of their proposals, including the type of action the Commission should take and whom the Commission should target with its action.

In addition to the Notice of Inquiry, the Commission concurrently issued orders pursuant to section 206 of the Federal Power Act directing certain entities either to propose revisions to the transmission rates in their open access transmission tariffs or transmission owner tariffs to reflect the change in the federal corporate income tax rate, or to show cause why they should not be required to do so. Though the show cause orders address only transmission rates, the Notice of Inquiry seeks comment on whether other jurisdictional transmission rates or non-transmission rates should also be revised to reflect the impact of the Tax Cuts and Jobs Act.

Comments on the Notice of Inquiry will be due sixty days after its publication in the Federal Register.

For more information about the Notice of Inquiry, please contact us.