Why Utilities Are Worried About Tax Reform

A GOP proposal could force energy companies to raise rates, unless they can win a carve-out.

AP Photo/Jim Suhr
Jason Plautz
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Jason Plautz
July 26, 2017, 8 p.m.

As Congress moves toward a potentially messy tax-reform debate, utility groups are working hard to ensure they’ll be protected from a GOP-backed provision they say could prove costly to the industry.

In a broad blueprint released last year, House Republicans proposed getting rid of the interest deduction, which allows corporations to write off the interest from borrowing as an expense. Backers say that replacing it with full expensing—allowing businesses to write off their investments immediately—would give companies more incentive to make big purchases and inject immediate activity into the economy.

The problem for utilities: While other industries might benefit from the opportunity to make big investments now, the utility sector relies heavily on debt to build massive power plants, which then last for decades. Getting rid of the ability to write that off over time could lead to higher rates, said ‎Eric Grey, director of government relations at the Edison Electric Institute, the utilities’ main trade group.

“We are hands-down the most capital-intensive industry,” Grey said. “The infrastructure we’re building is just very expensive, so we have to be in the debt and equity market. When you look at proposals like the House blueprint, that’s an immediate cost we’d have to recoup from our customers.”

Leaders from both chambers and the White House are expected to release more details of the tax plan as early as this week, likely including some version of the interest-deduction provision (the House blueprint would get rid of it entirely to help cut corporate tax rates, while the Trump administration has proposed capping it).

While many critics have focused on the proposed border-adjustment tax, which caught the ire of major retailers, the interest-deduction proposal has also emerged as a potential trouble spot for tax writers (House Freedom Caucus Chairman Mark Meadows has expressed concern over the proposal as written).

Emily Schillinger, a spokeswoman for the House Ways and Means Committee, said that Congress and the White House are now working on “specific policies to include in pro-growth tax-reform legislation,” but that the plan as outlined would “make it easier for America’s utilities and all industries to grow and create new jobs.”

“The House’s ‘Built for Growth’ tax-reform blueprint included provisions that would allow America’s utilities to benefit from a dramatically lower corporate tax rate and immediate expensing of business investments,” Schillinger said. “These proposed tax reforms will deliver strong economic growth. That will mean increased demand for utilities and growth for utility businesses.”

Grey said that while it’s true that an injection into the economy from tax reform would give utilities more customers, that might not be enough to offset the potential damage if companies can’t write off their interest long-term. Utility regulation means that companies spread out their tax benefits evenly over the life of an asset, like a power plant, in the rates it charges customers; immediate expensing would complicate that calculation.

“We’re not trying to game the system; we just want to be able to use our money the same as anyone else,” Grey said. “In our conversations on Capitol Hill, we’re just telling people we don’t want to be harmed.”

Utility groups have repeatedly raised their concerns with members of Congress and the administration, and they say they’re optimistic that lawmakers could work out an exemption for regulated industries like them. Grey said that Ways and Means Chairman Kevin Brady has been amenable to their concerns.

However, that could open the door for other industries to seek their own carve-outs, further complicating the discussions.

The utility sector already faces massive uncertainty from the regulatory side; the Trump administration has proposed reversing the Clean Power Plan, which regulates emissions from power plants, and is likely to rewrite or reduce enforcement on several other environmental regulations. Legal challenges will likely keep the Clean Power Plan in flux throughout Trump’s first term, while states are also working on their own clean-energy goals that could make long-term planning difficult.

The tax-reform discussions could have wide-ranging implications for the energy sector, which has meant that environmentalists and industry groups alike are pushing their message out. The oil industry has been aggressively pushing back against the border-adjustment tax over concerns it would force the price of oil up.

One of the biggest questions is what happens to tax incentives for renewable energy that would seem to be on the chopping block. Two key tax credits—an investment tax credit for solar energy and a production credit for wind—were given new life in the 2015 omnibus deal and have coincided with a steep drop in the cost of renewables. And while key Republicans have said the tax credits would be safe, they’ve been on the chopping block before and renewable advocates worry they could be again.

That’s on top of the possibility that Republicans could try to gain revenue by increasing energy production on public lands.

“The specific details of tax reform are worrying on their own merits; we don’t want this to be an opportunity to attack renewable energy and leave big oil’s protections intact,” said Lukas Ross, climate and energy campaigner at Friends of the Earth. “If we’re being presented a tax deal for and by the GOP, the political priority is to stop it.”

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