Utilities, Regulators Grapple With How to Distribute Tax Windfall

State-regulated utilities say they want to pass on their tax savings to the consumer, but should that be as lower rates or better infrastructure?

AP Photo/Jeff Roberson
Feb. 28, 2018, 8 p.m.

Last year’s tax-code overhaul gave a big tax cut to utility companies, but whether those savings show up in customers’ bills is unclear.

Over the past two months, utilities in states such as Illinois, Iowa, and Maryland have said they want to pass on what could be billions of dollars in tax cuts to consumers through lower rates. But in some states, companies might not have a choice. That’s because many utility companies providing electricity and natural gas to consumers operate as a monopoly. Their rates are heavily regulated by the states, and their prices are calculated using a formula that includes the company’s tax burden. Lower tax rates should mean lower power prices.

It should be an easy choice for state regulators, but some areas are also suffering from aging energy infrastructure—and companies could put the savings from the tax bill toward improving power lines, substations, or natural-gas lines.

“You’ve got to figure out what to do with that, and the discussions that are starting to happen at the states are, ‘do we just simply adjust rates, or do we use some of that pool of money to do some things that we may have wanted to do on the system in terms of infrastructure improvements or cybersecurity improvements, resilience improvements, those types of things?’” David Springe, executive director of the National Association of State Utility Consumer Advocates, said.

That may be an attractive option for some states, and utilities. The savings could offset future rate increases to pay for upgrades, and consumers would likely be more amenable to foregoing a rate drop rather than a rate increase later on, Springe said.

So far, states are just digging into the issue. But there have been a variety of proposals.

Researchers at Michigan State University’s Institute of Public Utilities have compiled a list of states working on the issue. The institute has recorded about three-dozen states that have regulators or utilities that are investigating plans, or have utility consumer groups publicly pressing the government to mandate rate cuts.

Utility companies in Iowa could see as much as $147 million in tax savings from the bill, and some have said they will pass on that money to the customers, The Des Moines Register reported. In Louisiana, Gov. John Bel Edwards asked state regulators to consider lowering rates, and they’ve responded. The Louisiana Public Service commission ordered utilities to figure out how to return the savings from the tax bill back to customers—including from rate payments already collected this year—by March 21.

But in some states, the rate cuts may not come for some years. Utilities in Ohio and North Carolina are asking state regulators to delay a rate drop until their next regular ratemaking process, known as a rate case.

Florida has a novel approach. Florida Power & Light said in January it planned to put the tax savings toward the $1.3 billion in damages to its power grid from Hurricane Irma in 2017, avoiding an increase in customer rates.

“Our current rate agreement provides the ability to use federal tax savings to entirely offset Hurricane Irma restoration costs, which delivers an immediate benefit to customers, and also the potential opportunity to avoid a general base rate increase for up to an additional two years,” Eric Silagy, president and chief executive officer of FPL, said in a statement at the time.

In Wisconsin, WEC Energy Group filed a proposal with state regulators asking that its $200 million savings help pay costs related to investment in electric transmission equipment, the Milwaukee Business Journal reported.

Some analysts are skeptical of the infrastructure argument. Tyson Slocum, director of the energy program at the consumer-advocate group Public Citizen, said infrastructure spending should be a separate issue and utilities should make their rates reflect the current tax environment.

“I’d want the underlying rates to more accurately reflect what the utilities’ true expenses are and the tax bill has clearly changes corporate expenses,” Slocum said.

Janice Beecher, director of the Institute of Public Utilities, said tax rates and infrastructure are separate issues as well.

“While a reduction in taxes could effectively offset other expenditures, I recommend against thinking about this as some spare change to be spent by the utility,” Beecher said in an email. “Despite our infrastructure needs, not all spending is prudent, useful, or cost-effective—a regulator determination is needed.”

The issue also exists at the federal level. The Federal Energy Regulatory Commission, which oversees interstate pipelines and power lines, has been under pressure to mandate companies lower rates. The American Public Gas Association and other groups called on FERC in January to require natural-gas pipeline and storage companies to lower their usage rates.

Mary O’Driscoll, director of media relations for FERC, said in an email that the commission has sent letters to 20 pipeline companies that have rate cases pending inquiring about the effect of the tax bill on rates. FERC acted on three of them in a February meeting, O’Driscoll said.

“FERC regulates the rates for interstate transmission of electricity and the interstate transportation of natural gas and oil,” O’Driscoll said. “The chairman has said the commission is looking into how it will review the rates for these entities.”

The moves by state regulators are meant to counter what happened during the last major tax-code overhaul—when Congress cut the corporate rate from 46 percent to 34 percent, and a similar fate was meant for utility rates. Then they received pushback from some utility companies. Ultimately, in 1987, FERC issued an order requiring electric public utilities file for rate decreases or face a rate investigation. In a January joint letter, 12 state attorneys general asked the federal regulator to examine rate decreases, citing the 1987 order.

There isn’t a set deadline for companies or state regulators to figure out what to do with the tax savings, Springe said. They can take a few months to work out a solution, as long as utilities and regulators agree that, once they do start calculating the rate reduction, it begins when the tax bill took effect, Jan. 1. As to which options will prevail, it will likely be on a state-by-state basis.

“It’s going to be 50 different answers, probably,” Springe said.

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