On December 20, 2018, FERC issued a series of nine orders addressing how certain public utilities calculate accumulated deferred income tax (“ADIT”) balances in their transmission formula rates. The orders were the result of separate proceedings under Section 206 of the Federal Power Act (“FPA”), which FERC initiated after concluding in a June 21, 2018 order (“June Order”) that the use of its former “two-step” ADIT averaging methodology may be unjust and unreasonable.
Generally, IRS rules allow companies to take advantage of accelerated depreciation, which lowers income tax payable during the later years of an asset’s life, whereas FERC’s ratemaking policies use straight-line depreciation. The difference between actual tax owed and tax liability for ratemaking purposes is reflected in an ADIT account and is subject to specific procedures under IRS rules. Because ADIT balances are effectively cost-free capital, they are also subtracted from a utility’s rate base during ratemaking. The Commission had been allowing a two-step methodology for calculating ADIT based on the understanding that it was necessary to comply with IRS tax rules. But in April 2017, the IRS issued a private letter ruling regarding ADIT calculations for formula rates that prompted FERC to reconsider how to calculate ADIT.
In the June Order, FERC determined that its previous two-step methodology was no longer necessary to comply with IRS rules and that this methodology may unreasonably inflate rates (see June 26, 2018 edition of the WER). FERC initiated FPA section 206 proceedings to examine how certain public utilities were utilizing the methodology, suggesting that perhaps the first step alone was sufficient because it would result in a weighted average ADIT balance based on the number of days remaining in the year, as opposed to, under the second step, an ADIT balance skewed toward the beginning-of-the-year balance. As part of the 206 proceedings, FERC directed each of the named public utilities to file briefs addressing the Commission’s concerns with the two-step ADIT methodology.
In the resulting nine orders issued December 20, 2018, FERC addressed the responses from the jurisdictional utilities identified in in its June Order (listed below), as well as related filings submitted under FPA Section 205. Generally, FERC accepted proposals to eliminate the two-step methodology, and, as applicable, directed compliance filings implementing tariff revisions to that end. FERC rejected proposals to continue using the two-step methodology as well as alternative recommendations to wait for additional IRS guidance and proposals that the Commission deemed out of scope of its June Order, e.g., to eliminate proration and use a historical test year instead or to retroactively apply the proration methodology to the entire year.
Copies of FERC’s orders, listed by the impacted utilities, are provided below:
• Midcontinent Independent System Operator, Inc.; ALLETE, Inc.; Montana-Dakota Utilities Co.; Northern Indiana Public Service Company; Otter Tail Power Company; Southern Indiana Gas & Electric Company;
• GridLiance West Transco LLC; and