On November 21, 2019, FERC announced that public utilities with transmission formula rates must revise those rates to account for changes in accumulated deferred income taxes (“ADIT”) resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). Utilities with transmission formula rates under an Open Access Transmission Tariff, a transmission owner tariff, or a rate schedule must:
- include a mechanism to deduct any excess ADIT from, or add any deficient ADIT to, their rate base in order to ensure rate base neutrality (the “Rate Base Adjustment Mechanism”);
- return to, or recover from, customers any excess or deficient ADIT through an adjustment to the formula rate’s income tax allowance (“Income Tax Allowance Adjustment Mechanism”); and
- incorporate a new permanent worksheet into the formula rate to annually track ADIT amounts.
FERC declined to adopt any compliance requirements for transmission stated rates, finding that the utility’s next rate case would be the most appropriate place to address excess or deficient ADIT resulting from the TCJA. Compliance filings are due the later of: (1) 30 days from the effective date of the final rule; or (2) the utility’s next informational filing following the final rule.
ADIT amounts are regulatory assets that accumulate due to timing differences between the way taxes are recovered in rates and reported to the IRS. Recent TCJA tax rate reductions generally led to overcollections from customers for tax amounts that will no longer become due, resulting in “excess” ADIT. FERC’s long-standing tax normalization policy, established in Order No. 144, requires utilities to make ADIT adjustments when excess or deficient amounts are created as a result of tax changes. FERC proposed specific rules pertaining to the TCJA to ensure the benefits of the tax rate change were appropriately flowing through rates.
With respect to transmission formula rates, FERC previously proposed two adjustments to ensure changes in ADIT were reflected in the formula rate: (1) the Rate Base Adjustment Mechanism; and (2) the Income Tax Allowance Adjustment Mechanism. These adjustments were largely adopted by FERC in its November 21 order (“Order No. 864”) as proposed and have not materially changed from the Notice of Proposed Rulemaking (“NOPR”) and Policy Statement issued last November (see November 20, 2018 edition of the WER).
In response to comments, FERC declined to adopt a specific method for the adjustments required in Order No. 864, noting that compliance filings would be evaluated on a case-by-case basis. FERC also declined to provide additional guidance regarding the period over which amortization must occur, simply reiterating instead that the full amount of excess ADIT must be returned to transmission formula rate customers.
FERC confirmed that these mechanisms should be used for changes in state and local taxes that give rise to excess or deficient ADIT, but limited Order No. 864’s requirements to transmission formula rates. FERC reasoned that the potentially complex questions involving the return of excess ADIT in transmission stated rates were best dealt with in Federal Power Act (“FPA”) Section 205 and 206 proceedings where all interested parties could weigh in. Thus, FERC maintained the status quo under Order No. 144, Order No. 475, and 18 CFR § 35.24 for all rates other than transmission formula rates.
To ensure transparency, FERC is also requiring utilities to incorporate a new permanent ADIT worksheet into their transmission formula rates. In its order, FERC adopted the NOPR’s proposal to include five categories of information in the worksheet, but declined to establish a pro forma worksheet. In addition, FERC is requiring the worksheet to be filed populated rather than unpopulated as initially proposed. The order explains that this change will aid FERC in determining whether the worksheets, which will be reviewed on a case-by-case basis, provide sufficient transparency. Notably, once the ADIT worksheet has been incorporated into a utility’s transmission formula rate, FERC clarified that a utility can automatically reflect excess or deficient ADIT in its formula rate following future tax rate changes without the need for an FPA Section 205 filing (including the amortization period for such excess or deficient ADIT).
A copy of the order is available here.