Nineteen states have asked the Federal Energy Regulatory Commission (FERC) to modify public utilities’ FERC-regulated cost-of-service revenue requirements to reflect the recent reduction in the federal corporate income tax rate. The states claimed that “[t]he Tax Cuts and Jobs Act significantly reduces the marginal federal corporate income tax rate from 35 to 21 percent. Unless the Commission adjusts… revenue requirements to reflect this federal corporate income tax reduction, utility customers nationwide will be overpaying for their electric and gas service by hundreds of millions of dollars.”
According to the states, the level of current corporate income tax expense incorporated into public utilities’ rates could render those rates unjust and unreasonable, and if FERC does not proactively reduce those rates, a significant amount of money would need to be refunded to customers in the future.
FERC has taken similar action in the past in response to a reduction in the corporate tax rate. Under the Tax Reform Act of 1986, the federal corporate income tax rate was reduced from 46% to 34%. In response, FERC issued Order 475 to allow electric public utilities to submit a voluntary, abbreviated rate filing to reflect a decrease in costs to customers based on the new 34% federal corporate income tax rate. The abbreviated filing reflected a “formula reduction in rates” based on data supplied by the utility in its most recent rate filing at the time (not its FERC Form 1). FERC believed that this method would best allow utilities to closely approximate the actual cost-to-service impact of the lower, 34% tax rate. This was much shorter than a full rate case proceeding and allowed participating utilities to more quickly pass through the benefit of the lower corporate tax rate to their ratepayers.
The states called upon FERC to use its prior experience and expertise, along with stakeholder input, to determine the appropriate procedural mechanisms needed to curtail the scope of over-collections of tax expenses, the types of voluntary rate reductions or refunds that can be implemented under existing rules and regulations, and the best way to ensure that customers remain unharmed by any delay in making those changes. It seems very likely that FERC will consider some or all of this advice as it formulates its response to the change in tax law.