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FERC Issues Final Rule on Changes to Public Utility Transmission Rates to Account for the Tax Cuts and Jobs Act of 2017

On November 21, 2019, the Federal Energy Regulatory Commission (FERC) issued a final rule on Public Utility Transmission Rate Changes to Address Accumulated Deferred Income Taxes requiring public utility transmission providers with transmission formula rates to revise those rates to account for changes caused by the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA’s reduction of the federal corporate income tax rate from 35% to 21% results in less federal corporate income tax expense, and therefore a reduction of accumulated deferred income tax (ADIT) liabilities and ADIT assets on the books of public utilities, from January 1, 2018, forward.

To adjust for the TCJA’s lower federal corporate income tax rate, public utilities with transmission formula rates must include two mechanisms in their transmission formula rates:

  • A mechanism to deduct from rate base any excess ADIT or add to rate base any deficient ADIT; and
  • A mechanism to decrease or increase their income tax allowances by amortized excess or deficient ADIT, respectively, to return excess ADIT to, or recover deficient ADIT from, their ratepayers.

Both mechanisms also must apply to any future tax rate changes, including state and local tax rate changes, that cause excess or deficient ADIT. FERC does not prescribe a specific approach for either mechanism that public utilities must adopt, allowing public utilities to propose changes to their formula rates that will be evaluated on a case-by-case basis. FERC also will evaluate proposed amortization periods for unprotected excess or deficient ADIT on a case-by-case basis.

Finally, all public utilities with transmission formula rates must include a new permanent worksheet, populated with annual information on excess or deficient ADIT, in their transmission formula rates. Notably, inclusion of this worksheet means FERC will no longer require public utilities to make a filing under section 205 of the Federal Power Act before including excess or deficient ADIT in transmission formula rates.

FERC declined to adopt the changes proposed in its Notice of Proposed Rulemaking in this proceeding for public utilities with stated transmission rates. Instead, FERC maintains the status quo for these utilities, under which public utilities with stated transmission rates are required to address any excess or deficient ADIT resulting from TCJA in their next rate proceeding.

Each public utility with transmission formula rates must submit a filing to demonstrate compliance with the Final Rule no later than thirty days after the effective date of the Final Rule or the public utility’s next annual informational filing following the issuance of the Final Rule. If a public utility believes that its existing transmission formula rate already meets the requirements of the Final Rule, it must demonstrate that the formula rate tariff mechanisms FERC already has approved are consistent with or superior to the requirements of the Final Rule. The Final Rule will become effective on January 27, 2020.