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FERC Proposes Transmission Rate Changes to Address Accumulated Deferred Income Taxes

On November 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) proposing to require all utilities with FERC-jurisdictional transmission rates to revise those rates to account for changes caused by the Tax Cuts and Jobs Act of 2017.  FERC states the reforms it proposes are intended to ensure that utilities’ transmission rates are just and reasonable following enactment of the Tax Cuts and Jobs Act and meet FERC’s tax normalization requirements.  The NOPR focuses on the Tax Cuts and Jobs Act’s impact on the accumulated deferred income tax (ADIT) liabilities and assets that are on regulated utilities’ books as a result of tax normalization.

FERC proposes to direct utilities with transmission formula rates to include a mechanism in their formula rates to: (1) deduct any excess ADIT from, or add any deficient ADIT to, their rate bases; and (2) decrease or increase their income tax allowances by any amortized excess or deficient ADIT.  FERC further proposes that utilities with transmission formula rates incorporate a new permanent worksheet into their formula rates that will annually track information related to excess or deficient ADIT.

The NOPR would require utilities with stated transmission rates to determine the excess or deficient ADIT in their rates caused by the Tax Cuts and Jobs Act, based on the ADIT amounts approved in their last rate case, and to return this amount to, or recover this amount from, customers.

The NOPR does not prescribe specific mechanisms for adjusting rate base and income tax allowances for excess or deficient ADIT that would apply to all jurisdictional utilities with transmission formula rates.   Instead, FERC will allow utilities to propose any necessary changes on an individual basis or to demonstrate that their rates already are compliant.

Regarding the period over which utilities would return or recover excess or deficient ADIT through amortization, FERC stated that utilities should follow the guidance provided in the Tax Cuts and Jobs Act, where available.

FERC proposes to require each utility with jurisdictional transmission rates to submit a compliance filing within ninety days of the effective date of any subsequent final rule in this proceeding to revise its transmission formula or stated rates, as necessary, to demonstrate that it meets the requirements set forth in that final rule.  Alternatively, utilities may make a filing demonstrating that previously-approved mechanisms continue to be consistent with or superior to the requirements of any subsequent final rule.  These compliance filings may be made on a “single-issue” basis.

Comments on the proposed rule are due thirty days after the date on which the NOPR is published in the Federal Register.

A copy of the proposed rule is available here.