Federal Cuts Lead States to Eye Utility Rates, Deferred Taxes

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

Utility companies from California to New York can expect states to reduce consumer rates and possibly adjust the treatment of accumulated deferred income taxes as a result of the new federal tax act.

The law, which took effect Jan. 1, lowered income tax rates on utility companies—which means utility companies are carrying excess money on their balance sheets because of accumulated deferred income taxes, regulators and tax experts told Bloomberg Tax. Accumulated deferred income taxes involve money that utility companies set aside to pay future tax bills.

Regulators in more than a dozen states told Bloomberg Tax they are considering lower consumer rates to mirror the companies’ lower tax rates, and ways to address accumulated deferred income taxes this year.

Those states include California, Illinois, Kentucky, Massachusetts, Michigan, Montana, New York, Oklahoma, Texas, and Virginia.

David Springe, executive director of the National Association of State Utility Consumer Advocates, said the industry somewhat welcomes the idea of states taking a hard look at the federal law’s financial impact on utility companies.

Though the industry expects that most states will work to come to an agreement with companies over the treatment of accumulated deferred income taxes, any tax savings created by the federal changes should benefit consumers first, Springe said.

Adverse Impacts

The Brattle Group, a consultancy firm that focuses on economic and regulatory matters, said in a Jan. 30 report that regulators in almost half the states started tax-related inquires of utility companies by mid-January.

State regulators are looking for customer tax savings through “reduced tax gross-ups on current-year net income” and by recaptured excess deferred income taxes associated with accumulated deferred income taxes for prior years, “which comprise a material portion of most regulated utility balance sheets,” the report said.

Reduced Rates

Regulators from several states said they began looking at ways to pass along industry tax savings as soon as President Donald Trump signed the 2017 federal tax act ( Pub. L. No. 115-97) into law Dec. 22.

Montana Public Service Commission Chairman Brad Johnson told Bloomberg Tax in a statement that the agency wants to make sure utility customers receive the benefits of lower tax rates.

In New York, Gov. Andrew Cuomo (D) ordered the state Public Service Commission Jan. 9 to take steps to ensure that any windfall from a reduction in federal corporate income taxes be returned to utility customers. The move is Cuomo’s latest effort to fight back against the federal tax law.

“We will do everything in our power to keep this windfall from lining the pockets of the top 1 percent, and deliver savings directly to hardworking New Yorkers,” Cuomo said in a statement.

Track Savings

A number of other states have taken—or are considering taking—similar steps, including Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Missouri, Rhode Island, and South Dakota.

“These companies will begin seeing major savings,” Oklahoma Attorney General Mike Hunter said in a December 2017 statement. “Oklahomans who are customers of these companies should immediately retain the benefits of the savings from the tax cut in the form of lower rates.”

Oklahoma regulators are requiring utilities to track savings from the federal tax cut and report it to the Oklahoma Corporation Commission.

The Kentucky Public Service Commission took a similar approach Jan. 2, ordering for-profit utilities to track their savings, paving the way for those savings to be passed on to customers in the form of lower electric, gas, or water rates.

“Since ratepayers are required to pay through their rates the tax expenses of a utility, any reduction in tax rates must be timely passed through to ratepayers,” Kentucky regulators said.

With assistance from Gerald B. Silverman in New York

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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