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Sunday, 21 January 2018 12:17

Refunds ahead? Utility customers to receive millions in rate reductions under federal tax reform

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Utility customers across the state could be refunded hundreds of millions of dollars as a result of the federal tax overhaul that passed in December, reducing the corporate income tax rate.

State regulators were still analyzing a final dollar amount resulting from the reduction of the tax rate from 35 percent to 21 percent when spread across 13 regulated gas and electric utilities as this story went to press. Utilities are required to detail how they will spread the savings, a trend that is playing out similarly in states across the country.

The Association of Businesses Advocating Tariff Equity (ABATE), a trade group representing large energy users in the state, estimates the total statewide figure could exceed $700 million.

While utilities recognize customers will likely see a decrease in their rates, it’s unclear how much and when the funds will flow back. In addition to the lower income tax rate, which is a direct pass-through to customers, questions remain over how money will be distributed from deferred income taxes. Those are taxes that have already been collected from customers at the 35 percent rate but have not been paid to the federal government.

“Every indication is that the tax cut will result in lower utility bills for ratepayers across the country,” said Michael Pattwell, an attorney for Clark Hill PLC in Lansing who represents ABATE. 

Based on utility filings in other states, Pattwell said customers of DTE Energy and Consumers Energy — who make up a majority of utility customers in Michigan — “should see significant rate relief.”

“Of course, ABATE will remain fully engaged throughout the process to ensure that the savings that result from lower taxes are passed along to ratepayers in the most expeditious way possible,” Pattwell said.

‘SIGNIFICANT SAVINGS’

The Michigan Public Service Commission (MPSC) required utilities to file plans by Jan. 19. Interested parties have until Feb. 2 to respond. MPSC spokesperson Nick Assendelft said the agency anticipates “significant savings” for utilities but can’t put a number on it until it reviews the filings.

“The information we receive in this docket will be incredibly useful in understanding the magnitude of the expected reduction in federal taxes that the utilities pay, which is likely to be significant,” MPSC Commissioner Rachael Eubanks said in a statement. “It will also provide broader input regarding the appropriate avenue for how to extend benefits to customers.”

Consumers Energy spokesperson Katelyn Carey said rate-regulated utilities, “unlike many other companies,” directly pass federal taxes through to customers.

“So, our customers will be the ones receiving a bonus in the form of lower energy bills in the future,” Carey said. “As for the timing of these savings, we will be working with the Michigan Public Service Commission and other utilities in Michigan during 2018 to determine the best method to lower our customers’ bills.”

The Upper Michigan Energy Resources Corp., or UMERC, issued a similar statement. UMERC, a subsidiary of Wisconsin-based WEC Energy Group, was created in 2016 to cover a region of the central and western Upper Peninsula.

UMERC spokesperson Amy Jahns said the company and its affiliates are in the middle of similar proceedings in Wisconsin, Illinois and Minnesota. In Minnesota, the new tax structure will be incorporated into a pending rate filing.

BILLIONS NATIONWIDE

Across the country, the change in the corporate income tax rate meant utility earnings — which total about $41 billion — became excessive by $7 billion annually starting on Jan. 1, said Steve Huntoon, principal at Washington, D.C.-based Energy Counsel and former president of the Energy Bar Association

And that’s before considering the amount of excess “accumulated deferred income taxes” — “another huge pile of money that consumers ought to start getting back as of … yesterday,” Huntoon wrote recently in the trade publication RTO Insider.

Huntoon told MiBiz that it varies by state how much authority utility commissions have in determining how the money is distributed among customers.

“We’ve sort of had a mixed bag in terms of what regulators in different states have done. It’s all over the map,” Huntoon said.

Chicago-based Commonwealth Edison, for example, filed plans in early January to reduce rates by $201 million this year.

Tim Zeldenrust, vice president of strategic consulting for software firm PowerPlan who also teaches seminars at Michigan State University’s Institute for Public Utilities, said distributing the money accumulated from customers through deferred income taxes will take longer to play out. It will also depend on whether a utility’s assets are considered “protected” — such as property related to power plants and services — or “not protected,” he added.

At the end of a protected asset’s life, the excess deferred taxes collected on those assets will flow back to ratepayers. Savings through non-protected assets can be flowed back in a “reasonable timeframe,” Zeldenrust said.

“In the shorter term, tax reform will reduce customer rates,” Zeldenrust said, adding that regulators, consumer advocates and utilities are most likely to debate refunds related to non-protected assets. This was a “point of contention” during the last round of major federal tax reform in the 1980s, he said.

MICHIGAN A LEADER

Utility industry groups reportedly support excess deferred taxes being returned over time rather than immediately, which would reduce their cash flow.

Eric Grey, senior director of government relations for the Edison Electric Institute, which advocates on behalf of utilities, said in a statement the group supported the federal tax changes that simplify the tax code, broaden the tax base and “reduce rates, which not only will benefit our customers but also will enable the industry to invest for the future.”

“Electric companies are now working to determine how the new law will affect them individually, and will be in discussion with the public service commission and (Federal Energy Regulatory Commission) to ensure that customers benefit from tax reform,” Grey said. 

As the issue plays out nationally in the coming weeks and months, Zeldenrust said Michigan has emerged as a leader.

“The Michigan commission is among the forefront in terms of investigating this so any benefits of tax savings are handled appropriately with the commission’s and IRS rules,” Zeldenrust said. “I think it’s high on their radar to protect customers as a result of the tax rate change.” 

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