In what could be a sign of things to come in the wake of tax reform championed by President Trump and his Republican allies in Congress, a state regulator from Oklahoma warned contemporaries that swift action was needed to ensure that public utility customers, not the utilities themselves, reap the benefits.
Bob Anthony, a member of the Oklahoma Corporation Commission (OCC), said other state regulatory agencies must immediately act to avoid retroactive ratemaking, as the federal corporate tax rate is set to decline from 35% to 21%, beginning on Jan. 1.
"Regulators know public utility rates include a component for federal income taxes," Anthony wrote in an opinion piece published in the latest monthly bulletin of the National Association of Regulatory Utility Commissioners. "If new legislation significantly decreases income tax expense paid by regulated utilities to the federal government, shouldn't ratepayers therefore get lower rates?"
Anthony said state utility commissions needed to address whether a single-issue ratemaking could be used, or how the $1.5 trillion comprehensive tax reform bill passed by Congress on Wednesday would impact ratemaking in general.
"Potentially, all public utility ratepayers could benefit, including low-income utility customers," Anthony said, adding that Oklahoma public utility customers could see $100 million in savings.
According to Anthony, when the federal government enacted comprehensive tax reform 31 years ago, corporate income tax rates were lowered and depreciation provisions were modified. That changed the way corporate taxes were calculated, and utilities saw substantial savings in income tax. The Tax Reform Act of 1986 lowered the top corporate income tax rate from 46% to 34%.
In 1986, "many state regulators took timely action to ensure the savings were immediately passed on to utility ratepayers," Anthony said. "In Oklahoma, OCC staff entered into separate settlement agreements with many utilities to change the status of rates from permanent to temporary rates, and the Commission entered orders adopting those settlements. This allowed the Commission time to determine tax savings while ensuring those savings would not be retained by the utilities through regulatory lag."
Anthony added that temporary rates enabled the OCC to evaluate all of the impacts the 1986 law had on both current and deferred income tax expenses, which he described as a "complex task."
"Furthermore, as regulators know, significant timing differences exist between when a utility recognizes certain revenues and expenses for payment of income taxes and when the related deferred tax expense is collected from ratepayers," Anthony said.
"As a result, utilities have recorded deferred tax assets and liabilities on their books over time at greater federal income tax rates than those of the current congressional legislation. Regulators should consider flowing these savings to ratepayers, also."