On November 15, 2018, FERC issued a Notice of Proposed Rulemaking (“NOPR”) addressing the effect of the Tax Cuts and Jobs Act of 2017 (“TCJA”), which lowered the federal corporate tax rate from 35 percent to 21 percent, on accumulated deferred income tax (“ADIT”) balances. Specifically, FERC proposed to require transmission companies to remove excess ADIT or add deficient ADIT to their rate bases. In addition, FERC issued a policy statement providing accounting and ratemaking guidance related to the treatment of ADIT (“Policy Statement”).
As FERC explained in the NOPR, ADIT arises from timing differences between Internal Revenue Service reporting and how income taxes are recovered in rates. As corporate tax liabilities decrease, so do a utility’s ADIT liabilities and assets, which can have ratemaking consequences. With regards to the NOPR, FERC’s proposal would require transmission providers to revise their rates to account for the tax law’s effects. FERC’s proposed reforms would: (1) adjust a utility’s rate base to reflect changes in deferred income taxes; (2) include mechanisms that would raise or lower income tax allowances; and (3) incorporate a new worksheet into rates that tracks annual ADIT information.
In addition, FERC issued the Policy Statement explaining which accounts companies should record the amortization of excess and deficient ADIT in and how to address any such excess or deficiency as a result of assets being sold or retrieved—namely that excess and deficient ADIT amounts must continue to be recorded after an asset sale or retirement.
In separately issued orders, FERC also approved revised line items for income tax in certain public utilities’ formula rates and revised income tax rates in certain utilities’ stated rates to reflect the federal tax rate reduction and provided blanket approval for the reclassification of certain stranded tax effects resulting from the TCJA.
Links to the policy statement and NOPR are available here.