Under existing law, the Public Utilities Commission has regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable.

This bill would require the commission to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes and, if the commission determines that the projected expenses and tax liabilities for federal taxes that the commission has authorized in the rates for a public utility are materially affected by the enactment, would require the commission to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.

Under existing law, the Public Utilities Commission has regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable.

This bill would require the commission to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes and, if the commission determines that the projected expenses and tax liabilities for federal taxes that the commission has authorized in the rates for a public utility are materially affected by the enactment, would require the commission to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.

Under existing law, the Public Utilities Commission has regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable.

This bill would require the commission to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes and, if the commission determines that the projected expenses and tax liabilities for federal taxes that the commission has authorized in the rates for a public utility are materially affected by the enactment, would require the commission to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.

Under existing law, the Public Utilities Commission has regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable.

This bill would require the commission to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes and, if the commission determines that the projected expenses and tax liabilities for federal taxes that the commission has authorized to be recovered in the rates for a public utility are materially affected by the enactment, would require the commission to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law. The bill would require that a utilitys rates be adjusted within 90 days after any probable savings can be determined, or reasonably estimated, for that utility.

Under existing law, the Public Utilities Commission has regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable.

This bill would require the commission to evaluate the effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses incurred by public utilities for payment of federal taxes and, if the commission determines that the projected expenses for federal taxes that the commission has authorized to be recovered in the rates for a public utility are materially affected by the enactment, would require the commission to adjust the rates of the utility to reflect projected expenses in light of the changes in federal law. The bill would require that a utilitys rates be adjusted within 90 days after any probable savings can be determined, or reasonably estimated, for that utility.

This bill would declare that it is to take effect immediately as an urgency statute.

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1028

Author:(Hill) – As Amended Ver:April 25, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires the California Public Utilities Commission (CPUC) to evaluate the full effect of recent changes to federal law governing taxes on corporations on each public utility regulated by the commission and, if the CPUC finds the changes to have materially affected the projected expenses and tax liabilities of the utility, to adjust the rates the utility collects from its customers (ratepayers) to reflect the changes.

FISCAL EFFECT:

Minor costs the CPUC as the changes to federal tax law necessitate the CPUC to consider the effect of those changes on the expenses and tax liabilities of regulated utilities and to adjust rates accordingly. (The CPUC contends this bill will result in nearly $300,000 in ongoing personnel costs and $500,000 in ongoing contracting costs for outside consultants. Yet, in describing the new work created by this bill, the CPUC writes it is “implementing many of the requirements of this bill” but has come to realize “current resources are insufficient” and that the CPUC “has limited expertise to complete existing and necessary tax related task which will need to be completed on an ongoing basis.” Based on this description, it seems the need for CPUC to consider how changes to federal tax law affects a utility’s rates—and the workload associated with that consideration—exists, regardless of whether this bill becomes law. Therefore, it seems unreasonable to attribute to the bill the costs of CPUC’s consideration, or at least all the costs of CPUC consideration.)

COMMENTS:

1. Purpose. The author intends this bill to provide clear direction to the CPUC that any savings realized by any utility resulting from changes to federal tax law should be reflected in the rates paid by the utility’s customers because those customers have already paid for the utility’s anticipated taxes through rates previously approved by the CPUC. Some bill supporters contend certain utilities have proposed reinvesting such savings in safety-related infrastructure or other purposes.
2. Background and Comments. The CPUC approves the rates charged by the state’s monopoly utilities, frequently referred to as “investor-owned utilities” (IOUs). Generally, the CPUC conducts a triennial “general rate case” (GRC) to establish and approve the rates each IOU may charge its customers. The GRC is a multi-party, technical, and contested judicial proceeding in which the CPUC determines the amount of revenue an IOU must recover from its customers to cover all of its costs, plus a profit. Included in those costs is assumed tax liability.

Recently, the federal government made changes to federal tax law. The changes had several effects, though, overall, they are likely to lower the federal tax obligations of the state’s IOUs. Yet, customers of the IOUs have paid rates that assumed the IOUs would face a certain tax burden. Therefore, the IOUs likely have collected from ratepayer more money than is needed to cover all the utilities costs.

Presumably, the CPUC will account for any savings realized by the IOUs and credit those savings back to ratepayers. To do otherwise would, presumably, render the rates unjust and unreasonable and very much contrary to foundational public utility law. Indeed, the CPUC has ordered the IOUs and other entities it regulates to record any tax savings in “memorandum accounts” that allow the CPUC to track such savings, and the CPUC has expressed its intent to refund such monies to ratepayers. Given this, it is unclear that this bill will alter the CPUC’s treatment of utility tax savings.

At the very least, the bill seems harmless. It is also consistent with actions taken by several other states to ensure regulators return utility tax savings to ratepayers.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: June 20, 2018

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Chris Holden, Chair

SBPCA Bill Id:SB 1028

Author:(Hill) – As Amended Ver:April 25, 2018

SENATE VOTE: 38-0

SUBJECT: Public utilities: rates: federal tax law changes

SUMMARY: This bill would require the California Public Utilities Commission (CPUC) to evaluate the effects of federal House Resolution 1 (corporate tax cuts) on the expenses and tax liabilities incurred by public utilities for payment of federal taxes and if the CPUC determines that the projected expenses and tax liabilities for federal tax are affected, it would require the commission to adjust the rates of the utility. Specifically, this bill:

1. Requires the CPUC to evaluate the full effect of the enactment of federal House Resolution 1 (H.R. 1; Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes.
   
2. Requires the CPUC to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.
   
3. Applies the provisions of this bill to only those public utilities over which the CPUC exercises its authority to fix rates and only to the extent the revenue requirements of the utility are based upon the tax rates in effect at the time rates were fixed for the utility by the CPUC.
   

EXISTING LAW:

1. Defines a “public utility” to includes every common carrier, pipeline corporation, gas corporation, electrical corporation, telephone corporation, water corporation, sewer system corporation, and heat corporation, where the service is performed for, or the commodity is delivered to, the public or any portion thereof. (Public Utilities Code § 216)
2. Requires that all charges demanded or received by any public utility for any product, commodity or service be just and reasonable, and that every unjust or unreasonable charge is unlawful. (Public Utilities Code § 451)
3. Provides the CPUC with general, broad authority to regulate every public utility in the state. (Public Utilities Code § 701)
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code § 761)

FISCAL EFFECT: According to Senate Appropriations Committee, the CPUC would incur costs occur regardless of the passage of this measure. According to the CPUC, the evaluations and rate adjustment included in this bill would result in a total fiscal impact of $787,183 for the following positions and contract services:

• $287,183 including Benefits and Operating Expenses and Equipment for one Public Utilities Regulatory Analyst V to assess annual federal tax liability, accelerated depreciation, and other financial impacts in all private electric and natural gas utility General Rate Cases and applications regulated by the Commission.
  
• $70,000 annually for a Business Services Officer III to administer contracts, issuing Request for Proposals, and coordinating administrative contract functions.
  
• Ongoing contracting costs of $500,000 per year for specialized federal tax law and financial cost analyses of federal corporate tax rate changes and of accelerated depreciation for businesses, and other financial impacts on all electric and natural gas utility General Rate Case and applications regulated by the Commission. These services will provide ongoing tax code expertise. Staying up to date on federal tax changes involves deep knowledge of the tax code and Internal Revenue Service rulings such as “private letters” which may impact regulated electric and natural gas utilities. For example, in the PG&E Transmission Owner Federal Energy Regulatory Commission rate case number 18, the estimated federal tax law change is a windfall of about $130 million out of about $1.8 billion that was not anticipated when this rate case began. Thus, the magnitude of funds that need to be returned to California ratepayers could be substantial.

BACKGROUND:

CPUC General Rate Cases (GRC) – The CPUC determines the amount a utility can charge, invest in and profit through an extensive general rate case which occurs every 3-5 years depending on the utility. The GRC is the CPUC’s main opportunity to review utility operations, investments, and associated costs. The utilities tax burden is one factor in how much a utility can charge customers in rates. As the case with other expenses, income taxes are recoverable by the utility in their rates. Since utilities are allowed to charge customers for a set amount any change in taxes becomes either profit or loss for the utility. Generally any difference in the amount a utility is allowed to charge versus the amount it expends is recorded in a memorandum account. These accounts are corrected during the next GRC cycle.

Federal House Resolution 1 – Under the recent House Resolution 1 utilities are expected to receive lower taxes. Among other provisions, H.R. 1 significantly lowers corporate taxes from 35% to 21% and changes the rules for deducting equipment costs, but also exempts utilities from any limitations of deducting interest on loans, debt or credit. This means that utilities will be freer than other corporations to borrow money for infrastructure upgrades and could likely increase the demand for utility bonds. These changes in federal law under H.R. 1 lower the overall tax burden to the utilities.

What the CPUC is already doing – Prior to this bill the CPUC had directed all electric, gas and water utilities to track the savings from the federal tax law change in memorandum accounts. Memorandum accounts are used by the CPUC regularly to track actual costs of a program. Under most circumstances the savings would be credited back to ratepayers in a future general rate case. The CPUC is also requesting the tax savings information from telephone carriers that are subject to general rate cases. The CPUC claims to be working on the most appropriate procedural mechanism to return the tax savings to ratepayers.

Other states – As a result of the corporate tax savings under H.R. 1 many states have already taken proactive measures to ensure customers benefit from utility savings. Kentucky, Michigan, Connecticut, Louisiana, Minnesota, Missouri, Montana, Oklahoma, South Dakota and West Virginia have started proceedings related to the passage of the federal tax cuts. In Oklahoma the Corporations Commission’s administrative law judges have recommended that utilities pass the savings along to their customers. South Dakota’s Public Utility Commission has determined that investor owned power and natural gas utilities should share the savings from the tax bill with customers. The Michigan Public Service Commission ordered utilities to study the tax cuts’ impact and how they will pass the savings along to customers. In Montana the Public Service Commission ordered utilities to calculate the change in their tax liabilities and come up with proposals for applying their savings.^[1] The attorneys general from 12 states signed a letter sent to FERC in January which called for an investigation into the “justness and reasonableness” of utility rates now that the tax cuts approved by Congress last month reduce the corporate income tax rate from 35% to 21%. The states include: New York, California, Connecticut, Illinois, Kentucky, Maryland, Massachusetts, Nevada, North Carolina, Rhode Island, Texas and Virginia. Public consumer advocacy offices and state regulatory agencies from Connecticut, Florida, Maine, Nevada, New Hampshire, Rhode Island and Vermont also are involved.

COMMENTS:

1. Author’s Statement. According to the author’s office, SB 1028 ensures any recent federal tax savings privately owned utilities receive are passed back to ratepayers. This bill applies only to utilities with near-exclusive rights to sell and operate within a given service area, and who have their rates set by the CPUC. Ratepayers pay the federal taxes of these utilities, and should receive the benefits of reductions in those taxes. States across the country have already called on their utilities to pass any savings on to ratepayers; SB 1028 would ensure the same is true for California. SB 1028 provides clear direction to the CPUC that any change to these utilities’ taxes shall be adjusted for in rates.
   
2. Ratepayer Savings. Since ratepayers have already paid for the corporate taxes previously forecasted by the utilities, any tax savings would result in a profit for the utility. This bill would provide ratepayers with savings, to the extent they are warranted, due to the recently adopted adjustments in the federal corporate tax changes. These savings could come in many forms, depending on what mechanisms the CPUC uses to adjust rates. Some possibilities could be: rebates to ratepayers, using these savings to pay for future expenses or deductions in rates or requested expenses moving forward. With each utility being uniquely affected by the taxes, not all ratepayers may experience rate changes.
3. Related Legislation. ACA 22 (McCarty, Ting, 2018) imposes a 10 percent surcharge on any qualified taxpayer’s net income over $1 million. The surcharge will be deposited into the Middle Class Fiscal Relief Fund, with specified appropriations. A “qualified taxpayer” is defined as corporations subject to certain taxation, which appears to include utilities. The bill is pending referral in the Assembly.

REGISTERED SUPPORT / OPPOSITION:

Support

Office of Ratepayer Advocates
The City Of Lakewood
The Utility Reform Network

Opposition

None on file.

Analysis Prepared by: Elle Hoxworth / U. & E. /

1. https://www.rtoinsider.com/tax-cut-and-jobs-act-opsi-utilities-83740/ ↑

 THIRD READING  

Bill No: SB 1028

Author:

Amended: 4/25/18

Vote:

SENATE ENERGY, U. & C. COMMITTEE: 10-0, 4/17/18

AYES: Hueso, Morrell, Bradford, Cannella, Hertzberg, Hill, McGuire, Skinner, Stern, Vidak

NO VOTE RECORDED: Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/22/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT: Public utilities: rates: federal tax law changes

SOURCE: Author

DIGEST:

This bill requires the California Public Utilities Commission (CPUC) to evaluate the full effect of the recently adopted federal corporate tax cuts on the expenses and tax liabilities incurred by investor-owned utilities (IOUs) for payment of federal taxes and adjust the rates of the utilities to reflect any changes.

ANALYSIS:

Existing law:

1. Authorizes the CPUC to fix rates, establish rules, examine records, issue subpoenas, administer oaths, take testimony, punish for contempt, and prescribe a uniform system of accounts for all public utilities, including electrical and gas corporations, subject to its jurisdiction. (Article 12 of the California Constitution)
2. Requires that all charges demanded or received by any public utility for any product, commodity or service be just and reasonable, and that every unjust or unreasonable charge is unlawful. (Public Utilities Code §451)
3. Provides the CPUC with general, broad authority to regulate every public utility in the state. (Public Utilities Code §701)
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code §761)

This bill:

1. Requires the CPUC to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes.
2. Requires the CPUC to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.
3. States that the section does not limit the discretionary authority of the CPUC to determine the full effect of the changes in federal tax law on each utility’s cost of service, including the ability to allocate the impacts over the period of time that results in the most reasonable allocation based on the particular circumstances of each utility.
4. Applies the provisions of this bill to only those public utilities over which the CPUC exercises its authority to fix rates and only to the extent the revenue requirements of the utility are based upon the tax rates in effect at the time rates were fixed for the utility by the CPUC.
5. States that this section does not limit the discretionary authority of the CPUC to adjust any incentives provided pursuant to any state supervised or administered program, including the state’s telecommunications universal service programs administered pursuant to Chapter 1.5 (commencing with Public Utilities Code Section 270).

Background

Federal House Resolution 1 (Public Law 115-97). Also known as the Tax Cuts and Jobs Act, federal House Resolution was signed into law on December 22, 2017, with portions of the law taking effect January 1, 2018. The Act results in a federal corporate income tax rate cut from 35 percent to 21 percent. The Act made additional tax changes including repeal of Section 199 deduction (also known as a domestic manufacturing tax deduction), the loss of bonus depreciation for IOUs, and complications to the Accumulated Deferred Federal Income Taxes. These provisions affect the federal tax liabilities of corporations, including IOUs regulated by the CPUC beginning in tax year 2018. However, the effect of the changes will vary by utility depending on how the utility accounts for its taxes, depreciation expenses, and other factors. Further complicating the effect of the tax law on regulated utilities, as noted by a report by the Brattle Group, the changes to the federal tax law could result in an increase in credit costs for utilities due to reduced cash flow resulting from the tax changes and the loss of bonus depreciation. In fact, credit ratings agencies reduced the credit ratings for a number of utilities across the nation due to the tax changes.

CPUC general rate case (GRC). The GRC is the CPUC’s main opportunity to review utility operations, investments, and associated costs. Typically, IOUs file GRCs every three years. Tax expenses are among the expenses reviewed during the GRC proceeding. In general, any increase or decrease in tax liabilities is accounted for through the GRC process for each utility. As part of its authority to regulate the rates of a utility, the CPUC provides each rate-regulated utility a revenue requirement through the GRC. The revenue requirement refers to the annual amount of money that IOUs are authorized by the CPUC to collect in rates from their customers. A utility’s income taxes are among the expenses considered a cost of providing service. As is the case with other expenses, income taxes are recoverable by the utility in the revenue requirement.

CPUC addresses federal tax law changes. Given the sizeable potential impacts of the tax changes made in the recent federal tax law, the CPUC has informed all rate-regulated utilities (energy, water, telecommunications) of the CPUC’s goal to implement expeditious and efficient rate relief to the extent the new tax laws contain flow-through benefits for utility customers. Recognizing that each utility’s GRC cycle is conducted on a unique schedule, any changes from the recent federal tax law would typically not be accounted for until the utility’s next GRC. In the case of some utilities, the next GRC may not be until three years from now, whereas, other utilities may be in the midst of their GRC proceeding. As such, the CPUC has instituted a number of tax memorandum accounts in order to account for the tax expenses and adjustments. However, this process requires a tailored approach for each utility given that the impacts of the tax changes will depend on how the utility accounts for depreciation, the timing of their GRC cycle and other factors.

Need for bill. This bill provides ratepayers with rate reductions, to the extent they are warranted, due to the recently adopted adjustments in the federal corporate tax changes. With each utility uniquely affected by the tax changes, not all ratepayers may experience rate changes. However, to the extent a utilities federal tax obligations have reduced overall, the utility’s ratepayers are likely to have a reduction in the rates associated with the tax expenses that would have been collected for federal taxes. Since overall rates may be affected by numerous other factors and expenses, it’s unclear whether the reduction in tax liabilities will guarantee reduced rate recovery overall. While the CPUC seems to be addressing the changes to tax liability from the new federal law on utilities they regulate, this bill will require them to do so.

Related/Prior Legislation

ACA 22 (McCarty, Ting, 2018) imposes a 10 percent surcharge on any qualified taxpayer’s net income over $1 million. The surcharge will be deposited into the Middle Class Fiscal Relief Fund, with specified appropriations. A “qualified taxpayer” is defined as corporations subject to certain taxation, which appears to include utilities. The bill is pending referral in the Assembly.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, the costs that the CPUC would incur would occur regardless of the passage of this bill. According to the CPUC, the evaluations and rate adjustment included in this bill will result in a total fiscal impact of $787,183 for the following positions and contract services:

• $287,183 including Benefits and OE&E [operating expenses & equipment] for one Public Utilities Regulatory Analyst V to assess annual federal tax liability, accelerated depreciation, and other financial impacts in all private electric and natural gas utility GRCs and applications regulated by the CPUC.
• $70,000 annually for a Business Services Officer III to administer contracts, issuing Request for Proposals, and coordinating administrative contract functions.
• Ongoing contracting costs of $500,000 per year for specialized federal tax law and financial cost analyses of federal corporate tax rate changes and of accelerated depreciation for businesses, and other financial impacts on all electric and natural gas utility GRC and applications regulated by the CPUC. These services will provide ongoing tax code expertise. Staying up-to-date on federal tax changes involves deep knowledge of the tax code and Internal Revenue Service rulings such as “private letters” which may impact regulated electric and natural gas utilities. For example, in the PG&E Transmission Owner Federal Energy Regulatory Commission rate case number 18, the estimated federal tax law change is a windfall of about $130 million out of about $1.8 billion that was not anticipated when this rate case began. Thus, the magnitude of funds that need to be returned to California ratepayers could be substantial.

SUPPORT: (Verified 5/22/18)

City of Lakewood

Consumer Action

Office of Ratepayer Advocates

The Utility Reform Network

OPPOSITION: (Verified 5/22/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “SB 1028 ensures any recent federal tax savings privately owned utilities receive are passed back to ratepayers as soon as possible. This bill applies only to utilities with near-exclusive rights to sell and operate within a given service area, and who have their rates set by the CPUC. Ratepayers pay the federal taxes of these utilities, and should receive the benefits of reductions in those taxes. States across the country have already called on their utilities to pass any savings on to ratepayers; SB 1028 would ensure the same is true for California.”

Prepared by: Nidia Bautista / E., U., & C. / (916) 651-4107

5/24/18 13:51:37

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1028 (Hill) - Public utilities: rates: federal tax law changes

This bill does not meet the criteria for referral to the Suspense File.

Bill Summary:

SB 1028 requires the California Public Utilities Commission (Commission) to evaluate the full effect of the recently adopted federal corporate tax cuts on the investor owned utilities (utilities) expenses and tax liabilities incurred and adjust the rates of the utilities to reflect any changes.

Fiscal Impact:

Annual costs of approximately $800,000 (Reimbursement Account) to the Commission for staff and consulting contracts necessary to conduct the required analysis. Staff notes that under current law, the Commission is already required to evaluate the effect of recently adopted federal tax cuts and tax liabilities and adjust rates as necessary. The Commission would therefore incur these costs regardless of the provisions of this bill. (See staff comments)

Background:

Federal House Resolution 1 (Public Law 115-97). The resolution (also known as the Tax Cuts and Jobs Act), was signed into law on December 22, 2017, with portions of the law taking effect January 1, 2018. The Act results in a federal corporate income tax rate cut from 35 percent to 21 percent. The Act also made additional tax changes including loss of Section 199 deduction (also known as a domestic manufacturing tax deduction), the loss of bonus depreciation for investor-owned utilities (utilities), and complications to the Accumulated Deferred Federal Income Taxes (AdFit).

These provisions affect the federal tax liabilities of corporations, including IOUs regulated by the Commission beginning in tax year 2018. However, the effect of the changes will vary by utility, depending on how the utility accounts for its taxes, depreciation expenses, and other factors. Further complicating the effect of the tax law on regulated utilities, as noted by a report by the Brattle Group, the changes to the federal tax law could result in an increase in credit costs for utilities, namely due to reduced cash flow of the tax changes and the loss of bonus depreciation. In fact, credit ratings agencies reduced the credit ratings for a number of utilities across the nation due to the tax changes.

Commission general rate case (GRC). As part of its authority to regulate the rates of a utility, the Commission provides each rate-regulated utility a revenue requirement through the GRC. The revenue requirement refers to the annual amount of money that Utilities are authorized by the Commission to collect in rates from their customers. A utility’s income taxes are among the expenses considered a cost of providing service. As the case with other expenses, income taxes are recoverable by the utility in the revenue requirement. The GRC is the Commission’s main opportunity to review utility operations, investments, and associated costs. The GRC phase 1 decision establishes the revenue requirement for the “test year” and for the following two “attrition years.” The test year is the year in the future for which costs are estimated. Typically, IOUs file GRCs every three years. Tax expenses are among the expenses reviewed during the GRC. In general, any increase or decrease in tax liabilities is accounted for through the GRC process for each utility. Given that each utility’s GRC cycle is conducted on a unique schedule, any changes from the recent federal tax law would typically not be accounted for until the utility’s next GRC. In the case of some utilities their GRC may not be until three years from now and for other utilities, they may currently be in the midst of their GRC. However, given the sizeable tax changes made in the recent federal tax law, the Commission has informed all rate-regulated utilities (energy, water, telecommunications) of the Commission’s goal to implement expeditious and efficient rate relief to the extent the new tax laws contain flow-through benefits for utility customers. As such, the Commission has instituted a number of tax memorandum accounts in order to account for the tax expenses and adjustments. However, this process requires a tailored approach for each utility, as much depends on how the utility accounts for depreciation, the point of their GRC cycle and other factors.

Proposed Law:

This bill:

1. Requires the Commission to evaluate the impact federal House Resolution 1 (Public Law 115-97) will have on the utilities’ expenses and federal tax liabilities.
2. Requires the Commission to adjust rates if it determines that federal House Resolution 1 (Public Law 115-97) materially affects the projected expenses and federal tax liabilities of the utilities.
3. Affirms the Commission’s discretionary authority to determine the full effect of the changes on each utility’s cost of service, to use appropriate mechanisms to track changes and adjust rates accordingly, and to allocate the impacts over the period of time that results in the most reasonable allocation based on each utility’s particular circumstances.

Related Legislation:

ACA 22 (McCarty, Ting, 2018) would impose a 10 percent surcharge on any qualified taxpayer’s net income over one million dollars. The surcharge will be deposited into the Middle Class Fiscal Relief Fund, with specified appropriations. This measure is pending referral in the Assembly.

Staff Comments:

Staff notes that the costs that the Commission would incur would occur regardless of the passage of this measure. According to the Commission, the evaluations and rate adjustment included in this bill would result in a total fiscal impact of $787,183 for the following positions and contract services:

• $287,183 including Benefits and OE&E for one Public Utilities Regulatory Analyst V to assess annual federal tax liability, accelerated depreciation, and other financial impacts in all private electric and natural gas utility General Rate Cases and applications regulated by the Commission.
• $70,000 annually for a Business Services Officer III to administer contracts, issuing Request for Proposals, and coordinating administrative contract functions.
• Ongoing contracting costs of $500,000 per year for specialized federal tax law and financial cost analyses of federal corporate tax rate changes and of accelerated depreciation for businesses, and other financial impacts on all electric and natural gas utility General Rate Case and applications regulated by the Commission. These services will provide ongoing tax code expertise. Staying up to date on federal tax changes involves deep knowledge of the tax code and Internal Revenue Service rulings such as “private letters” which may impact regulated electric and natural gas utilities. For example, in the PG&E Transmission Owner Federal Energy Regulatory Commission rate case number 18, the estimated federal tax law change is a windfall of about $130 million out of about $1.8 billion that was not anticipated when this rate case began. Thus, the magnitude of funds that need to be returned to California ratepayers could be substantial.

Ratepayer impacts. This bill would provide ratepayers with rate reductions, to the extent they are warranted, due to the recently adopted adjustments in the federal corporate tax changes. With each utility being uniquely affected by the tax changes, not all ratepayers may experience rate changes. However, to the extent a utilities federal tax obligations have reduced overall, the utility’s ratepayers are likely to have a reduction in the rates associated with the tax expenses that would have been collected for federal taxes.

-- END --

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2017 - 2018 Regular

Bill No: Hearing Date: 4/17/2018

SUBJECT:

DIGEST: This bill would require the CPUC to evaluate the full effect of the recently adopted federal corporate tax cuts on the expenses and tax liabilities incurred by public utilities for payment of federal taxes and adjust the rates of the utilities to reflect any changes.

ANALYSIS:

Existing law:

1. Authorizes the California Public Utilities Commission (CPUC) to fix rates, establish rules, examine records, issue subpoenas, administer oaths, take testimony, punish for contempt, and prescribe a uniform system of accounts for all public utilities, including electrical and gas corporations, subject to its jurisdiction. (Article 12 of the California Constitution)
2. Requires that all charges demanded or received by any public utility for any product, commodity or service be just and reasonable, and that every unjust or unreasonable charge is unlawful. (Public Utilities Code §451)
3. Provides the CPUC with general, broad authority to regulate every public utility in the state. (Public Utilities Code §701)
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code §761)

This bill:

1. Requires the CPUC to evaluate the full effect of the enactment of federal House Resolution 1 (Public Law 115-97) upon the expenses and tax liabilities incurred by public utilities for payment of federal taxes.
2. Requires the CPUC, if it determines that the projected expenses and tax liabilities for federal taxes that the CPUC has authorized in the rates of a public utility are materially affected by the enactment of federal House Resolution 1, to adjust the rates of the utility to reflect the changes in projected expenses and tax liabilities in light of the changes in federal law.
3. States that the section does not limit the discretionary authority of the CPUC to determine the full effect of the changes in federal tax law on each utility’s cost of service, to utilize appropriate mechanisms at its disposal to track changes and adjust rates accordingly, and to allocate the benefits from the changes in federal tax law over the period of time that results in the most reasonable allocation based on the particular circumstances of each utility.

1. Applies the provisions of this bill to only those public utilities over which the CPUC exercises its authority to fix rates and only to the extent the revenue requirements of the utility are based upon the tax rates in effect at the time rates were fixed for the utility by the CPUC.
2. States this section does not limit the discretionary authority of the CPUC to adjust any incentives provided pursuant to any state supervised or administered program, including the state’s telecommunications universal service programs administered pursuant to Chapter 1.5 (commencing with Section 270).

Background

Federal House Resolution 1 (Public Law 115-97). Also known as the Tax Cuts and Jobs Act, federal House Resolution was signed into law on December 22, 2017 with portions of the law taking effect January 1, 2018. The Act results in a federal corporate income tax rate cut from 35 percent to 21 percent. The Act also made additional tax changes including loss of Section 199 deduction (also known as a domestic manufacturing tax deduction), the loss of bonus depreciation for investor-owned utilities (IOUs), and complications to the Accumulated Deferred Federal Income Taxes (AdFit). These provisions affect the federal tax liabilities of corporations, including IOUs regulated by the CPUC beginning in tax year 2018. However, the effect of the changes will vary by utility, depending on how the utility accounts for its taxes, depreciation expenses, and other factors. Further complicating the effect of the tax law on regulated utilities, as noted by a report by the Brattle Group, the changes to the federal tax law could result in an increase in credit costs for utilities, namely due to reduced cash flow of the tax changes and the loss of bonus depreciation. In fact, credit ratings agencies reduced the credit ratings for a number of utilities across the nation due to the tax changes.

CPUC general rate case (GRC). As part of its authority to regulate the rates of a utility, the CPUC provides each rate-regulated utility a revenue requirement through the GRC. The revenue requirement refers to the annual amount of money that IOUs are authorized by the CPUC to collect in rates from their customers. A utility’s income taxes are among the expenses considered a cost of providing service. As the case with other expenses, income taxes are recoverable by the utility in the revenue requirement. The GRC is the CPUC’s main opportunity to review utility operations, investments, and associated costs. The GRC phase 1 decision establishes the revenue requirement for the “test year” and for the following two “attrition years.” The test year is the year in the future for which costs are estimated. Typically, IOUs file GRCs every three years. Tax expenses are among the expenses reviewed during the GRC. In general, any increase or decrease in tax liabilities is accounted for through the GRC process for each utility. Given that each utility’s GRC cycle is conducted on a unique schedule, any changes from the recent federal tax law would typically not be accounted for until the utility’s next GRC. In the case of some utilities their GRC may not be until three years from now and for other utilities, they may currently be in the midst of their GRC. However, given the sizeable tax changes made in the recent federal tax law, the CPUC has informed all rate-regulated utilities (energy, water, telecommunications) of the CPUC’s goal to implement expeditious and efficient rate relief to the extent the new tax laws contain flow-through benefits for utility customers. As such, the CPUC has instituted a number of tax memorandum accounts in order to account for the tax expenses and adjustments. However, this process requires a tailored approach for each utility, as much depends on how the utility accounts for depreciation, the point of their GRC cycle and other factors.

Ratepayer impacts. This bill would provide ratepayers with rate reductions, to the extent they are warranted, due to the recently adopted adjustments in the federal corporate tax changes. With each utility being uniquely affected by the tax changes, not all ratepayers may experience rate changes. However, to the extent a utilities federal tax obligations have reduced overall, the utility’s ratepayers are likely to have a reduction in the rates associated with the tax expenses that would have been collected for federal taxes. Since overall rates may be affected by numerous other factors and expenses, it’s unclear whether the reduction in tax liabilities will guarantee reduced rate recovery, overall.

Prior/Related Legislation

ACA 22 (McCarty, Ting, 2018) would impose a 10 percent surcharge on any qualified taxpayer’s net income over one million dollars. The surcharge will be deposited into the Middle Class Fiscal Relief Fund, with specified appropriations. A “qualified taxpayer” is defined as corporations subject to certain taxation, which appears to include utilities. The bill is pending referral in the Assembly

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

City of Lakewood

Consumer Action

Office of Ratepayer Advocates

The Utility Reform Network

OPPOSITION:

None received

ARGUMENTS IN SUPPORT: The according to the author:

“SB 1028 ensures any recent federal tax savings privately owned utilities receive are passed back to ratepayers as soon as possible. This bill applies only to utilities with near-exclusive rights to sell and operate within a given service area, and who have their rates set by the PUC. Ratepayers pay the federal taxes of these utilities, and should receive the benefits of reductions in those taxes. States across the country have already called on their utilities to pass any savings on to ratepayers; SB 1028 would ensure the same is true for California.”

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