Case Background
Indiantown
Company, Inc. (Indiantown or utility) is a Class A utility providing water and
wastewater services in Martin County to approximately 2,181 customers. The
utility reported in its 2016 annual report operating revenues in the amount of
$758,519 for water and $1,241,519 for wastewater. The utility did not collect
any contributions in aid of construction (CIAC) for 2016.
On
February 20, 2018, the utility filed an application for approval of a tariff to
allow for gross-up of CIAC. As discussed in Issue 1 below, the utility
indicated that the change in tax law may cause it to risk the loss of its
opportunity to earn a reasonable return on its used and useful property if it
is not allowed to collect the tax impact on receipt of CIAC. On March 29, 2018,
the utility filed revised tariff sheets that incorporate depreciation expense into
the gross-up calculations. This recommendation addresses the utility's request
for approval of a gross-up tariff. This recommendation only addresses changes
in the tax code related to CIAC. Any potential refund related to the change in
the federal tax rate currently embedded in the Utility’s rates is outside of
this recommendation and will be addressed in the generic Docket No.
20180013-PU. The Commission has jurisdiction pursuant
to Sections 367.081 and 367.091, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should Indiantown’s request for approval of tariffs to
allow the gross-up of CIAC be approved?
Recommendation:
Yes, the revised tariff filed on March 29, 2018
should be approved. The utility should provide notice to all persons in the
service areas included in the application who have filed a written request for
service or who have been provided a written estimate for service within the 12
calendar months prior to the month the application was filed. The approved gross-up
charges should be effective for connections made on or after the stamped approval
date on the tariff sheets. The utility should
provide proof of noticing within 10
days of rendering its approved notice. (Sibley, Hudson, Cicchetti)
Staff Analysis:
Effective January
1, 2018, the Federal Tax
Cuts
and Jobs Act amended
Section 118 of the Internal
Revenue Code. Prior to the amendments, CIAC was exempt from
taxable gross income for water and wastewater utilities. As a result of the amendments, both cash and property CIAC are now taxable gross income
for
water
and
wastewater
utilities. In recognition of this
change in the tax law, the Commission has opened Docket
No. 20180013-PU, In re: Petition to establish a generic docket to investigate and adjust rates for 2018 tax savings by Office of Public
Counsel to address
the potential rate impacts on regulated electric, gas, water, and wastewater
utilities.
A similar law, the Tax Reform Act of 1986, became effective in 1987. In Docket No.
19860184-PU, the Commission found
that it was appropriate to allow water
and wastewater utilities
to recover the tax on CIAC from the
contributor, including the tax
associated with the additional tax that
would also become
taxable income. For those utilities
that were approved
to collect the gross-up on CIAC, the gross-up amounts collected were held subject to refund and were evaluated on a case-by-case basis as to whether any refunds were subsequently required.
On March 29, the utility filed
revised tariffs (Attachment A) to gross-up cash service availability charges
and property contributions to recover the federal and state corporate income
taxes associated with those contributions. According to the utility, Indiantown
could risk loss of its opportunity to earn a reasonable return on its property
used and useful in the public service if it is not allowed to collect the tax
impact on receipt of CIAC.
The revised tariffs
recognize that, for depreciable property, depreciation expense is tax
deductible and the Utility’s tax liability will be reduced by the amount of
depreciation claimed for tax purposes. The revised tariff is mathematically the
same, regarding the gross-up for taxes, as the tariff approved by the
Commission following the hearing in Docket No. 860184-PU.
Because the revised tariffs accurately depict the Utility’s expected tax
expense associated with CIAC, staff believes no further Commission action would
be required once the gross-up formula has been approved. Staff notes that in
Order No. 23541 in Docket No. 860184-PU, the Commission required a reconciliation
of CIAC tax collected to taxes paid. Staff does not believe a reconciliation of
tax collected on CIAC to taxes paid should be required for two reasons. First,
the proposed formula more appropriately tracks the potential tax liability
associated with the collection of CIAC. Second, expenses approved in base rates
are not typically subject to reconciliation. For example, the utility’s revenue requirement
is grossed-up for expected taxes and expected tax expense is included in rates
but there is no after-the-fact proceeding to reconcile taxes actually paid with
tax expense allowed in case the Utility experienced a loss and paid no taxes.
Consequently, staff believes no after-the-fact proceeding is warranted to
compare allowed tax expense for CIAC to actual tax expense and, therefore, no
corporate undertaking is necessary.
Based on the above, staff recommends that the revised
tariff should be approved. The approved gross-up
charges should be effective for connections made on or after the stamped
approval date on the tariff sheets. The utility should provide notice to all
persons in the service areas included in the application who have filed a
written request for service or who have been provided a written estimate for
service within the 12 calendar months prior to the month the application was
filed. The utility should provide proof of noticing within 10 days of rendering its approved notice.
Issue 2:
Should this docket be closed?
Recommendation:
If a protest is filed by a substantially
affected person within 21 days of issuance of the order, the revised tariff
should remain in effect, with any revenues held subject to refund, pending
resolution of the protest. If no timely protest is filed, the order
should become final upon the issuance of a consummating order. However,
the docket should remain open to allow staff to verify that the appropriate
notice has been filed by the Utility and approved by staff. Once the utility
has provided proof of noticing, the docket should be closed administratively. (Crawford)
Staff Analysis:
If a protest is filed by a substantially
affected person within 21 days of issuance of the order, the revised tariff
should remain in effect, with any revenues held subject to refund, pending
resolution of the protest. If no timely protest is filed, the order
should become final upon the issuance of a consummating order. However,
the docket should remain open to allow staff to verify that the appropriate
notice has been filed by the Utility and approved by staff. Once the utility
has provided proof of noticing, the docket should be closed administratively.
