Table of Contents
Issue Description Page
Case Background. 3
4B Appropriate disposition of the
protected excess deferred taxes. 4
5B Appropriate disposition of the
unprotected excess deferred taxes. 7
21 Should FPUC be allowed to retain the
tax benefits arising from the TCJA rate reduction. 10
24 Should this docket be closed. 12
Case Background
The
Florida Public Service Commission opened Docket No. 20180051-GU on February 23,
2018, to consider the tax impacts affecting Florida Public Utilities Company –
Gas, (FPUC or Company) resulting from the passage of the Tax Cuts and Jobs Act
of 2017 (TCJA). FPUC is a wholly owned subsidiary of Chesapeake Utilities
Corporation (CUC). CUC is also the parent of CUC – Florida (Chesapeake). FPUC –
Indiantown and FPUC – Fort Meade are separate divisions of FPUC. Docket Nos.
20180052-GU, 20180053-GU and 20180054-GU were opened to address the tax impacts
affecting Indiantown, Fort Meade and Chesapeake.
On
April 25, 2018, an Order Establishing Procedure for the docket was issued, in
which controlling dates were set for filing testimony, exhibits, and discovery.
On May 31, 2018, the discovery procedures and controlling dates were modified.
Order No. PSC-2018-0412-PCO-GU, issued on August 20, 2018, was the second order
revising the order establishing procedure that allowed the Company to file revised
and supplemental testimony, and extended testimony filing dates for Commission
staff and the Office of Public Counsel (OPC). OPC is the only intervenor in this
docket.
The prehearing
conference was held on November 5, 2018. On Monday, November 9, 2018, OPC filed
an Agreed Motion to Consolidate for Purposes of Hearing Docket Nos.
20180051-GU, 20180052-GU, 20180053-GU and 20180054-GU. On November 16, 2018, Prehearing
Order No. PSC-2018-0535-PHO-GU was issued and reflected proposed stipulations
between FPUC and OPC on most of the issues. Order No. PSC-2018-0555-PCO-GU,
issued on November 20, 2018, consolidated the four dockets for the purpose of
the hearing. The hearing was held on November 27, 2018. At that time, the
Commission voted to accept and approve the parties’ proposed stipulations. This
recommendation addresses the remaining contested issues. The Commission has
jurisdiction pursuant to Sections 366.04, 366.041, 366.06, and 366.07, Florida
Statutes.
Discussion
of Issues
Issue 4B:
What is the appropriate disposition of the protected
excess deferred taxes?
Recommendation:
FPUC should be allowed to retain the annual
amortized amount of the protected excess deferred tax balance less the
unprotected excess deferred tax amortization, for an annual net amount of
$537,174. (Hightower, D. Buys, Cicchetti)
Position of the Parties
FPUC:
FPUC should be
allowed to retain the estimated amortized deferred balance less the unprotected
deferred tax amortization, thereby fulfilling the purpose of the TCJA by
allowing FPUC to continue making capital improvements and potentially delaying
a rate proceeding.
OPC:
The Company
should not be allowed to retain the amount of the protected excess accumulated
deferred income tax (ADIT). The protected excess ADIT should be reversed using
an Average Rate Assumption Method (“ARAM”) if the utility has the available
information to calculate the ARAM, or via another appropriate method that
complies with normalization requirements, if the Company does not have the
information to compute the ARAM.
Staff Analysis:
PARTIES’
ARGUMENTS
FPUC
FPUC argued that the Company is projected to be earning at
the bottom of its allowable range of return on equity. (FPUC
BR 9; TR 98) In light of the Company’s earning posture, FPUC argued that it
should be allowed to retain the estimated annual amortized amount of the
protected excess accumulated deferred income tax (ADIT) balance of
approximately $844,461, less the unprotected deferred tax amortization annual
amount of $307,287, for an annual net amount of $537,174. (FPUC BR 10; TR 100)
FPUC argued that the ability to retain the net tax amount will provide the
Company with further opportunity to earn within its authorized range of return
on equity (ROE), while also enabling the Company to provide service at present
rates for a longer period, to continue making necessary capital investments,
and to delay a costly rate proceeding. (FPUC BR 10; TR 100) FPUC argued that if
it is allowed to retain all of the tax amounts as proposed, the Company’s
return on equity for 2019 is projected to be 8.67 percent, which is below FPUC’s
allowed range of return on equity of 9.85 to 11.85 percent. (FPUC
BR 12; EXH 10, BSP 00043; EXH 12, BSP 00067) FPUC also argued that if it is
required to reduce its base rates by $537,174 for the net excess deferred tax amount,
its projected ROE would be even lower, at 8.29 percent. (FPUC BR 12, EXH 12,
BSP 00064)
OPC
OPC argued that the Commission
should reject FPUC’s proposal to retain the tax amount associated with the
protected deferred taxes as being unjust, unfair and unreasonable, and should
apply the estimated annual tax savings of $537,174 for the benefit of customers
in the form of a rate reduction. (OPC BR 1; TR 232, 241) OPC also argued that
the tax savings represents money that was previously paid by FPUC’s customers, and
that the money therefore belongs to those customers and should be returned to
them. (OPC BR 5) Finally, OPC argued that the TCJA did not contain any
language, express or otherwise, that suggests an intended goal of the TCJA was
to allow a utility to keep tax savings so as to continue making capital
investments, while potentially delaying the need for a rate proceeding. (OPC BR
5; TR 184)
ANALYSIS
FPUC and OPC agree on the amount of the protected excess
deferred tax of $21,955,992, amortized over 26 years, resulting in an annual tax
amount of $844,461. (TR 100, 232) Where the parties differ is how the
disposition of the tax savings should be resolved. OPC argued that the tax savings
should be returned to FPUC’s customers regardless of the Company’s earnings
posture to satisfy the intent of the TCJA. (OPC BR 10) FPUC proposed to retain
the tax savings which, it argued, will benefit its customers by enabling the
Company to delay a rate case and place downward pressure on the requested rate
increase in its next rate case. (FPUC BR 11)
OPC witness Smith relied on a 1982 Florida Supreme Court
decision in Reedy Creek Utils. Co. v. Fla. Public Serv. Comm., 418 So.
2d 249, 254 (Fla. 1982), which stated, “[a] change in a tax law should no [sic]
result in a ‘windfall’ to a utility, but in a refund to the customer who paid
the revenue that translated into the tax saving.” (OPC BR 6; TR 235; EXH 17)
OPC argued that, by definition, the excess tax monies in FPUC’s possession are
a windfall to the Company that should be flowed back to the customers who paid
the taxes in rates. (OPC BR 7, 10) OPC pointed out during cross-examination of FPUC
witness Cassel that he admitted he did not provide in his testimony any
calculations or evidence to demonstrate what the Company’s projected earnings
would be if the tax savings were retained by the Company. (OPC BR 8-9; TR 182) However,
in response to a staff interrogatory, FPUC indicated that its forecasted ROE
for 2018 and 2019 would be 9.10 and 8.67 percent, respectively, if it were to
retain all the tax savings resulting from the TCJA. (EXH 12, BSP 00062, 00067)
FPUC noted that OPC witness Smith acknowledged that Reedy
Creek utility was in an over-earnings position at the time of the 1978 Tax Reform;
thus, the issue that ultimately came before the Florida Supreme Court in the Reedy
Creek case was a question of how much the utility would be required to
refund. (FPUC BR 14) The Commission had already determined that Reedy Creek
would have to provide a refund because it was over-earning. (FPUC BR 14, TR 308)
In the Reedy Creek decision, the Florida Supreme
Court acknowledged the Commission’s decision wherein the Commission stated its
position regarding a company’s over-earnings position:
Viewing the documents together with the testimony in
the record, it is clear that a utility would be required to refund revenues if
and only if it were earning in excess of the range of its authorized rate of
return. (EXH 17)
FPUC argued that OPC witness Smith's refusal to consider
FPUC's earnings posture in rendering his opinion of FPUC’s proposals to retain
some of the TCJA tax savings is contrary to prior Commission policy as
reflected in Order Nos. 8624 and 8624A, and overstates the applicability of the
Court's conclusions in the Reedy Creek case. (FPUC BR 14) As such, FPCU
contends OPC’s arguments on this point should be rejected and staff agrees with
the Company’s interpretation. (FPUC BR 14)
OPC maintained that FPUC witness Cassel’s interpretation
of the Reedy Creek decision mistakenly links the over-earnings posture
of the company in that case with the Court’s use of the term “windfall.” (OPC
BR 9) Staff disagrees with OPC’s argument. It is staff’s opinion that in the Reedy
Creek case, the utility was ordered to make a refund to its customers
because regulated utilities are not allowed to earn above the Commission
authorized range of ROE regardless of the cause, and therefore, any
over-earnings should be refunded to the customers. In Order No. 8624 the Commission
asserted, “It is the Commission’s responsibility to ensure they do not earn in
excess of a fair and reasonable return upon their investment.”
The record evidence demonstrates that FPUC is earning
below its allowed range of ROE. (FPUC BR 12; TR 102; EXH 15, BSP 000518) The
record also indicates that even with FPUC retaining all of the tax savings it
has requested, the Company will not earn above its authorized range of ROE.
(EXH 12, BSP 00062, 00067) Staff agrees with FPUC that a key factor in the Reedy
Creek case pertained to the utility’s earning posture whereby the utility
was required to make a refund because it was over-earning.
Staff agrees with FPUC’s argument that OPC's reliance upon
the Reedy Creek case is misplaced, and staff agrees with the Company’s
analysis. (FPUC BR 14) On cross-examination, OPC witness Smith conceded that
the Commission's orders underlying the Reedy Creek case, Order Nos. 8624
and 8624A, reflect that, in addressing the 1978 Tax Reform, the Commission
considered the circumstances of the utilities on a case-by-case basis, and only
required those utilities that were earning above the ceiling of their
Commission-authorized ROE range to refund the tax savings arising under the
1978 Tax Reform. (FPUC BR 14; TR 311-315)
CONCLUSION
Staff recommends that it is fair, just, and reasonable for
the Commission to consider the earnings position of the Company in its
decision. Reducing the base rates as recommended by OPC would result in a cash
flow reduction to the Company, put downward pressure on FPUC’s earnings, and
would accelerate the need for a full rate case sooner than it would otherwise
due to FPUC earning below its authorized range of ROE. Therefore, staff
recommends that FPUC be allowed to retain the estimated amortized protected deferred
tax balance, less the unprotected deferred tax amortization attributed to the
TCJA, for an annual savings of $537,174, because FPUC will not exceed its
authorized range of ROE.
Issue 5B:
What is the appropriate disposition of the
unprotected excess deferred taxes?
Recommendation:
FPUC should be allowed to retain the excess deferred
tax amount associated with the net acquisition adjustment of $6,518,569 amortized
over the life of the acquisition adjustment. Further, the unprotected deferred
tax amount of $3,072,874 should be amortized over 10 years and netted against
the protected excess deferred taxes of $21,955,922. (Hightower, D. Buys,
Cicchetti)
Position of the Parties
FPUC:
FPUC should be allowed to retain the deferred
tax liability associated with the net acquisition adjustment amortized over the
life of the acquisition adjustment and unprotected deferred tax asset amortized
over 10 years, netted against the protected excess deferred taxes.
OPC:
The Company should not be allowed to retain
the tax savings from the unprotected excess ADIT. The Unprotected excess ADIT
net asset of $3,072,874 should be amortized over 10 years at $307,287 per year.
Staff Analysis:
PARTIES’
ARGUMENTS
FPUC
FPUC argued that the Company is projected to be earning at
the bottom of its authorized range of return on equity.
(FPUC BR 9, TR 98) In light of the Company’s earning posture, FPUC argued that
it should be allowed to retain the estimated annual amortized amount of the
protected excess accumulated deferred tax balance of approximately $844,461,
less the unprotected deferred tax amortization annual amount of $307,287, for
an annual net amount of $537,174. (FPUC BR 10; TR 100) FPUC also argued that
the annual unprotected excess deferred tax of $298,560 associated with the
acquisition adjustment should be applied to reduce the remaining grossed up balance
of the unamortized acquisition adjustment of $6,518,569. (FPUC BR 11; TR 99)
FPUC contended that this accounting treatment will facilitate a more
expeditious reduction of the acquisition adjustment balance. (FPUC BR 11; TR
99) FPUC argued that the ability to retain the net tax savings will provide the
Company with further opportunity to earn within its authorized range of ROE,
while also enabling the Company to charge current rates for a longer period,
continue making necessary capital investments, and delay a costly rate proceeding.
(FPUC BR 10; TR 100) FPUC argued that if it is allowed to retain all of the tax
savings as proposed, the Company’s return on equity for 2019 is projected to be
8.67 percent. (FPUC BR 12; EXH 12, BSP 00067) FPUC also argued that if it is
required to reduce its base rates by $537,174 for the net excess deferred tax amount,
its projected ROE would be 8.29 percent. (FPUC BR 12; EXH 12, BSP 00064) FPUC’s
authorized range of ROE is 9.85 to 11.85 percent.
(FPUC BR 12; EXH 10, BSP 00043)
OPC
OPC agreed with FPUC that the
estimated annual protected excess ADIT amount amortization of $844,461, less
the estimated annual unprotected excess ADIT amortization of $307,287, produces
an estimated annual net amount of $537,174. (OPC BR 6; TR 234) However, OPC
argued this net amount of $537,174 should be returned to customers via a base
rate reduction, and not retained by the Company. (OPC BR 6; TR 234) OPC argued
that in the recent cases before the Commission that address the tax savings due
to the TCJA, the electric and gas utilities have agreed to refund the monies to
their customers, or to apply them in a manner that directly benefits their
customers (e.g., pay off storm costs in lieu of utilizing a storm surcharge). (OPC
BR 7; TR 318) OPC further contended that FPUC is currently earning a positive
return, and that FPUC will continue to earn within its authorized range without
the tax savings being retained by the Company. (OPC BR 7; TR 98) OPC argued
that although FPUC claims that retaining the tax savings would not put the
Company in an over-earning position, FPUC witness Cassel could not point to any
calculations or evidence that was offered by FPUC to demonstrate where FPUC’s
projected earnings level would be if the tax savings were retained. (OPC BR 7, TR
103, 182) OPC contended that the net amount of the protected and unprotected
excess ADIT that is not related to the acquisition adjustment of $537,174
should be applied for the benefit of the customers as a rate reduction. (OPC BR
7, TR 241) OPC argued that to do otherwise would be unjust, unfair, and
unreasonable to FPUC’s customers. (OPC BR 7)
ANALYSIS
FPUC witness
Cassel testified that there are two distinct components of the unprotected excess
deferred tax balance. (TR 99) The first component is a deferred tax amount
associated with the acquisition adjustment. (TR 99) This grossed up balance is
$6,518,569, which the Company requested be included with the net acquisition
adjustment and amortized at $298,560 per year, based on the remaining months of
amortization of the acquisition adjustment. (TR 99) The second component is a
net unprotected excess deferred tax amount of $3,072,874. (TR 99) The Company
requested this excess deferred tax amount be amortized over 10 years at
$307,287 per year. (TR 99) The Company requested that the amortization detriment
be netted against the annual protected tax amount and retained by the Company.
(TR 99)
Staff recommends that this treatment is appropriate because
the Company is not earning above its authorized range of ROE. OPC witness Smith
agreed that the net annual amortization of the protected and unprotected excess
ADIT that is not associated with the acquisition adjustment estimated by the
Company is approximately $537,174 annually. (TR 241) Witness Smith further testified
that the TCJA savings should be applied for the benefit of customers as a permanent
base rate reduction, rather than being retained by FPUC. (TR 241) Staff disagrees
with OPC witness Smith because the record demonstrates that the Company is not projected
to be in an over-earnings position even if it is allowed to retain all the tax
savings. (EXH 12, BSP 00067) Staff additionally finds the Company’s proposal
appropriate because the record shows that OPC did not take issue with FPUC’s
proposed disposition of the unprotected deferred tax amount associated with the
acquisition adjustment. (TR 233-234)
CONCLUSION
Staff recommends that it is fair, just, and reasonable for
the Commission to consider the earnings position of the Company in its
decision. Therefore, for the reasons discussed in Issue 4B and the
aforementioned analysis, staff recommends FPUC be allowed to retain the excess
deferred tax amount associated with the net acquisition adjustment of
$6,518,569 amortized over the life of the acquisition adjustment. Further, the
unprotected deferred tax amount of $3,072,874 should be amortized over 10 years
and netted against the protected excess deferred taxes of $21,955,922.
Issue 21:
Should FPUC be allowed to retain the tax benefits
arising from the TCJA rate reduction, excluding the 2018 GRIP savings, as well
as the estimated Deferred Tax portion of the Protected and estimated
Unprotected Deferred Tax regulatory asset that are not associated with the
acquisition adjustment?
Recommendation:
Yes, FPUC should be allowed to retain the tax savings
arising from the TCJA rate reduction, excluding the 2018 GRIP savings, as well
as the estimated net deferred tax savings of the protected and unprotected deferred
tax regulatory amount not associated with the acquisition adjustment (Hightower,
D. Buys, Cicchetti)
Position of the Parties
FPUC:
Yes, FPUC should be allowed to retain the tax
benefits arising from the TCJA rate reduction, excluding the 2018 GRIP savings,
as well as the estimated Deferred Tax portion of the Protected and estimated
Unprotected Deferred Tax regulatory asset including those that are associated
with the acquisition adjustment.
OPC:
No, FPUC should not be allowed to retain the
tax savings arising from the TCJA rate reduction.
Staff Analysis:
PARTIES’
ARGUMENTS
FPUC
FPUC
argued that even if the Company is allowed to retain the tax savings as it has
requested, FPUC's ROE for 2019 is projected to be only 8.67 percent, which is
below its authorized range of 9.85 percent to 11.85 percent. (FPUC BR 12; EXH 12,
BSP 00067) The Company also contended that if it is required to reduce its base
rates in 2019 by $537,174 for the net excess deferred tax amount, its projected
ROE will be only 8.29 percent. (FPUC BR 12; EXH 12, BSP 00064) FPUC also argued
that if it is required to refund the $1,141,134 in annual tax savings, along
with the gas reliability infrastructure program (GRIP) tax savings it has
already proposed to refund, its ROE is projected to be even lower at only 7.85
percent. (FPUC BR 12; EXH 12, BSP 00065) Also, if FPUC is not allowed to retain
any of the tax savings, FPUC projected that its 2019 ROE would be 7.74 percent.
(FPUC BR 12; EXH 12, BSP 00064).
FPUC contended that the Company is currently under-earning.
(TR 102; EXH 15, BSP 000518) FPUC argued that earning below its authorized
range would drives the Company into a rate case or force it to deal with severe
financial duress. (FPUC BR 12) The Company opined that such a result would be
contrary to the stated intent of those that sponsored the TCJA. (FPUC BR 13) Although
retention of the savings as proposed by the Company will not enable the Company
to earn above its authorized range, it will allow it to earn much closer to its
ROE. (TR 102) This will ensure that the Company remains well-positioned
financially pending its next rate case so that it can continue to provide safe and
reliable service to its customers. (FPUC BR 13)
OPC
OPC argued that FPUC is not currently under-earning, and is projected to earn
within its authorized range - albeit at the lower end of the range for the
foreseeable future. (OPC BR 8; TR 98) OPC further argued that FPUC did not
offer any evidence or provide any calculations indicating where FPUC would be
earning relative to its authorized earnings range if the Commission were to
allow the Company to keep the tax savings. (OPC BR 8; TR 182) OPC contended
that even though the Company asserts that it could avoid a potential rate case
if the tax savings was retained, a close examination of witness Cassel’s
testimony demonstrates no rate case will be avoided. (OPC BR 9) Witness Cassel
acknowledged that FPUC was already earning within its authorized earnings
range. (TR 98) Furthermore, OPC argued that none of the testimony or exhibits
submitted by FPUC included any evidence indicating a rate case by the Company
was pending. (OPC BR 9) Finally, OPC argued that the tax savings resulting from
the TCJA is money that belongs to the Company’s customers and should be
returned to them as a permanent base rate reduction. (OPC BR 10; TR 241)
ANALYSIS
FPUC witness Cassel testified
that the estimated impact of the federal income tax rate change from 35 percent
to 21 percent for FPUC is approximately $2,181,275. (TR 98, 180) Excluding
$1,040,141 of tax savings related to FPUC’s GRIP, the incremental amount of tax
savings is $1,141,134. (TR 98; EXH 10, BSP 00047) In Issues 9 and 22, FPUC and
OPC stipulated to return the tax savings related to GRIP back to the customers.
(FPUC BR 3, 6) Further, FPUC proposed to retain the net savings annual amount
of $537,174 related to the protected and unprotected excess deferred tax saving
($844,461 for the protected excess ADIT less $307,287 for the unprotected
excess ADIT). (TR 100) A second component of the unprotected deferred tax amount
is associated with the acquisition adjustment. (TR 99) FPUC proposed to reduce
the amortization amount for the remaining life of the acquisition adjustment to
$298,560 per year. (FPUC BR 9; TR 99) OPC witness Smith did not object to
FPUC’s proposal for disposition of the tax savings associated with the
acquisition adjustment. (OPC BR 6; TR 233) It is staff’s opinion that the record
evidence demonstrates that FPUC is earning below the bottom of its authorized
ROE. (TR 98; EXH 15, BSP 000518) The record also indicates that even with FPUC
retaining all of the tax savings it has requested, the Company will not earn
above its authorized range of ROE. (EXH 12, BSP 00062) Therefore, it is staff’s
opinion that FPUC should be allowed to retain the tax savings.
CONCLUSION
Staff agrees with FPUC that the
Company should be allowed to retain the tax savings arising from the TCJA rate
reduction, excluding the 2018 GRIP savings, as well as the estimated net
deferred tax saving of the protected and unprotected deferred tax amount not associated
with the acquisition adjustment.
Issue 24:
Should this docket be closed?
Recommendation:
Yes, this docket should be closed after the time for
filing an appeal has run. (Dziechciarz, DuVal)
Position of the Parties
FPUC:
Yes.
OPC:
No.
Staff Analysis:
PARTIES’
ARGUMENTS
FPUC
None provided.
OPC
None Provided.
ANALYSIS
Upon issuance of an order determining the tax impacts
associated with the Tax Cuts and Jobs Act of 2017 for Florida Public Utilities
Company, this docket should be closed after the time for filing an appeal has
run.
