Table of Contents
Issue Description Page
Case Background. 3
4B Disposition of the protected excess
deferred taxes. 4
5B Disposition of the unprotected excess
deferred taxes. 8
17 Should Indiantown be allowed to
recover any detrimental impact associated with the TCJA through the ECCR
clause. 11
18 Should Indiantown be allowed to
retain and amortize the benefit associated with the Protected Deferred Tax
liabilities. 14
19 Should Indiantown be allowed to
retain and amortize the benefit associated with the Unprotected Deferred Tax
liabilities. 16
21 Should this docket be closed. 18
Case
Background
The
Florida Public Service Commission opened Docket No. 20180052-GU on February 23,
2018, to consider the tax impacts affecting Florida Public Utilities Company –
Indiantown Division (Indiantown or Company), resulting from the passage of the
Tax Cuts and Jobs Act of 2017 (TCJA). Indiantown is a subsidiary of Chesapeake
Utilities Corporation (CUC). CUC is the parent of Chesapeake Utilities
Corporation – Florida (Chesapeake) and Florida Public Utilities Company (FPUC).
Indiantown and Fort Meade are separate divisions of FPUC. Docket Nos.
20180051-GU, 20180053-GU, and 20180054-GU were opened to address the tax
impacts affecting FPUC, Fort Meade, and Chesapeake.
On April 25,
2018, an Order Establishing Procedure for the instant 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 the
docket.
The prehearing
conference was held on November 5, 2018. On November 9, 2018, OPC filed an Agreed
Motion to Consolidate for Purposes of Hearing in Docket Nos. 20180051-GU, 20180052-GU,
20180053-GU and 20180054-GU. On November 16, 2018, the Prehearing Order was
issued. The Order reflected proposed stipulations between Indiantown and OPC on
most of the issues. Order No. PSC-2018-0555-PCO-GU, issued on November 20,
2018, consolidated the four dockets for purposes 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:
Indiantown
should be allowed to retain the net amortized amount of the protected excess deferred
tax balance of $7,862. (Hightower, D. Buys, Cicchetti)
Position of the Parties
INDIANTOWN:
Indiantown should be allowed to retain the amortized
deferred balance less the unprotected deferred tax amortization, thereby
fulfilling the purpose of the TCJA by allowing Indiantown to continue making
capital improvements and potentially delaying a rate proceeding.
OPC:
Indiantown should not be allowed to retain the
benefit of the protected excess 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 Indiantown does not
have the information to compute the ARAM.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
Indiantown
argued that given its earnings posture, the Company should be allowed to retain
the protected excess deferred tax amount of $8,510, less the unprotected excess
deferred tax amount of $648, for a net tax savings of $7,862. (Indiantown BR 9)
Indiantown argued that the ability to retain this amount will provide the
Company with the opportunity to earn closer to its authorized range of return
on equity (ROE), while also enabling the Company to provide service at current
rates for a longer period, to continue making necessary capital investments,
and to delay a costly rate proceeding. (Indiantown BR 9) Indiantown argued that
it is currently under-earning and even if it is allowed to retain the tax
benefits it has requested, the Company’s ROE for 2019 is projected to be
negative 21.85 percent as opposed to a negative 22.58 percent. (Indiantown BR
10-11; EXH 9, BSP 00048)
Indiantown
also argued that while retention of the net tax savings as proposed by
Indiantown will not enable the Company to earn within its authorized range, it
will improve the current situation. (Indiantown BR 11) This will ensure that
the Company remains financially stable pending the next rate case so that it
can continue to provide safe and reliable service to its customers. (Indiantown
BR 11, TR 123) Indiantown contended that its proposal reflects the more reasonable
approach to addressing the disposition of the tax savings and provides the
greatest overall benefit for the Company and its customers. (Indiantown BR 13)
OPC
OPC argued that instead of
retaining the tax savings as proposed by Indiantown, the tax savings should be
returned to the customers via a base rate reduction. (OPC BR 2, 8) OPC
contended that Indiantown has knowingly been earning below its authorized range
since 2013, and has had ample opportunity to file for a base rate increase.
(OPC BR 2) OPC argued that the TCJA’s effect on the excess ADIT amount resulted
in ratepayers making overpayments to Indiantown. (OPC BR 8) Like any
overpayment, the protected excess deferred taxes should be refunded as rapidly
as possible under the IRS regulations to ensure only fair, just, and reasonable
rates are paid by ratepayers. (OPC BR 8) Therefore, OPC argued all of the 2018
income tax savings should be applied for the benefit of its customers through a
base rate reduction. (OPC BR 2)
ANALYSIS
The Parties agree
on the amount of the amortization of the protected excess accumulated deferred
income taxes of $7,862. (TR 253-254; TR 120-121) In its brief, Indiantown
reiterated there is no debate between the Parties regarding the amount of the
protected excess deferred taxes, nor is there any debate regarding Indiantown's
earnings posture. (Indiantown BR 7; TR 252) Witness Cassel testified that
retention of the net protected annual tax savings of $7,862 will potentially
provide the Company with an opportunity to earn a return closer to its
authorized range, to continue making capital investments, and will enable
Indiantown to charge current rates for a longer period of time, thereby
delaying a rate case proceeding. (Indiantown BR 9; TR 121-122) Witness Cassel
also testified that retention of the tax savings would potentially enable the
Company to continue its interim consolidation efforts pending its next rate
case, while also placing downward pressure on any rate increase sought in its
next rate case. (Indiantown BR 10; TR 121-123)
OPC witness
Smith relied on the 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 255; EXH 18) OPC argued that, by definition, the
excess tax monies in Indiantown’s possession are a windfall to the Company that
should be flowed back to the customers who paid the taxes through rates. (OPC
BR 6) In response to a staff interrogatory, Indiantown indicted that its
forecasted ROE for 2019 would still be negative 19.43 percent, even if it were
to retain all the tax savings resulting from the TCJA. (EXH 11, BSP 00063)
In its
brief, Indiantown pointed out that OPC witness Smith also acknowledged that Reedy
Creek 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 Reedy Creek would be required to
refund. (Indiantown BR 12-13; TR 310-311) The Commission had already determined
that Reedy Creek would have to make a refund, because it was over-earning.
(Indiantown BR 12-13, TR 314-315) 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)
OPC
maintained that Indiantown 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 6) While OPC
conceded that the decision in Reedy Creek was driven by the over-earning
posture of the utility, OPC argued the foundation of the analysis was based on
the cause of the increase in earnings, not on the extent of the company’s
earnings. (OPC BR 6; TR 314-315) 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 [public
utilities] do not earn in excess of a fair and reasonable return upon their
investment.”
In its
brief, Indiantown contended the Company’s approach is not inconsistent with Reedy
Creek or prior Commission practice as opined by OPC witness Smith.
(Indiantown BR 12-13; TR 314-315) Witness Cassel testified that Reedy Creek was
in an overearnings position, which led to a required refund, while Indiantown
is under-earning and should be able to retain the protected excess deferred tax
benefit. (Indiantown BR12-13; TR 308) Staff agrees with Indiantown that a key
factor in the Reedy Creek case pertained to the utility’s earnings
posture whereby the utility was required to make a refund because it was
over-earning.
In his testimony, Indiantown witness Cassel explained that
permitting the Company to retain some of the tax savings would allow immediate
financial support to the Company, thereby enabling it to continue to provide
reliable service to its customers. (Indiantown BR 11-12; TR 123) Witness Cassel
testified that allowing the Company to retain some of the tax savings will also
delay the additional expense, and likely rate increase associated with a full
rate proceeding, which OPC's witness Smith conceded would be costly.
(Indiantown BR 12; TR 121-123, 306) The Company argued that Indiantown is
currently earning below its authorized ROE range, and that retention of the net
protected excess deferred tax amount will improve the Company's earnings
posture, but will not cause it to exceed its authorized range. (Indiantown BR
13; EXH 9, BSP 00048) The authorized range of ROE for Indiantown is 10.50
percent to 12.50 percent. (EXH 9, BSP 00044) Indiantown is currently
earning a negative return which is well below its authorized ROE range. (EXH 9,
BSP 00045) Staff agrees with Indiantown that the Company is currently earning
below its authorized ROE and that retention of the net protected tax savings
will improve the Company's earnings posture and will not cause it to exceed its
authorized range. (TR 121-122) Further, staff agrees with Indiantown that a
reduction in the Company’s rates as recommended by OPC would put additional
downward pressure on Indiantown’s earnings and reduce the earned ROE on a
prospective basis, which would produce an unreasonable outcome. (TR 122; EXH 11,
BSP 00063)
Indiantown
argued in its brief that witness Smith's refusal to consider Indiantown's
earnings posture in rendering his opinion on Indiantown’s proposals to retain
some of the TCJA benefits 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. (Indiantown BR 13) As such,
Indiantown contended, and staff agrees, OPC’s arguments on this point should be
rejected. (Indiantown BR 13)
Staff agrees with Indiantown’s
argument that OPC's reliance upon the Reedy Creek case is misplaced.
(Indiantown BR 12) On cross-examination, 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. (Indiantown BR 12-13; TR 310-315)
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 base rates as recommended by OPC would
result in a cash flow reduction to the Company, put further downward pressure
on Indiantown’s earnings, and accelerate the need for a full rate case sooner
due to Indiantown earning well below its authorized range of ROE. Therefore,
staff recommends that Indiantown be allowed to retain the net amortized amount
of the protected excess deferred tax balance of $7,862.
Issue 5B:
What is the appropriate disposition of the
unprotected excess deferred taxes?
Recommendation:
Indiantown should
be allowed to retain the unprotected excess deferred tax balance of $6,484,
amortized over 10 years at $648 per year, netted against the
protected excess deferred tax balance. (Hightower, D. Buys, Cicchetti)
Position of the Parties
INDIANTOWN:
Indiantown
should be allowed to retain the deferred tax liability associated with the
unprotected deferred tax asset amortized over 10 years, netted against the
protected excess deferred taxes.
OPC:
Indiantown should
not be allowed to retain the benefit of the unprotected excess ADIT. The
unprotected excess ADIT net asset of $6,484 should be amortized over 10 years
at $648 per year.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
Indiantown
contended that it has an unprotected excess deferred tax asset recorded on its
books with an estimated balance of $6,484. (Indiantown BR 8) The Company
requested this deferred tax asset be amortized over 10 years at $648 per year.
(Indiantown BR 8-9; TR 120-121) The Company proposed retaining the protected
excess deferred tax liability of $8,510, less the unprotected excess deferred
tax asset of $648, for a net tax savings of $7,862. (Indiantown BR 9; TR 121-122)
Indiantown argued that given its earnings posture, the Company should be
allowed to retain the net tax savings of $7,862. (Indiantown BR 9) Indiantown
argued that the ability to retain this amount will provide the Company with the
opportunity to earn closer to its range of return on equity (ROE), while also
enabling the Company to provide service at current rates for a longer period,
to continue making necessary capital investments, and to delay a costly rate
proceeding. (Indiantown BR 9)
Indiantown
also argued that while retention of the net tax savings as proposed by
Indiantown will not enable the Company to earn within its authorized range, it
will improve the current situation. (Indiantown BR 11) This will ensure that
the Company remains financially stable pending the next rate case so that it
can continue to provide safe and reliable service to its customers. (Indiantown
BR 11-12; TR 123) Indiantown contended that its proposal reflects the more
reasonable approach to addressing the disposition of the tax savings and
provides the greatest overall benefit for the Company and its customers.
(Indiantown BR 13)
OPC
OPC pointed out it its brief that
the unprotected excess deferred tax asset of $6,484 was one the three impacts
of the TCJA. (OPC BR 8) OPC argued that instead of retaining the proceeds as
Indiantown has proposed, these tax savings should be returned to the ratepayers
as soon as allowable under the IRS guidelines. (OPC BR 8) OPC argued that
Indiantown witness Cassel affirmed that the TCJA does not contain any language,
express or otherwise, suggesting an intended goal of the TCJA was to allow a company
to keep tax savings in order to continue making capital investments or to avoid
potential rate proceedings.
(OPC BR 9; TR 184) OPC maintained that the TCJA’s effect on the Company results
in Indiantown’s customers making overpayments which create excess accumulated
deferred income taxes. (OPC BR 9) OPC argued that like any overpayment, the
unprotected excess deferred taxes should be refunded as rapidly as possible to
avoid intergenerational inequity and to ensure only fair, just, and reasonable
rates are paid by Indiantown’s ratepayers. (OPC BR 9-10)
ANALYSIS
Both Indiantown and OPC agreed on the unprotected excess deferred
tax balance of $6,484, and that it should be amortized annually over 10 years. (TR
121, 251-252) Indiantown witness Cassel testified that the Company’s under-earnings
posture necessitates the Company’s retention of the unprotected excess deferred
tax amount arising from the TCJA. (Indiantown BR 9-11; TR 121-122) Indiantown
witness Cassel also testified that permitting the Company to retain some of the
tax savings would allow immediate financial support to the Company, thereby
enabling it to continue to provide safe and reliable service to its customers.
(Indiantown BR 12; TR 121-122) Retention of the unprotected excess deferred
income tax amount will potentially provide the Company with an opportunity to
earn a reasonable return, to continue making capital investments, and to enable
Indiantown to charge current rates for a longer period of time, thus, delaying
a rate case proceeding. (Indiantown BR 9-10; TR 121-122) Witness Cassel explained that if the Company is allowed to retain
the net deferred tax savings of $7,862, the Company would be able to delay a
rate case and continue its interim consolidation efforts, and to place downward
pressure on the rate increase amount that the Company would be seeking in its
next rate case. (Indiantown BR 10, TR 121-122)
In its brief, OPC reiterated its argument as articulated in Issue
4B, based on the Reedy Creek Florida Supreme Court case, that, “[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 9) OPC further argued that the TCJA’s effect on Indiantown
results in the customers making overpayments, and like any overpayment, the
unprotected excess deferred taxes should be refunded to avoid intergenerational
inequity and to ensure only fair, just, and reasonable rates are paid by the
Company’s customers. (OPC BR 9-10)
As discussed in Issue 4B, the record evidence demonstrates that
Indiantown is earning a negative return well below its authorized range of
return on equity. (EXHs 9, 11, 19) In response to a staff interrogatory,
Indiantown provided a calculation of its projected ROE of negative 22 percent
“with tax savings recognized.” (EXH 11, BSP 00061) Staff agrees with Indiantown’s
contention that its approach is not inconsistent with the Reedy Creek decision
or prior Commission practice as acknowledged by OPC witness Smith. (Indiantown
BR 12-13; TR 314-315) In staff’s opinion, Indiantown made a compelling argument
that regulatory efficiency supports allowing the Company to retain the annual
tax savings of $648 associated with the unprotected excess deferred accumulated
taxes, which would be netted against the annual protected excess deferred
accumulated tax amount of $8,510, for a net tax savings of $7,862.
Staff concurs that Indiantown is currently earning well below its
authorized ROE range, and retention of the net protected excess ADIT benefit
will improve the Company's earnings posture, but will not cause it to exceed
its authorized range of ROE. (Indiantown BR 10-11; TR 121-122, 190-191)
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 base rates as recommended by OPC would
result in a cash flow reduction to the Company, put further downward pressure
on Indiantown’s earnings, and accelerate the need for a full rate case sooner
due to Indiantown earning well below its authorized range of ROE. Therefore,
staff recommends that Indiantown should be allowed to retain the unprotected
excess deferred tax balance of $6,484, amortized over 10 years at $648 per
year, netted against the protected excess deferred tax balance.
Issue 17:
Should Indiantown be allowed to recover any
detrimental impact associated with the corporate income tax rate change
implemented by the TCJA? If so, what amount, and should Indiantown be allowed
to recover such amount through the Energy Conservation Cost Recovery (ECCR)
clause?
Recommendation:
No,
Indiantown should not be allowed to recover from its customers an alleged
detrimental impact associated with the corporate income tax rate change
implemented by the TCJA. (Hightower, D. Buys, Cicchetti, Coston)
Position of the Parties
INDIANTOWN:
Yes, Indiantown should be allowed to recover any
detrimental impact associated with the corporate income tax rate change
implemented by the TCJA. The amount Indiantown should be allowed to recover
through the ECCR clause is $54,096.
OPC:
No, Indiantown should not be allowed to
recover any detrimental impact associated with the corporate income tax rate
change implemented by the TCJA.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
Indiantown
argued that the change in the corporate income tax rate from 35 percent to 21
percent results in a tax detriment of approximately $54,096. (Indiantown BR 8;
TR 119) Indiantown argued that the Company is projected to be earning at the
bottom of the earnings range utilized for Indiantown's surveillance reporting
purposes. (Indiantown
BR 8; TR 119) Indiantown argued that approval to recover the tax detriment will
provide the Company with an opportunity to preserve or improve its current
earnings posture, thereby potentially deferring a future rate case. (Indiantown
BR 8) The Company argued that such regulatory efficiency will extend rate
stability and be more consistent with the stated purpose outlined by the tax
bill’s sponsor, Congressman Brady, to provide tax relief for workers, families,
and job creators. (Indiantown BR 8) Indiantown acknowledged that approval of
the Company’s proposal to recover the tax detriment is at the discretion of the
Commission. (Indiantown BR 8)
OPC
OPC argued
that a tax detriment is not suffered directly by Indiantown but is suffered, if
at all, by Indiantown’s parent company, CUC, through its consolidated tax
return. (OPC BR 10; TR 213-215) OPC contended that witness Cassel admitted during
cross-examination that the taxes at issue here are already part of current base
rates. (OPC BR 10; TR 189) Further, OPC argued that the fallacy of Indiantown’s
proposed treatment of the putative tax detriment is demonstrated by inverting
the effects of the TCJA. (OPC BR 10) If, instead of a detriment to the parent
company’s consolidated tax return, as purported here, the TCJA resulted in a tax
benefit on the parent company’s consolidated tax return, Indiantown would not
be requesting to include said tax benefit in its rate base. (OPC BR 10)
ANALYSIS
Indiantown
projects to have negative operating income for 2018 and has identified an
annual net tax detriment of $54,096 based on its pro forma surveillance report.
(TR 119) Indiantown contended that the change in the corporate income tax rate
from 35 percent to 21 percent results in a tax detriment of approximately
$54,096 for the Company. (Indiantown BR 8; TR 119) Witness Cassel testified
that Indiantown’s purpose for recovering the tax detriment is to address
incremental ongoing costs that have been incurred since the Company’s last rate
case in 2003. (Indiantown BR 8; TR 119)
The alleged
tax detriment is the result of Indiantown’s net operating loss (NOL) being
worth less at 21 percent than at 35 percent on CUC’s consolidated tax return.
(TR 213-214) Indiantown does not file its own Federal tax return, but instead
files a consolidated Federal tax return with its parent company, CUC. (TR 214) Consequently,
the “write off” on CUC’s books from Indiantown’s NOL is worth less to the
parent company due to the lower tax rate. (TR 214) Indiantown is requesting to recover
the loss of that tax deduction for its parent company through an increase of
$54,096 in its ECCR clause factors. (TR 119) However, witness Cassel confirmed
that regulated public company rates are set on a stand-alone basis, that is, as
if the regulated company is required to pay income taxes. (TR 214) The utility
rates charged to customers already include an allowance for income taxes in
base rates. (TR 189)
In staff’s
opinion, Indiantown is requesting to use a purported tax detriment on CUC’s
books to recover incremental costs in lieu of initiating a rate increase. Witness
Cassel explained in his direct testimony:
At present, the Company is not
over-earning. In fact, the Company is earning below its allowable range and is
projected to continue to do so in the foreseeable future. As such, the Company
should be allowed to recover this annual tax detriment through the Energy
Conservation Cost Recovery (“ECCR”) clause for purposes of addressing ongoing,
incremental costs that have been incurred since the company’s last base rate
increase, which was initiated in 2003. (TR 119)
As argued
by OPC, the tax detriment is not suffered directly by Indiantown, but is
suffered, if at all, by CUC through its consolidated tax return. (OPC BR 10; TR
213-215) Further, sufficient record evidence is lacking to support that the tax
detriment as proposed by Indiantown is a result of the TCJA on a stand-alone
basis. In staff’s opinion, recovery of a tax detriment or benefit by a
regulated company on behalf of its parent company is inconsistent with current
regulatory practice to align income tax expense on a stand-alone basis.
Regarding whether the Company should be allowed to collect
any detrimental impact through the ECCR clause, staff notes that the clause is
governed by Rule 25-17.015, F.A.C., which states that a utility “may seek to
recover its costs for energy conservation programs.” OPC witness Smith stated
that “[t]he estimated amount of the 2018 income tax detriment does not have
anything to do with the ECCR and, therefore, should not be charged to ratepayers
through the ECCR.” (TR 254) Witness Cassel agreed during cross-examination that
the taxes in question are part of base rates, and that the ECCR has nothing to
do with base rate tax impacts. (TR 189)
Additionally the Company stated in its response to staff’s
2nd Set of Interrogatories, No. 4(c), that it:
recommends that the annual tax detriment be collected
through the ECCR clause on an entirely consolidated basis, rather than a
per-division basis. The Company believes that this computation is more
favorable to the Indiantown customers as compared to assigning the detrimental
impacts specific to only the appropriate division customers. (EXH 17)
In Order No. PSC-14-0655-FOF-GU, the Commission allowed
FPUC to consolidate the conservation programs’ expenses of the various
divisions for purposes of ECCR cost recovery.
The Order is specific to conservation expenses and does not consider
non-conservation expenses or costs. As Indiantown proposes, customers from all
FPUC divisions would contribute to Indiantown’s base rates tax impact through
the ECCR factors. The Company further stated in its response to staff’s 2nd
Set of Interrogatories, No. 4(f), that it, “anticipates collecting these funds
though the clause until its next rate proceeding.” (EXH 17) Witness Cassel
stated during cross-examination that 2020 or 2021 is the current anticipated
timeframe for potential rate filings. (TR 218) As such, there would not be a
clearly defined endpoint at which the non-division customers would cease
supporting Indiantown’s base rate tax detriment through ECCR factors.
Based on
the aforementioned, staff agrees with OPC and recommends that Indiantown not be
allowed to recover any alleged detrimental impact associated with the corporate
tax rate change implemented by the TCJA, and that the ECCR clause is not the
appropriate mechanism to collect the tax detriment because the taxes are part
of base rates and not associated with conservation expenses.
CONCLUSION
Staff recommends Indiantown not
be allowed to recover from its customers any presumed detrimental impact
associated with the corporate income tax rate change implemented by the TCJA
through the ECCR clause.
Issue 18:
Should Indiantown be allowed to retain and amortize,
over 26 years, the total annual benefit associated with the Protected Deferred
Tax liabilities?
Recommendation:
Yes, Indiantown should be allowed
to retain and amortize, over 26 years, the total annual amount of the tax savings
associated with the protected excess deferred taxes consistent with the ARAM.
(Hightower, D. Buys, Cicchetti)
Position of the Parties
INDIANTOWN:
Yes, Indiantown should be allowed to retain
and amortize, over 26 years, the total annual benefit associated with the
Protected Deferred Tax liabilities.
OPC:
No, Indiantown should not be allowed to retain
any portion of the protected deferred income taxes; however, OPC agrees with
the 26 years amortization which is consistent with ARAM.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
Indiantown argued that for
protected excess deferred income taxes, the grossed-up balance for Indiantown
was approximately $221,269. (Indiantown BR 9; TR 120) This deferred tax balance
will be amortized over 26 years using the Average Rate Assumption Method (ARAM)
as prescribed by the Internal Revenue Service (IRS), which results in an amount
of approximately $8,510 annually. (Indiantown BR 9; TR 121; EXH 2)
OPC
As discussed
in Issue 4B, OPC argued Indiantown should not be allowed to retain the annual tax
savings associated with the protected excess deferred tax amount. (OPC BR 11) However,
if the Commission decides to allow Indiantown to retain the protected excess deferred
tax savings, then OPC agreed the benefit should be amortized over 26 years
consistent with the ARAM. (OPC BR 11)
ANALYSIS
This issue
is basically a fall-out issue from Issue 4B. OPC maintained that the protected excess
deferred taxes should be returned to customers while Indiantown argued the Company
should be allowed to retain the amount of the protected excess deferred taxes. Both
parties agreed Indiantown should amortize the protected excess deferred tax
balance of $221,269 over 26 years consistent with the ARAM, for an annual amount of $8,510. (Indiantown BR 9; OPC
BR 11; TR 120-121; TR 251-252)
Based on
the staff analysis in Issue 4B, in staff’s opinion, it is fair, just, and
reasonable for the Commission to consider the earnings position of the Company
in its decision. Reducing base rates as recommended by OPC would result in a
cash flow reduction to the Company, put further downward pressure on
Indiantown’s earnings, and accelerate the need for a full rate case sooner due
to Indiantown earning well below its authorized range of ROE. Therefore, staff
agrees with Indiantown and recommends that the Company be allowed to retain the
protected excess deferred tax liability. Staff also agrees that it is
appropriate for the Company to follow the IRS ARAM and that an amortization
period of 26 years is consistent with ARAM.
CONCLUSION
Because
Indiantown is earning a negative return well below its authorized range of ROE
and is expected to continue to earn below this range even with retention of the
tax savings, staff recommends that Indiantown be allowed to retain and
amortize, over 26 years, the total annual amount of the tax savings associated
with the protected excess deferred taxes consistent with the ARAM.
Issue 19:
Should Indiantown be allowed to retain and amortize,
over 10 years, the total annual benefit associated with the Unprotected
Deferred Tax liabilities?
Recommendation:
Yes, Indiantown should be allowed to retain and
amortize, over 10 years, the total annual amount of the tax savings associated
with the unprotected excess deferred taxes. (Hightower, D. Buys, Cicchetti)
Position of the Parties
INDIANTOWN:
Yes, Indiantown should be allowed to retain
and amortize, over 10 years, the total annual benefit associated with the unprotected
deferred tax liabilities.
OPC:
No, Indiantown should not be allowed to retain any
portion of the unprotected deferred income taxes; however, OPC agrees with the
10 years amortization period.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
The Company
argued that it has an unprotected excess deferred tax balance of $6,484.
(Indiantown BR 8; TR 120) The Company requested this excess deferred tax balance
be amortized over 10 years at $648 per year. (Indiantown BR 8-9; TR 121) The Company
requested that this annual amortization amount be retained by the Company.
(Indiantown BR 9; TR 120 - 121)
OPC
OPC argued Indiantown should not be allowed to retain the
annual tax savings associated with the unprotected excess deferred tax amounts.
(OPC BR 11) However, if the Commission decides to allow Indiantown to retain the
unprotected excess deferred tax savings, OPC agreed the balance should be amortized
over 10 years. (OPC BR 11)
ANALYSIS
This issue is basically a fall-out issue from Issue 5B.
OPC maintained that Indiantown should not be allowed to retain the annual tax
savings associated with the unprotected excess deferred tax balance. Indiantown
argued the Company should be allowed to retain the amount of the unprotected
excess deferred tax amount. Both Parties agreed Indiantown should amortize the unprotected
excess deferred tax balance of $6,484 over 10 years for an annual amount of $648.
(Indiantown BR 8-9; OPC BR 11; TR 120-121; TR 251)
In Issue 5B, OPC maintained that the unprotected excess
deferred tax savings should be retuned to customers while Indiantown argued the
amount should be retained by the Company. (OPC BR 11) However, both Parties
agree Indiantown should amortize the total unprotected excess deferred tax
balance over a 10 year period. (Indiantown BR 9; OPC BR 11)
Based on the staff analysis in Issue 5B, in staff’s
opinion, it is fair, just, and reasonable for the Commission to consider the
earnings position of the Company in its decision. Reducing base rates as
recommended by OPC would result in a cash flow reduction to the Company, put
further downward pressure on Indiantown’s earnings, and accelerate the need for
a full rate case sooner due to Indiantown earning well below its authorized
range of ROE. Therefore, staff agrees with Indiantown and recommends that the
Company be allowed to retain the unprotected excess deferred tax savings. Staff
also agrees that a 10 year amortization period is appropriate and reasonable.
CONCLUSION
Because Indiantown is earning a negative return well below
its authorized range of ROE, and is expected to continue to earn below this
range even with retention of the tax savings, staff recommends that Indiantown
be allowed to retain and amortize, over 10 years, the total annual amount of
the tax savings associated with the unprotected excess deferred taxes.
Issue 21:
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
INDIANTOWN:
Yes.
OPC:
No.
Staff Analysis:
PARTIES’
ARGUMENTS
INDIANTOWN
None Provided
OPC
Once the Commission makes the
findings contained herein it will be unnecessary to keep this docket open.
However, until that time, the docket should not be closed.
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 – Indiantown Division, this docket
should be closed after the time for filing an appeal has run.
