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
18 Should Fort Meade be allowed to
recover any detrimental impact associated with TCJA through the ECCR clause?. 11
19 Should Fort Meade be allowed to
retain and amortize the benefit associated with the Protected Deferred Tax
liability?. 14
20 Should Fort Meade be allowed to
retain and amortize the total annual benefit associated with the Unprotected
Deferred Tax liability?. 16
21 Should Fort Meade be allowed to
retain the 2018 tax benefits of the TCJA, excluding the 2018 GRIP savings?. 18
24 Should this docket be closed?. 21
Case Background
The Florida Public Service Commission
opened Docket No. 20180053-GU on February 23, 2018, to consider the tax impacts
affecting Florida Public Utilities Company (FPUC) – Fort Meade Division (Fort
Meade or Company), resulting from the passage of the Tax Cuts and Jobs Act of
2017 (TCJA). FPUC – Fort Meade is a subsidiary of Chesapeake Utilities
Corporation (CUC). CUC is also the parent of the Florida division of CUC
(Chesapeake) and FPUC. FPUC – Indiantown and FPUC – Fort Meade are separate
divisions of FPUC. Docket Nos. 20180051-GU, 20180052-GU and 20180054-GU were
opened to address the tax impacts affecting FPUC, Indiantown 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 this
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 and reflected proposed stipulations between Fort Meade 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. 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:
Fort Meade should be allowed to retain the amortized
amount of the protected excess deferred tax balance of $1,787. (Hightower,
D.Buys, Cicchetti)
Position of the
Parties
FORT
MEADE:
Fort Meade should
be allowed to retain the estimated amortized deferred balance, thereby
fulfilling the purpose of the TCJA by allowing Fort Meade to continue making
capital improvements and potentially delaying a rate proceeding.
OPC:
Fort
Meade 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 Fort Meade does not have the information to compute the ARAM.
Staff
Analysis:
PARTIES’ ARGUMENTS
FORT MEADE
Fort Meade
argued that given its earnings posture, the Company should be allowed to retain
the estimated annual amount of $1,787 as a result of the tax benefit created by
the excess deferred tax balance. (Fort Meade BR 8-9; TR 129-130, 132-133) Fort Meade
argued that the ability to retain this amount will provide the Company with
further opportunity to earn a reasonable return, 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. (Fort
Meade BR 10, TR 130) Fort Meade contended that if the Company is allowed to
retain the tax benefits as it has proposed, the Company's return on equity (ROE)
for 2019 is projected to be negative 19.40 percent. (Fort Meade BR 12; EXH 10,
BSP 00047)
Fort Meade
argued that while retention of the benefits as proposed will not enable the
Company to earn within its authorized range of ROE, it will certainly allow it
to earn closer to its range. (Fort Meade BR 12; EXH 10, BSP 00047)
OPC
OPC argued that Fort Meade should return the net tax benefit amount of
$6,375 to the customers via a base rate reduction. (OPC BR 1) OPC contended
that Fort Meade’s earning surveillance reports for 2014-2018 demonstrate the
Company has been in an under-earnings posture for several years; thus, it had
the ability to file at any time for a base rate increase, which it unilaterally
chose not to do. (OPC BR 7; EXH 19) OPC
argued the TCJA effect on the excess accumulated deferred income tax (ADIT)
resulted in ratepayers making overpayments to Fort Meade. (OPC BR 8) OPC argued
that 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)
ANALYSIS
Fort Meade and OPC agree on the amount of the annual amortization
of the protected excess accumulated deferred income tax (ADIT) benefit of
$1,787. (Fort Meade BR 9; TR 270) Nor is there any debate regarding Fort Meade's
earnings posture. (Fort Meade BR 8; TR 273, 305-306) Witness Cassel testified
that retention of the protected deferred income tax benefit will potentially
provide the Company with an opportunity to earn a reasonable return, to continue
making capital investments, and enable Fort Meade to charge current rates for a
longer period of time thus, delaying a rate case proceeding. (Fort Meade BR 10;
TR 130)
Fort Meade
witness Cassel explained that if the Company is allowed to retain the protected
excess accumulated deferred income tax (ADIT) benefit of $1,787 annually, this
would allow the Company to delay a rate case enabling continuation of its
interim consolidation efforts pending its next rate case while also placing
downward pressure on any rate increase sought in its next rate case. (Fort
Meade BR 11; TR 130-132) Fort Meade wishes to avoid customer confusion that
could be associated with implementation of a rate decrease resulting from
flowing through the tax benefit as a rate reduction, followed, in short order,
by a rate increase arising from a full rate case proceeding. (Fort Meade BR 11;
TR 132-133)
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 274; EXH 17) OPC argued, by definition, the
excess tax monies in Fort Meade’s possession are a windfall to the Company that
should be flowed back to the customers who paid the taxes in rates. (OPC BR 6-7;
TR 274) OPC pointed out during cross-examination of Fort Meade 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 benefits were retained by the Company. (OPC BR 9, TR 208) However, in
response to a staff interrogatory, Fort Meade indicated that its forecasted return
on equity (ROE) for 2018 would be negative 19.40 percent if it were to retain
all the tax benefits resulting from the TCJA. (EXH 10, BSP 00047)
Fort Meade argued
in its brief 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. (Fort
Meade BR 13-14; TR 310-311) The Commission had already determined that Reedy Creek
would have to make a refund, because it was over-earning. (Fort Meade BR 13-14,
TR 308, 314-315) Fort Meade argued in its brief that witness Smith's refusal to
consider Fort Meade's earnings posture in rendering his opinion on Fort Meade’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. (Fort
Meade BR 14) As such, Fort Meade contended and staff agrees, OPC’s arguments on
this point should be rejected. (Fort Meade BR 14) 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 Fort Meade
witness Cassel’s interpretation of the Reedy Creek decision mistakenly
links the over-earnings posture of the utility in that case with the Court’s
use of the term “windfall.” (OPC BR 6) While OPC conceded that it is a given
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 utility’s earnings.
(OPC BR 6) 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 a
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 on their
investment.”
In its brief, Fort Meade contended that the Company’s approach
is not inconsistent with Reedy Creek or prior Commission practice as mentioned
by OPC witness Smith. (Fort Meade BR 14; TR 314-315) There is agreement between
the parties with regard to the calculation of the annual protected excess
deferred tax amount of $1,787. Witness Cassel testified that approval of its
proposed treatment reflects the more reasonable approach to addressing the
disposition of the tax benefits and provides the greatest overall benefit for the
Company and its customers. (TR 130-133) Staff agrees with Fort Meade 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.
Staff agrees that the record is clear that Fort Meade is
currently earning a negative return well below its authorized ROE range, and
that retention of the protected tax benefit will improve the Company's earnings
posture and will not cause it to exceed its authorized range. (TR 129-130, 133;
EXH 19)
Staff agrees with Fort Meade’s argument that OPC's
reliance upon the Reedy Creek case is misplaced. (Fort Meade BR 13-14)
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 benefits arising under the 1978 Tax Reform. (Fort
Meade BR 13-14; 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 base rates as recommended by OPC would
result in a cash flow reduction to the Company, put further downward pressure
on Fort Meade’s earnings, and accelerate the need for a full rate case sooner due
to Fort Meade earning well below its authorized range of ROE. Therefore, staff
recommends that Fort Meade be allowed to retain the amortized protected excess deferred
tax balance attributed to the TCJA of $1,787.
Issue 5B: What is the appropriate disposition of the unprotected
excess deferred taxes?
Recommendation:
Fort Meade should be allowed to retain the unprotected
excess deferred tax amortized over 10 years of $4,588. (Hightower, D.Buys,
Cicchetti)
Position of the
Parties
FORT MEADE:
Ft.
Meade should be allowed to retain the unprotected deferred tax liability
amortized over 10 years.
OPC:
Fort
Meade should not be allowed to retain the benefit of the unprotected excess
ADIT. The unprotected excess ADIT net liability of $45,881 should be amortized
over 10 years at $4,588 per year.
Staff
Analysis:
PARTIES’ ARGUMENTS
FORT
MEADE
Fort Meade
asserted that given its earnings posture, the Company should be allowed to
retain the unprotected excess deferred tax benefits. (Fort Meade BR 8) Fort
Meade contended that it has an unprotected excess deferred tax liability
recorded on its books with an estimated balance of $45,881. (Fort Meade BR 9;
TR 129) The Company requests this deferred tax liability be amortized over 10
years at $4,588 per year. (Fort Meade BR 9; TR 129) The Company requested that
this annual amortization benefit be retained by the Company. (Fort Meade BR 9;
TR 129-130; EXH 2) Fort Meade argued that this amount will
provide the Company with further
opportunity to earn a reasonable return, to provide service at present rates
for a longer period, to continue making necessary capital investments, and to delay
a costly rate proceeding. (Fort Meade BR 10) Fort Meade also argued that the
ability to retain the excess ADIT of $4,588 related to the unprotected excess deferred
tax liability would enable the Company to delay a rate case, enable the Company
to continue its interim consolidation efforts pending its next rate case, and
would place downward pressure on the rate increase that the Company would be
seeking in its next rate case. (Fort Meade BR 11; TR 132-133) Fort Meade contended
that allowing the Company to retain some of the tax benefits will provide
immediate financial support to the utility, thereby enabling it to continue to
provide safe and reliable service to its customers. (Fort Meade BR 13; TR 133)
OPC
OPC argued that Fort Meade should return the total tax benefit amount of
$6,375, to the customers via a base rate reduction. (OPC BR 1) OPC contended
that Fort Meade’s earning surveillance reports for 2014-2018 demonstrate the
Company has been in an under-earnings posture for several years; thus, it had
the ability to file at any time for a base rate increase, which it unilaterally
chose not to do. (OPC BR 7; EXH 19) OPC argued the TCJA effect on the ADIT
resulted in ratepayers making overpayments to Fort Meade. (OPC BR 10) OPC
argued that the unprotected excess deferred taxes should be refunded as rapidly
as possible under the IRS regulations to ensure ratepayers pay only fair, just,
and reasonable rates. (OPC BR 10) In its brief, OPC argued that, as an
alternative to the Company’s proposal to retain the full benefit amount of the
excess ADIT amortization, this amount should be returned to the customers via a
base rate reduction. (OPC BR 9) OPC repeated its argument in Issue 4B citing the
Florida Supreme Court Reedy Creek case. (OPC BR 9) OPC maintained that
the TCJA’s effect on the Company results in the customers making overpayments
which create excess accumulated deferred income taxes. (OPC BR 10) 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 Fort Meade’s ratepayers. (OPC BR
10)
ANALYSIS
Staff agrees the record shows there is no debate between the
Parties regarding the amount of
unprotected excess deferred tax, nor is there any debate regarding Fort
Meade's earnings posture. (TR 129-130, 271, 273) Staff agrees with Fort Meade’s
position as discussed in Issue 4B, that the Company’s under-earnings posture
necessitates its retention of the unprotected excess ADIT amount arising from
the TCJA. (Fort Meade BR 10, TR 130) The Company contended retention of the
unprotected excess ADIT amount will potentially provide the Company with an
opportunity to earn a reasonable return, to continue making capital investments
and to enable Fort Meade to charge current rates for a longer period of time,
thus delaying a rate case proceeding. (Fort Meade BR 10; TR 130)
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 Fort Meade 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 10)
Staff disagrees with OPC’s arguments regarding the unprotected excess ADIT.
As discussed in Issue 4B, the
record evidence demonstrates that Fort Meade is earning a negative return well below
its authorized range of ROE. (EXH 10, BSP 00044-00046; EXH 12 00059-00061) Staff
agrees that Fort Meade made a compelling argument that regulatory efficiency supports
allowing the Company to retain the annual tax benefit of $4,588 associated with
the unprotected excess deferred accumulated taxes.
Fort Meade is currently earning well
below is authorized ROE range, and retention of the unprotected excess ADIT
amount will improve the Company’s earning posture, but will not cause it to
exceed its authorized range of ROE. (TR 170)
In response to a staff
interrogatory, Fort Meade provided a calculation of its projected ROE of
negative 22.35 percent “with tax savings recognized.” (EXH 12, BSP 00059) Staff
further agrees that this approach is not inconsistent with Reedy Creek
or prior Commission practice as acknowledged by OPC witness Smith. (Fort Meade
BR 14; TR 314-315)
CONCLUSION
Staff recommends that it is fair,
just, and reasonable for the Commission to consider the earnings position of
the Company in its decision. Therefore, for the reasons discussed in Issue 4B
and the aforementioned analysis, staff recommends Fort Meade be allowed to retain
the unprotected excess deferred tax amount and that this balance be amortized
over 10 years for an annual amount of $4,588.
Issue 18:
Should Fort Meade 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 Fort Meade be allowed
to recover such amount through the Energy Conservation Cost Recovery (ECCR)
clause?
Recommendation:
No, Fort Meade should not be allowed to recover any
supposed detrimental impact associated with the corporate income tax rate
change as a result of the TCJA through the ECCR clause. (Hightower, D.Buys,
Cicchetti, Coston)
Position of the Parties
FORT MEADE:
Yes, Ft. Meade should be allowed to recover any detrimental impact
associated with the corporate income tax rate change implemented by the TCJA.
The amount Fort Meade should be allowed to recover through the ECCR clause is
$17,929.
OPC:
No, Ft. Meade 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
FORT MEADE
Fort Meade argued that the change in the corporate income
tax rate from 35 percent to 21 percent results in a tax detriment of $17,929.
(Fort Meade BR 8; TR 128) Fort Meade proposes to recover the annual tax
detriment associated with the tax rate reduction for purposes of addressing
infrastructure investment. (Fort Meade BR 8; TR 128) Fort Meade argued that the
Company is projected to be earning below the bottom of the earnings range
utilized for Fort Meade's surveillance reporting purposes. (Fort Meade BR 8; TR
196; EXH 12, BSP 00059-00061) Fort Meade 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. (Fort Meade BR 9) 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. (Fort Meade BR 9) Fort Meade acknowledged that approval of the
Company’s proposal to recover the tax detriment is at the discretion of the
Commission. (Fort Meade BR 9)
OPC
OPC argued that a punitive tax
detriment is not suffered directly by Fort Meade but is suffered, if at all, by
Fort Meade’s parent company Chesapeake Utility Corporation through its
consolidated tax return. (OPC BR 10; TR 213-215) Upon cross-examination, witness
Cassel admitted the taxes at issue here are already part of current base rates.
(OPC BR 10; TR 196) The excess ADIT in
dispute in Issues 4B and 5B is already calculated into the detriment amount of
$17,929. (OPC BR 10; TR 196)
Further, OPC argued that the
fallacy of Fort Meade’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 benefit on the parent company’s consolidated tax return,
Fort Meade would not be requesting to include the benefit in its rate base. (OPC
BR 10)
ANALYSIS
As pointed
out by OPC in its post-hearing brief, Fort Meade projects to have negative
operating income for 2018 and has identified an annual net tax detriment of
$17,929, based on its pro forma surveillance report. (OPC BR 2) Fort Meade
contends that the change in the corporate income tax rate from 35 percent to 21
percent results in a tax detriment of approximately $17,929 for the Company.
(Fort Meade BR 8; 128) Witness Cassel testified that while this amount will not
be sufficient to increase the Company’s earned return into its allowed range of
ROE, it will help the Company to make additional investments in infrastructure.
(TR 128)
In response
to discovery requests, the Company explained the tax detriment is due to an
operating loss recognized by Fort Meade. (EXH 10, BSP 00048-00049) When a
company incurs a net operating loss (NOL), the lower tax rate creates a smaller
amount of tax deduction for the tax payer. (TR 205-206, TR 272; EXH 10) Fort
Meade does not file its own Federal tax return, but instead files a
consolidated Federal tax return with its parent company, CUC. (TR 214) CUC is
the tax payer, and the NOL is recognized as a tax detriment on CUC’s books. (TR
214) Consequently, the “write off” on CUC’s books from Fort Meade’s NOL is
worth less to the parent company due to the lower tax rate. (TR 214) Fort Meade
is requesting to recover the loss of that tax deduction for its parent company
through an increase of $17,929 in its ECCR Clause factors. (TR 128) However, witness
Cassel confirmed regulated public utility rates are set on a stand-alone basis,
that is, as if the regulated utility is required to pay income taxes. (TR 214)
The utility rates charged to customers already include an allowance for income
taxes. (TR 90)
The record
demonstrates that Fort Meade is requesting to use a purported tax detriment to
recover incremental costs in lieu of initiating a rate increase. As argued by
OPC, the tax detriment is not suffered directly by Fort Meade, 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 Fort Meade is a result of the TCJA on a stand-alone
basis. Recovery of a tax detriment or benefit by a regulated utility on behalf
of its parent company is inconsistent with current regulatory practice to align
income tax expense on a stand-alone basis.
As to 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 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 273) 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 rates tax impacts. (TR 196)
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 Ft. Meade customers as compared to assigning the detrimental
impacts specific to only the appropriate division customers. (EXH 13)
Per
Commission 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 FPUC proposes, customers from all FPUC’s
divisions would contribute to Fort Meade’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 through
the clause until its next rate proceeding.” (EXH 13) 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 Fort
Meade’s base rate tax detriment through ECCR factors.
Based on the aforementioned, staff agrees with OPC and
recommends that Fort Meade should 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 Fort Meade not
be allowed to recover any presumed detrimental impact associated with the
corporate income tax rate change implemented by the TCJA through the ECCR
clause.
Issue 19:
Should Fort Meade be allowed to retain and amortize,
over 26 years, the total annual benefit associated with the Protected Deferred
Tax liability?
Recommendation:
Yes, Fort Meade should be allowed to retain and
amortize, over 26 years, the total annual benefit associated with the Protected
Deferred Tax liability. (Hightower, D.Buys, Cicchetti)
Position of the Parties
FORT MEADE:
Yes, Fort Meade should be allowed to retain and amortize, over 26 years, the total
annual benefit associated with the
Protected Deferred
Tax liabilities.
OPC:
No, Fort Meade 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
FORT MEADE
Fort Meade argued that for protected excess deferred taxes, the
grossed-up balance for Fort Meade was approximately $46,451, which was recorded
as a Deferred Regulatory Tax Liability. (Fort Meade BR 9; TR 129-130) This estimated deferred balance will be amortized over 26 years using the Average Rate Assumption Method
(ARAM) as prescribed by the Internal
Revenue Service (IRS),
which is approximately $1,787 annually. (Fort Meade BR 9; TR 130; EXH 2)
OPC
As discussed in Issue 4B,
OPC argued Fort Meade should
not be allowed to retain the annual benefit associated with the protected excess
deferred tax liabilities. (OPC BR 11) However, if the Commission
decides to allow Fort Meade to retain the protected excess
deferred tax benefit, then OPC
agreed the amount should be amortized
over 26 years
consistent with the ARAM. (OPC BR 11)
ANALYSIS
In Issue 4B, OPC maintained that the protected excess deferred
tax amount should be returned to customers while Fort Meade argued the amount
should be retained. However, both Parties agree Fort Meade should amortize the
total annual benefit associated with the protected excess deferred tax
liabilities, over 26 years consistent with the ARAM. (Fort Meade BR 9; OPC BR
11, TR 130) Staff agrees that it is appropriate for the Company to follow the
IRS ARAM and that the protected excess ADIT should be amortized over a period
of 26 years.
CONCLUSION
Because Fort Meade 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 Fort Meade be allowed to retain the total annual amount
associated with the protected excess deferred tax liabilities and to amortize
this balance over 26 years consistent with the ARAM.
Issue 20:
Should Fort Meade be allowed to retain and amortize,
over 10 years, the total annual benefit associated with the Unprotected
Deferred Tax liability?
Recommendation:
Yes, Fort Meade should be allowed to retain and
amortize, over 10 years, the total annual benefit associated with the
Unprotected Deferred Tax liability. (Hightower, D.Buys, Cicchetti)
Position of the
Parties
FORT MEADE:
Yes, Fort
Meade should be allowed to retain and amortize, over 10 years, the total annual
benefit associated with the Unprotected Deferred Tax liabilities.
OPC:
No, Fort Meade 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
FORT
MEADE
Fort Meade
argued that the Company has an unprotected excess deferred tax liability
recorded on its books with an estimated balance of $45,881. (Fort Meade BR 9;
TR 129) The Company requested this excess deferred tax liability be amortized
over 10 years at $4,588 per year. (TR 129; Fort Meade BR 9) Fort Meade argued
that in light of its earnings posture, this annual amortization benefit be
retained by the Company as it will provide the Company with further opportunity
to earn a reasonable return. (Fort Meade BR 10)
OPC
As discussed in Issue 5B, OPC argued Fort Meade should
not be allowed to retain the annual benefit associated with the Unprotected
Deferred Tax liabilities. (OPC BR 11) However, if the Commission
decides to allow Fort Meade to retain the unprotected deferred tax benefit, OPC agreed the benefit should be amortized over 10 years.
(OPC BR 11)
ANALYSIS
In Issue
5B, OPC maintained that the unprotected excess deferred tax amount should be
returned to customers while Fort Meade argued the amount should be retained by
the Company. (OPC BR 11; Fort Meade BR 10) However, both Parties agreed Fort
Meade should amortize the total annual benefit associated with the unprotected excess
deferred tax amount over 10 years. (OPC BR 11; Fort Meade BR 9, TR 129-130)
Staff agrees that it is appropriate for the Company to amortize the unprotected
excess ADIT amount over a period of 10 years.
CONCLUSION
Because Fort Meade 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 Fort Meade be allowed to retain the total annual amount
associated with the unprotected excess deferred taxes and to amortize this
balance over 10 years.
Issue 21:
Should Fort Meade be allowed to retain the 2018 tax
benefits arising from the TCJA excluding the 2018 GRIP savings?
Recommendation:
Yes, Fort Meade should be allowed to retain the 2018
tax benefits arising from the TCJA, excluding the 2018 gas reliability
infrastructure program (GRIP) savings. (Hightower, D.Buys, Cicchetti)
Position of the Parties
FORT MEADE:
Yes, Fort Meade should be allowed to retain the 2018 tax benefits
arising from the TCJA
excluding the 2018 GRIP savings.
OPC:
No, Fort Meade should not be allowed
to retain the 2018 tax benefits arising from
the TCJA.
Staff
Analysis:
PARTIES’ ARGUMENTS
FORT
MEADE
Fort Meade
argued there are two components of the tax savings on the gas reliability
infrastructure program (GRIP) surcharge. (Fort Meade BR 10; EXH 3, 4) The first
component consists of
the tax savings on
the GRIP surcharge
from the Jurisdictional Date through the end of the calendar year. (Fort
Meade BR 10) The second component is the impact to the GRIP surcharge for 2019
forward. (Fort Meade BR 10) The tax savings in 2018 will be $2,376. (Fort Meade
BR 10) The Company contended that for 2019 and beyond, the savings will be
approximately $2,000. (Fort Meade BR 10; TR 131) The Company proposed to retain
the 2018 savings. (Fort Meade BR 10) Fort Meade argued that in 2019, the new
tax rate would be incorporated in the calculation of the GRIP surcharge passing
the estimated $2,000 tax benefit on to Fort Meade's customers. (Fort Meade BR
10) Fort Meade argued, if the Commission accepts Fort Meade's proposal to
retain a portion of the benefits of the Tax Act, Fort Meade's customers would experience
continued rate stability and would see a reduction to the GRIP surcharge. (Fort
Meade BR 10; TR 132) Fort Meade contended the Company would likewise benefit
from an improved earnings posture and a healthier fiscal outlook, which
ultimately inures to the benefit of Fort Meade's customers. (Fort Meade BR 10; TR 132-133)
OPC
OPC contended that Fort Meade’s proposal to retain the 2018 tax savings
associated with GRIP is for the Company’s sole benefit. (OPC BR 12; TR 274-275) OPC argued that Fort
Meade should return the 2018 GRIP-related TCJA savings directly to its
customers for the same reasons presented in the preceding issues. (OPC BR 12;
TR 274-275)
OPC agreed with Fort Meade’s proposal to apply the new 21 percent federal
income tax rate to its 2019 GRIP surcharge projections and future projections,
reducing the annual GRIP revenue amount by the resulting annual tax savings of
approximately $2,000. (OPC BR 12; TR 274-275) OPC agreed with the return of the
GRIP-related TCJA savings directly to its customers. (OPC BR 12; TR 274-275)
ANALYSIS
As a point of clarification, Fort
Meade’s position on this issue is inconsistent with its argument and testimony.
In its position statement, Fort Meade stated that it should be allowed to
retain the 2018 tax benefits arising from the TCJA excluding the 2018 GRIP Savings. (Fort Meade BR 6) (emphasis
added) However, in Fort Meade’s argument and witness Cassel’s testimony, it is
clear that the Company proposes to retain the 2018 GRIP tax savings. (TR 131)
Fort Meade proposed to retain the
estimated annual amount of $1,787 from the tax benefit associated with the
protected deferred tax amortization and the annual amount of $4,588 associated
with the unprotected deferred tax amortization for a total amount of $6,375. (Fort
Meade BR 10, TR 130) In addition, Fort Meade proposed to retain the tax savings
of $2,376 from the 2018 GRIP surcharge. (Fort Meade BR 10; TR 131; EXH 3) Fort
Meade proposed to incorporate the new tax rate of 21 percent into the
calculation of the 2019 GRIP surcharge passing on an estimated $2,000 tax
benefit to the Company’s customers on a prospective basis. (Ft. Meade BR 10; TR
131) As discussed in Issues 4B, 5B, 19, and 20, staff believes the record
supports allowing Fort Meade to retain the tax benefit resulting from the
protected and unprotected excess deferred taxes. However, as discussed in Issue
18, staff does not believe allowing the Company to monetize a tax detriment due
to a net operating loss into clause revenue is supported by record evidence,
nor is it sound regulatory policy.
In Docket Nos. 20180051-GU and
20180054-GU, FPUC and Chesapeake, respectively, the Company and OPC agreed to a
Type 1 Stipulation to flow the 2018 GRIP tax savings back to the customers as
an over-recovery in 2019.,
Fort Meade’s argument for retaining the 2018 GRIP tax benefit in the instant
docket was that the Company would benefit from an improved earnings posture and
a healthier financial fiscal outlook, which ultimately inures to the benefit of
its customers. (Fort Meade BR 10; TR 132-133) However, the GRIP surcharge is
separate from base rates and the surcharge is based on the costs incurred by
the Company to make reliability improvements to its system and is trued-up
annually. (EXH 3) All expenses, including income tax expense, recovered through
the GRIP surcharge are trued-up at the end of the year as an over or under
recovery and applied to the ensuing year’s GRIP factor. Income tax expense is
not an exception to the true-up methodology. (EXH 8, 00033) As such, flowing
the 2018 GRIP tax benefit back to the customers as an over-recovery in the 2019
GRIP surcharge is the appropriate regulatory treatment in this case. In
consideration of consistent regulatory treatment across all CUC owned utilities,
staff agrees with OPC that Fort Meade should return the 2018 GRIP-related TCJA
savings to its customers as an over-recovery applied in the 2019 GRIP
surcharge.
CONCLUSION
Staff recommends Fort Meade be allowed to retain the 2018 tax benefits
arising from the TCJA, excluding the 2018 GRIP over-recovery.
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
FORT MEADE:
Yes.
OPC:
No.
Staff Analysis:
PARTIES’
ARGUMENTS
FORT MEADE
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 Fort Meade, this docket should be closed
after the time for filing an appeal has run.
