Discussion
of Issues
Issue 1:
Should the Commission approve DEF’s calculation of
the tax savings associated with the IRA for 2023?
Recommendation:
Yes. The Commission should approve DEF’s
calculations of the net tax savings of $56 million for 2023 resulting from the
Company’s election to use Production Tax Credits (PTCs) instead of Investment
Tax Credits (ITCs) as allowed by the IRA. (Cicchetti)
Staff Analysis:
Effective January 1, 2022, the IRA expanded federal
income tax benefits for renewable energy by allowing owners of solar projects
which begin construction before 2025 the option to elect to receive PTCs
instead of ITCs. DEF has elected to use PTCs instead of ITCs because it
provides a greater tax benefit and greater customer savings. The application of
PTCs to DEF’s solar facilities results in net tax savings of $56 million. The
net tax savings is comprised of $34.7 million from the generation of PTCs, $7.0
million from the net change in DEF’s weighted average cost of capital (WACC)
due to replacing ITCs with PTCs, and $14.3 million from applying the revenue
expansion factor.
There are two adjustments to DEF’s WACC as a result of
replacing the ITCs with PTCs: 1) the removal of the ITCs and 2) the addition of
a deferred tax asset (DTA). DEF has proposed to flow back the full value of
PTCs generated in 2023 but will not have sufficient income to be able to use
these credits to reduce its taxes payable until sometime in the future,
currently estimated to be no sooner than 2027.
Consequently, DEF has recorded a DTA in the amount of the 13-month
average balance of the accumulated PTCs. Staff reviewed DEF’s calculations in
the direct testimony of Witness Olivier filed on October 17, 2022, in the
instant docket, and believes they are reasonable and appropriate. Based on the
aforementioned, staff recommends the Commission approve DEF’s calculations of
net tax savings of $56 million for 2023 resulting from the Company’s election
to use PTCs instead of ITCs as allowed by the IRA.
Issue 2:
Should the Commission approve DEF’s proposed process
for flowing the tax reform impacts to DEF's customers?
Recommendation:
Yes. Staff recommends the Commission approve a base
rate reduction of $56 million starting with the first billing cycle of January
2023 and allow DEF to credit customers for the actual 2022 tax savings impact
in the next Capacity Cost Recovery (CCR) Clause filing (expected in March 2023).
(Cicchetti)
Staff Analysis:
As discussed in Issue 1, DEF’s application of PTCs
has reduced its 2023 jurisdictional adjusted revenue requirement by $56
million. Pursuant to Paragraph 18(b) of the 2021 Settlement, DEF is obligated
to adjust base rates within 120 days of the latter of the enactment date or
effective date of a change in tax law. The IRA was effective August 16, 2022,
and December 16, 2022 is 120 days from the effective date. DEF proposes to
adjust base rates with the first billing cycle for January 2023 so that the tax
savings base rate change will be effective with the first billing cycle of the
month and to align the tax savings base rate change with other changes that
will be occurring January 2023. The PTC change in the IRA is retroactive to
January 1, 2022. Consequently, DEF proposes to credit customers for the actual
2022 tax savings in its next CCR filing (expected in March 2023). This is
consistent with Paragraph 18(b) of the 2021 Settlement which states:
Any effects of tax reform on retail revenue
requirements from the effective date through the date of the base rate
adjustment shall be flowed back or collected from customers through the CCR
Clause on the same basis used in any rate adjustment.
Staff has reviewed the Company’s calculation of the net
tax savings from the IRA and recommends the Commission approve a base rate
reduction of $56 million starting with the first billing cycle of January 2023
and allow DEF to credit customers for the actual 2022 tax savings impact in the
next Capacity Cost Recovery (CCR) Clause filing (expected in March 2023).
Issue 3:
Should the Commission give staff approval to
administratively approve DEF’s revised tariffs which reflect and implement the
multi-year base rate increase, ROE trigger, SoBRA (Duette) true-up, and the IRA
base revenue decrease effective January 2023?
Recommendation:
Yes. The Commission should give staff administrative
authority to approve DEF’s revised tariffs which reflect and implement the
multi-year base rate increase, ROE trigger, SoBRA (Duette) true-up, and the IRA
base revenue decrease effective January 2023. (Guffey)
Staff Analysis:
In its petition, DEF requested that the Commission
give staff authority to administratively approve tariffs reflecting base rates
for all customer classes to be effective January 2023. On October 27, 2022, DEF
filed tariffs in this docket that reflect previous Commission-approved base
rate changes and implement the proposed IRA base revenue decrease at issue in
this docket. Witness Olivier, in her direct testimony, discusses and summarizes
in Exhibit MJO-3 the four base rate changes effective January 2023.
The Commission has previously approved the following base
rate changes effective January 2023. First, in Order No. PSC-2021-0202A-AS-EI,
the Commission approved a 2023 multi-year base rate increase of $48.9 million
in DEF’s base rates.
Second, consistent with Order No. PSC-2017-0451-AS-EU, DEF calculated adjusted
base rates to reflect the Duette Solar Base Rate Adjustment (SoBRA) true-up.
The SoBRA true-up results in a $1.1 million decrease in base rates.
Finally, in Order No. PSC-2022-0357-FOF-EI, the
Commission approved an annual base revenue increase of $24.4 million to reflect
the ROE trigger provisions of the 2021 Settlement Agreement.
The calculation of the IRA adjustment factor of (2.095)
percent is shown in Exhibit MJO-2 of the petition and the adjustment factor has
been applied in a uniform manner to the base rates for all rate classes. The
IRA adjustment factor was calculated by dividing the $56 million reduction by
the 2023 projected $2,671.1 million retail base revenue sales of
electricity.
Staff has reviewed DEF’s tariff sheets and supporting
documentation for accuracy. The Commission should give staff administrative
authority to approve DEF’s revised tariffs which reflect and implement the
multi-year base rate increase, ROE trigger, SoBRA (Duette) true-up, and the IRA
base revenue decrease effective January 2023.
Issue 4:
Should this docket be closed?
Recommendation:
Yes. At the conclusion of the protest period, if no
protest is filed, this docket should be closed upon the issuance of a
consummating order. If a protest is filed within 21 days of the issuance of the
order, the tariffs should remain in effect, subject to adjustments pending the
resolution of the protest. (Stiller)
Staff Analysis:
At the conclusion of the protest period, if no protest
is filed, this docket should be closed upon the issuance of a consummating
order. If a protest is filed within 21 days of the issuance of the order, the
tariffs should remain in effect, subject to adjustments pending the resolution
of the protest.
