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Section 8
Oregon PUC Survey of Income Tax Treatment for Ratemaking
January/February 2005
OPUC Staff conducted an informal survey of other states, requesting information where a method
other than stand-alone was used for calculating income taxes for ratemaking. Staff sent an email to
the NARUC Accounting Subcommittee members:
The Oregon PUC is conducting a review of how Oregon's regulated utilities calculate
income taxes to be included in customers' rates. The Commission has traditionally
used, in general rate cases, a "stand-alone" calculation based solely on the regulated
revenues and costs of the utility itself, without regard to the utility's nonregulated
operations, its parent, or other affiliated companies. The Commission, and the Oregon
Legislature, are considering other methods of calculating income taxes for ratemaking,
including an annual true-up and incorporating consolidated tax rates or tax benefits.
If your Commission uses a method other than the traditional rate case "stand alone"
approach for calculating utility income taxes, please contact me at
ed.busch@state.or.us, or 503.378.6625, by February 1, 2005, if possible. (We have
already contacted a few Commissions on this issue.)
Following is a summary of the responses (and respondent) from those states indicating that a
method other than stand-alone has been used, either as a general practice or on a limited basis.
Oregon notes that its informal survey was not comprehensive, because some states were not on the
Subcommittee's distribution list. The method used in Oregon has been added to this summary.
State Comments
Connecticut Uses stand alone for income taxes, but has also incorporated consolidated tax
savings if there is a large tax loss caused by subsidiaries.
Florida Uses a "modified stand-alone" approach when calculating a utility's income
tax expense. In most cases, where a parent-subsidiary relationship exists and
they file consolidated tax returns, Florida conducts a parent-debt adjustment
pursuant to Florida Statue 25-14.004. This adjustment is a reduction the
utility's overall income tax expense that captures the tax effect/benefit of the
interest that can be written off at the parent level when a parent invests its
debt in the equity of its subsidiary. (Chrissy Kenny, CKenny@psc.state.fl.us)
Indiana Calculates income taxes on a stand-alone basis, with a cost of money
adjustment to reflect consolidated debt.
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Income Tax Treatment for Ratemaking
January/February 2005
Page 2
State Comments
Oregon The 2005 Oregon legislature passed Senate Bill 408, which applies to the four
largest electric and natural gas utilities (out of six total) effective with income
taxes paid beginning January 1, 2006. SB 408 effectively requires an
annual true-up between the amount of taxes collected from customers and the
lowest of the following three amounts:
(1) the amount of income taxes paid to units of government by the taxpayer--
either the utility or its affiliated group--that are "properly attributed" to the
regulated operations of the utility. (A rulemaking decision on the definition
of "properly attributed," which may include allocation of certain affiliate
losses, is expected this summer.)
(2) the total amount of income taxes paid to units of government by the
taxpayer.
(3) "that portion of the total taxes paid that is incurred as a result of income
generated by the regulated operations of the utility" (i.e., stand-alone tax
liability).
As noted, the annual SB 408 adjustment applies only to four large energy
utilities. The Oregon Commission traditionally has used a stand-alone
approach for calculating income taxes in general rate cases, and has
not considered a situation where a small utility's effective tax rate is lower
than the consolidated corporation's rate. (Ed Busch, ed.busch@state.or.us)
Pennsylvania The Pennsylvania PUC, consistent with that state’s Supreme Court decisions,
applies an “actual taxes paid” standard by including a utility’s share of
consolidated federal tax benefits in setting rates. The PUC uses a Modified
Effective Tax Rate Method that takes the consolidated tax savings generated
by losses of non-regulated members of the group, and then spreads those
savings to all members having positive taxable income. The savings allocated
to the regulated utility are included as an adjustment to the federal income
taxes included in customer rates. The adjustment is made in a rate case (with
no annual true up).
Tennessee Uses the "weighted cost of debt" times "rate base" to get the tax deductible
interest expense for purposes of setting rates. So if the capital structure
includes parent company or hypothetical debt, the taxes are computed
accordingly. (Dan McCormac, Dan.McCormac@state.tn.us)
Income Tax Treatment for Ratemaking
January/February 2005
Page 3
State Comments
Vermont Vermont generally uses a stand-alone method for C Corps and partnerships
for imputing income tax expense in a rate proceeding. However, for S Corps,
the Board has recently adopted a zero rate that could be adjusted for the
particular tax situation of the individual stockholder.
In subsequent cases, the Department will be seeking to apply a method that
enables the regulated operation to share in the actual tax benefits that accrue
to the company from filing state and federal tax returns. These benefits may
include "consolidated tax return" benefits and other tax deductions and credits
that are not normally considered when using the stand-along method. These
benefits can be specifically identified in examining the company's "effective
tax rate" and comparing it with the "tax rate schedule" that is normally used in
the stand-alone method. The differences between the "effective tax rate" and
the "tax rate schedules", once specifically identified, can be flowed-through to
rate payers by developing an "effective tax rate" for rate making purposes
rather than using the statutory rate published in tax rate schedules. Vermont
has developed no detailed methods but instead will rely upon the specific
methods used by each company in developing their "effective tax rate" which
they use in booking their monthly tax liability and expense accrual. (Ronald
W. Behrns, http://www.state.vt.us/psd)
Income Tax Treatment for Ratemaking
January/February 2005
Page 4
State Comments
Virginia The Virginia SCC has generally adopted a stand-alone policy for the
determination of income taxes for ratemaking purposes. This policy prohibits
the allocation to ratepayers of consolidated tax savings generated by costs
incurred from nonjurisdictional operations. However, there have been several
cases where savings generated from the filing of a consolidated return have
been recognized. It is the Virginia Staff's position that the types of
consolidated tax savings adjustments in these cases, as listed below, would
not be construed as a normalization violation under the Internal Revenue
Code.
The Commission has found that a parent company debt adjustment is
appropriate. This adjustment recognizes the income tax savings
associated with a parent company's interest expense on debt
supporting its investment in the regulated subsidiary.
The Commission also found that the income tax savings associated
with a parent company's leveraged ESOP should be allocable to
ratepayers.
In certain cases, rate base has been reduced to recognize that
ratepayers have funded the tax benefits allocable to the loss affiliates
of a consolidated group. This rate base reduction would reverse when
the loss affiliate could utilize the tax benefits itself on a stand-alone
basis.
In certain cases, jurisdictional income tax expenses have been reduced
to recognize an allocation of tax savings attributable to a parent
company's losses. Typically, parent company losses are chronic and
would never provide an income tax benefit absent the filing of a
consolidated return.
The Virginia Staff is currently developing a proposed ratemaking
policy to recognize an allocation of consolidated tax savings resulting
from the filing of a state income tax return. (Kent Peterson,
Kent.Peterson@scc.virginia.gov)
West The West Virginia PSC has a long-standing policy to include a consolidated
Virginia tax saving adjustment in rate cases. See the quote from Hope Gas, Inc., Case
No. 93-004-G-42T: “We are also persuaded that our policy for consolidated
tax savings should be modified for future cases. We believe that the
calculation of consolidated tax savings should include the losses of the parent
company as well as other affiliates within the corporate group. The exact
nature of the calculation should be litigated in future cases. We do put Hope
on notice that in future cases we will only allow it to recover from ratepayers
the amount of taxes that it actually pays into the federal treasury. To do
otherwise would allow the inclusion of fictitious expenses in rates.” West
Virginia allocates the losses of unregulated affiliates to those with positive
taxable income, including the utility for setting rates. (Byron Harris,
bharris@cad.state.wv.us)
Income Tax Treatment for Ratemaking
January/February 2005
Page 5
State Comments
Wisconsin In Wisconsin we treat taxes on a stand-alone basis so consolidated taxes
generally is not an issue. Where a S Corporation or LLC is involved, the
issue of recovery of income taxes and at what rate has been an issue. We had
a case involving an LLC (Century Telephone) in which the question of
consolidated taxes was raised. Interestingly enough, both the utility and the
Commission staff recommended that the utility be allowed to recover
corporate income taxes even though technically the tax liability did not show
up on the LLC's books. The Commission, however, initially viewed the issue
in a strict fashion. Only utility liabilities can be recovered from ratepayers.
Since the tax liability lies with the parent, the recovery of tax payments was
disallowed. The utility requested reconsideration of this issue and the
Commission reversed its decision. Intervenors appealed the decision to state
circuit court arguing that it was illegal to include a tax liability of another
entity in the revenue requirement. The circuit court upheld the ability of the
Commission to do just that.
The consolidated tax issue has come up for some small telephone companies.
The issue is what tax rate should be used where the consolidated entity has
the maximum tax rate, but the individual small telephone company would
have a lower rate on a stand-alone basis. (Tom Ferris,
Tom.Ferris@psc.state.wi.us)
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