On January 25, the Illinois Commerce Commission issued an order initiating investigations into Illinois public utilities’ rates due to changes in state and federal corporate income tax rates. Illinois state corporate income tax rates changed effective July 1, 2017, when income tax rates were raised from 5.25% to 7.0%, making the total Illinois corporate tax rate 9.5%. The Tax Cuts and Jobs Act of 2017, on the other hand, decreased federal corporate income tax rates from 35% to 21%, effective on January 1, 2018.
The Commission’s approach is reminiscent of 1986 – the last time the federal government significantly reduced corporate income tax rates (from 46% to 34%). The Commission responded to the 1986 Tax Reform Act as it does here: by asking utilities to either file tariffs reflecting the changes in the income tax component of cost of service, or show cause as to why the Commission should not reduce rates. The Commission also directed utilities to accrue a net regulatory liability reflecting the difference between revenues billed under rates in effect pursuant to each utility’s most recent rate order, and the revenues that would have been billed had the corporate income tax rate changes been in effect – a mechanism substantially similar to one imposed by the Commission in 1986. The Commission considers this net accrued liability “revenue subject to refund,” to be used to fund any refunds ultimately granted to customers if it determines that a rate reduction is warranted.
The circumstances surrounding the Commission’s January 25 Order differ in some respects with those facing the Commission in 1986. Unlike the phased-in tax rate reduction of the 1986 Tax Reform Act, the TCJA implements a one-time reduction in corporate income tax rates. More consequentially, this year’s reduction in federal corporate income tax rates was preceded by an increase in Illinois state corporate income tax rates, and utilities therefore must consider the impacts of both changes when responding to the Commission’s investigation. In addition, electric utilities using formula rates are not subject to the initiating order. (ComEd and Ameren have, however, both filed tariffs providing credits of $200 million and $50 million, respectively, to electric formula rate customers in 2018.)
The Commission has given Illinois utilities 30 days to respond to its order. It is expected that Illinois utilities will take a variety of approaches in responding to the order. For example, several Illinois utilities filed tariff riders with the Commission seeking to return the benefits of net reductions in tax rates to customers, prior to the initiation of the Commission’s tax investigation. These tariffs are currently pending before the Commission and the utilities have indicated they would use those riders to comply with the tax investigation order.