Illinois utilities responded this week to the January 25 order initiating an investigation into their rates following changes in state and federal corporate income tax rates.[1] In that order, the Commission directed utilities to either: (a) file tariffs reflecting the changes in the income tax component of cost of service, or (b) show cause as to why the Commission should not reduce rates. Although federal tax reform may impact regulated utilities in several ways[2], the Commission’s investigation is limited to the impact of changes in state and federal income tax rates, which in turn affect utility income tax expense and deferred income taxes.

Illinois utilities have taken a variety of approaches in responding to the Commission’s investigation, reflecting the myriad circumstances surrounding the respondents and underscoring the importance of flexibility in addressing the impacts of state and federal tax legislation.

Two utilities (MidAmerican Energy Company and Liberty Utilities) elected to follow option (a) in the Commission’s order, and filed revised tariffs effecting a decrease in rates to reflect the reduced net tax burden. Three utilities (Mt. Carmel Public Utility Company, Illinois Gas Company, and Rockwell Utilities) filed responses seeking to show cause that the Commission should not lower their rates to reflect a reduced net tax burden, because those utilities are not over-collecting revenues from ratepayers even with changes in income tax rates taken into account.

The remaining utilities responding to the Commission’s order indicated that they are addressing changes in state and federal corporate income tax rates in other docketed proceedings. Sundale Utilities indicated that it is in the process of being purchased by Illinois-American Water Company, and that therefore any rate adjustments are being addressed in the asset purchase proceeding. Three utilities (Aqua Illinois, Consumers Gas Company and Utility Services of Illinois) indicated that they are addressing the impacts of changes in tax rates through rate cases currently pending before the Commission. Three utilities (Peoples Gas, North Shore Gas, and Illinois-American Water Company) have riders pending before the Commission that, if approved, would return the benefits of net reductions in tax rates to customers via annual adjustments under the riders. And two utilities are responding by reference to both the tax rider and a pending rate filings: Nicor, which has been granted rehearing of its recent rate case to address tax issues, and Ameren Illinois, which filed a rate case in January 2018 that will address changes in corporate income tax rates for 2019 onward.

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[1] Note that Illinois electric utilities using formula rates are not subject to the Commission’s tax investigation; however, Commonwealth Edison and Ameren Illinois have both filed tariffs providing credits of $200 million and $50 million, respectively, to electric formula rate customers in 2018.

[2] The Tax Cuts and Jobs Act of 2017 (TCJA) reduces the federal corporate income tax rate from 35% to 21%, eliminates bonus depreciation as of September 27, 2017, and makes Contributions in Aid of Construction (CIAC) and Advances in Aid of Construction (AAC) 100% taxable. Tax guidance from the Internal Revenue Service on these topics is still being developed, and is expected to elaborate on how certain provisions of the TCJA should be implemented.