Associate with Whitt Sturtevant LLP
Nikhil’s practice focuses on energy and utility law, including litigation and counseling on behalf of natural gas, electric, and water utility clients in state regulatory and related proceedings. Click here for Nikhil’s full bio.
Illinois Utilities Respond to Commission’s Tax Investigation
March 2, 2018
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. 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, 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.
 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.
 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.
Commission Initiates Investigations into Illinois Utilities’ Rates Following Changes in State and Federal Corporate Income Tax Rates
February 27, 2018
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.
Commission Initiates Rulemaking to Address Ratemaking Treatment of Cloud Computing in Illinois
January 5, 2018
On December 6, the Illinois Commerce Commission issued an Order initiating Docket 17-0855, a rulemaking to clarify the regulatory accounting treatment of utility cloud-based computing systems. Cloud-based computing systems are arrangements in which a pool of computing resources, such as servers, storage, applications, and services, can be rapidly deployed in response to demand. Cloud computing offers utilities the promise of expanding their capacity and sophistication with respect to meter data management, emergency notification, advanced meter data analytics, and predictive maintenance, among several other functions.
The Commission’s rulemaking is supported by a Staff Report issued in April 2017: “Notice of Inquiry Regarding the Regulatory Treatment of Cloud-Based Solutions”, which summarized the comments the Commission received in response to a February 2016 Notice of Inquiry. The Report found that under current accounting principles, utility investment in on-premise computing systems is treated as a capital expense and included in the utility’s rate base on which it is allowed a return; whereas utility investment in cloud-based solutions is treated as an operating expense – typically as a service contract – which does not earn a rate of return. This inequality in regulatory treatment tends to disincentivize utility investment in cloud computing. As a result, the utility industry has consistently lagged its corporate peers in adopting cloud-based computing solutions.
Commenters responding to the Commission’s NOI suggested several alternatives to the status quo. Many electric and gas utilities and software providers agreed that most or all of the costs of cloud-based software could be included under FERC Account 303, “Miscellaneous Intangible Plant.” Water and sewer utilities similarly suggested the recognition of cloud-based software as intangible assets in NARUC Account 339.1. While the categorization of cloud computing systems in a FERC or NARUC account offers perhaps the most straightforward “fix”, other alternatives proposed include treating cloud-based systems as a capital lease, creating a new rider, or creating a regulatory asset accounting for the unamortized balance of cloud computing system costs. The Commission may evaluate several of these alternatives in the course of its rulemaking. While the Commission may consider the material differences in the manner in which utilities incur on-premise and cloud computing costs, the Report acknowledges a need to move towards a technology-agnostic, level playing field that allows utilities to make decisions regarding investment in computing solutions with an emphasis on ratepayer interests over ratemaking treatment.
The Commission’s first Notice Order in Docket 17-0855 is expected by June 4, 2018. That Order, and the publication of the proposed rule in the Illinois Register, initiates a 45 day “first notice” period under the Illinois Administrative Procedure Act, during which time the Commission accepts public comment on the proposed rule. The first notice period is followed by a 45 day second notice period, during which time the rule is submitted to the Joint Committee on Administrative Rules. A final rule clarifying the regulatory accounting treatment of cloud computing systems would therefore be expected no earlier than September 2018. Any accounting changes resulting from this rulemaking would affect applicable rate case (or other recovery mechanism) filings.
 Notice of Inquiry Regarding the Regulatory Treatment of Cloud-Based Solutions. Report to the Illinois Commerce Commission. April 7, 2017.
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