Tuesday, June 27, 2017

EEI Pledges to Fight Elimination of Tax Deductions

Moeller Discusses FERC Appointments

By Rich Heidorn Jr.

NEW YORK — Investor-owned utilities will fight any tax overhaul that doesn’t preserve deductions for interest and property taxes, the head of the Edison Electric Institute told Wall Street analysts Wednesday.

As the nation’s “most capital-intensive industry,” electric utilities hope to convince Congress and President Trump that they should be treated differently from others when it comes to eliminating deductions, EEI CEO Tom Kuhn said.

“We can make a case that we’re different,” Kuhn said. His argument: Current tax policies allow utilities to reduce their weighted average cost of capital, saving ratepayers money.

EEI said that while it supports simplifying the tax code, broadening the tax base and reducing rates, it will seek to preserve the federal income tax deduction for interest expenses and state and local taxes (primarily property taxes), as well as maintain parity between dividend and capital gains tax rates.

It also will fight to continue tax “normalization” rules, which require state regulators to treat tax benefits to customers in the same way that the recovery of the cost of the associated property is treated.

EEI tax deductions utilities

Normalization spreads the tax benefits associated with assets over the same time period that the costs of those assets are recovered from customers. “It is critically important to maintain tax normalization to the extent that accelerated depreciation or other investment incentives are retained in the tax code,” EEI said in a position paper.

About 100 analysts attended the annual briefing at the tony University Club off Fifth Avenue, about a block from Trump Tower.

Kuhn said a group of utility CEOs traveled to D.C. a few days after Trump’s inauguration to make their case to White House officials and congressional leaders. “We’re going to be in the front of the curve” in lobbying, he promised.

Although tax reform wasn’t a major issue in the fall elections, Kuhn said he sees the call by the president and Congress for change as reminiscent of the conditions in 1986, before President Ronald Reagan’s tax package was approved.

“Tax reform doesn’t happen very often — every couple of decades,” he cautioned, adding that a tax initiative will likely be a back burner issue until Trump and Congress act on replacing the Affordable Care Act. “I don’t think it’s going to be an easy lift.”

One wild card is the proposal by prominent conservatives, including former secretaries of state George Schultz and James Baker III, for a carbon tax. “It’s really early in the debate right now,” Kuhn said of the proposal, noting questions about how the proceeds for the tax would be spent.

Convincing Regulators on Capital Spending

EEI projects that its 44 investor-owned utilities made a record $120.8 billion in capital spending in 2016, up from $103.3 billion in 2015. Of that, 35% was spent on generation (up from 32% in 2015), while transmission dropped to 17% (from 18%), and distribution was unchanged with a 26% share. Much of that spending has been on smart grid improvements.

EEI tax deductions utilities

What are ratepayers getting for their money? Job growth, resiliency and economic benefits from shorter outages, said David Owens, EEI’s executive vice president for business operations and regulatory affairs.

EEI officials said the increase in smart grid technology — along with stronger wires and poles, use of robocalls and improved situational awareness — helped utilities in the Southeast restore power to all customers within two days after Hurricane Matthew in fall 2016.

About 70 million smart meters have been deployed to date — representing 60% of U.S. households — up from 32 million in 2012, when Superstorm Sandy knocked out power to millions along the East Coast for as long as two weeks.

“We’ve got to demonstrate [to regulators] that there’s a whole string of benefits that accrue” from smart grid investments, said Owens, a long-time EEI official who has announced he will retire June 30. “We’ve got to demonstrate to the regulator that there’s a fair way to allocate those costs. If you’re rolling in those costs, you’ve got to be able to demonstrate that all the customers benefit. If you’re not rolling them all in, you have to charge that individual customer.”

FERC’s Future

Former FERC Commissioner Philip Moeller, EEI’s senior vice president for energy delivery and chief “customer solutions” officer, commented on prospects for restoring the quorum lost Feb. 3 following the resignation of former Chairman Norman Bay.

FERC canceled its Feb. 16 meeting and said no monthly agenda meetings would be scheduled until a third commissioner is confirmed to join acting Chairman Cheryl LaFleur and Commissioner Colette Honorable. FERC’s annual joint meeting with the Nuclear Regulatory Commission will be held as scheduled on Feb. 23.

“Realistically, the most optimistic scenario I would say would be [to have] multiple slots filled in 60 days. But that’s very optimistic,” Moeller said, adding that a candidate who has already cleared the FBI background check could be installed more quickly.  Among those rumored as a candidate for the commission is former Texas regulator Barry Smitherman.

He predicted the new commission will seek to ensure that wholesale markets recognize the reliability value nuclear generators provide as baseload resources, citing financial supports approved in Illinois and New York. (See related story, Connecticut Lawmakers to Draw Up Millstone Rescue Plan.)

Moeller also said the new commission may revisit Order 745, which required RTOs to pay demand response the same LMPs as generation, and Order 1000, which he said “has not provided the certainty for transmission planning that FERC intended.” (See FERC Won’t Revisit Demand Response Pricing.)

He also called for the commission to “update” its interpretation of the Public Utility Regulatory Policies Act. (See FERC Conference Debates PURPA Costs, Purchase Obligations.)

EEI will be urging the commission to change its discounted cash flow model for calculating returns on equity “to attract additional capital to the transmission system,” Moeller said.

In June 2014, Moeller voted with LaFleur and former Commissioner Tony Clark to apply to electric utilities a two-step DCF process that incorporates long-term growth rates. The new formula has resulted in numerous ROE reductions.

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