BPU Straw Proposal Would Revise Tax Policy Governing State Utilities

Bottom line of proposed change: Customers would lose most of decades-old financial benefit

Stefanie Brand, director, Office of Rate Counsel
The state is considering significant changes in a tax policy that governs New Jersey’s electric, gas, and water utilities –a shift that could have important implications for their customers.

The staff of the New Jersey Board of Utilities has drafted a straw proposal to possibly revamp a more-than-two-decades-old policy dealing with when parent companies file consolidated taxes not only for their utilities, but also for other nonregulated subsidiaries it owns.

The filing of a consolidated income tax return allows members of the company to take advantage of tax losses incurred by other businesses owned by the parent. Under current New Jersey law, the benefits associated with such a filing should be shared with the regulated utility’s customers.

In the past, those customers received 100 percent of the savings — with certain adjustments. Under the BPU|straw proposal, 75 percent of the savings would go to the company and 25 percent to ratepayers.

The proposal drew concern from Rate Counsel Director Stefanie Brand.

“You want to share more with ratepayers, not less,’’ said Brand, when asked about the proposal. “It could be where it’s going to get down to where ratepayers get very little, or nothing at all.’’

The current law gives rate counsel an important bargaining chip in rate cases that come before the BPU, using it to negotiate better rates for consumers. But the so-called Consolidated Tax Adjustment (CTA) policy has long been a bone of contention for utilities here.

New Jersey is only one of four states with similar provisions that return losses to ratepayers. Critics say that since it was adopted in 1991, there have been significant shifts in tax laws.

In comments submitted by Jersey Central Power & Light in an ongoing proceeding on the issue, the utility argued the application of the CTA could produce a violation of Internal Revenue Service tax rules.

The New Jersey Utilities Association also is seeking changes in the law, saying it may result in unintended consequences and “negative impacts on utility credit quality and cost of capital and impact the attractiveness of New Jersey’s utilities to investors.’’

But Brand, in her own filing, argued otherwise. “It is fundamentally unfair for customers to pay fictitious expenses that the holding company then retains as excess profits.’’

All four electric utilities and the gas utilities are parts of holding companies that can file consolidated tax returns.

The straw proposal described by the staff elicited little comment from the BPU commissioners. BPU Commissioner Jeanne Fox said it is time to look at the issue. “It’s an old policy that needs to be fixed,’’ she said.

The issue is currently one of those outstanding in a pending rate case involving Jersey Central Power & Light, the state’s second-largest electric utility. In a comment from the utility, a JCP&L spokesman said the staff’s recommendation ‘’marks progress in addressing the CTA issue.’’

Brand had a different take. “All we are trying to do is make sure ratepayers are getting their fair share,’’ she said.

In addition to the change in who gets the benefits of the tax losses incurred by the holding company, the straw proposal also suggests that transmission assets of the electric utilities would not be included in the calculation of the CTA. Transmission projects have become an increasingly lucrative investment opportunity for utilities and their parent companies — especially with volatile prices for electricity their their power plants produce.

The BPU is soliciting written comments on the proposed modifications by August 18.

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