Tax-Policy Turnaround: Higher Rates for Consumers, Higher Returns for Utilities?

Tom Johnson | October 29, 2014 | Energy & Environment
BPU modifies consolidated tax adjustment, obscure tax policy that governs how savings are split between utilities and customers

Stefanie Brand, director of the Office of Rate Counsel
The state is changing an arcane tax policy dealing with New Jersey’s utilities, which could mean higher rates for customers and bigger returns for the companies.

The new policy, adopted by the state Board of Utilities at its monthly meeting last week, would shift most of the savings energy companies accrue due to how they file their taxes from customers to the company.

The changes have long been sought by utilities, which note that New Jersey is out of step with other states in calculating how savings from filing consolidated taxes are shared between the parent company and ratepayers.

The filing of a consolidated income tax return, or a consolidated tax adjustment (CTA), allows a utility to take advantage of tax losses incurred by other unregulated businesses owned by the parent, thereby reducing its tax liability.

Previously, 100 percent of those savings — with certain adjustments — would be returned to utility customers. The new policy would deliver approximately 75 percent of those savings to the company and roughly 25 percent to ratepayers, a change opposed by the state Division of Rate Counsel and others.

“Ratepayers will pay more and get less,’’ said Division of Rate Counsel Director Stefanie Brand. “It means higher rates.’’

The past policy gave consumer advocates an important bargaining chip in rate cases that came before the BPU, using it to negotiate better rates for consumers. That would could be undermined by the new policy, some say.

The BPU initiated a review of the earlier policy, stemming from a two-decades old rate case involving Atlantic City Electric, saying the CTA “is producing results that appear to be out of step with current economic developments and tax laws.’’

In an order issued by the BPU, the commissioners found that the old policy did not yield a result that is “just and reasonable for both ratepayers and shareholders.’’ The modifications adopted by the agency strike an appropriate balance between the interests of the regulated utilities and their customers, according to the order.

The order, however, falls short of what utilities and others sought — an outright elimination of the CTA, a tool used by only a few states besides New Jersey.

Even though the utilities did not win an elimination of the CTA, the modifications made by the BPU will make it less likely for it to be a detriment to the companies, according to Paul Patterson, an energy analyst with Glenrock Associates in New York City.

In comments submitted on the straw proposal developed by the BPU staff and essentially adopted in whole, Jersey Central Power & Light called the past policy fundamentally flawed and in violation of federal tax laws, adding that its continued application would result in confiscatory rates for the utility.

The New Jersey Utilities Association argued that at a time when the state is focused on increasing investment for infrastructure resilience, the CTA leads to reduced investment, and negatively impacts a utility’s ability to attract investment.

BPU Commissioner Mary-Anna Holden agreed. “It’s a long time coming,’’ she said.

In addition to the change in who gets the benefits of the tax losses incurred by the holding company, the new policy will not include a utility’s transmission assets when calculating the CTA. Transmission projects have become an increasingly lucrative investment opportunity for utilities and their parent companies — earning higher rates of return than investments in their distribution system.

That provision drew opposition from the New Jersey Large Energy Users Coalition, a group representing manufacturers and other companies using huge amounts of energy.

“If transmission assets are not included in the board’s CTA calculation, the billions of dollars of ratepayer revenues associated with this large and rapidly growing asset class will provide no tax benefit whatsoever to ratepayers who pay for these assets,’’ argued Steven Goldenberg, an attorney representing the coalition.