Appellate Court’s Reversal of Public Utility Tax Policy Could Mean Lower Bills

Tom Johnson | September 19, 2017 | Energy & Environment
Court rules on BPU’s failure to follow rulemaking process, remains silent on merits of consolidated income tax returns

Stefanie Brand, director of the New Jersey Division of Rate Counsel
A state appeals court yesterday reversed a Christie administration bid to change an arcane tax policy dealing with utility regulation. The decision could end up holding down rate increases for customers.

In a 27-page decision, the court ruled the New Jersey Board of Public Utilities adopted the tax policy without going through the formal process of rulemaking, sending the issue back to the state agency.

The case revolved around how utilities use the savings they achieve when they file consolidated tax returns with parent companies and affiliates. The new policy would have shifted most of the savings from customers to the companies.

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 business owned by the parent, thus reducing its tax liability.

“It’s good for ratepayers,’’ argued Rate Counsel Stefanie Brand, who appealed the case after the BPU changed the policy in the fall of 2014. “This has a direct impact on how much people pay.’’

The past policy gave consumer advocates like the Division of Rate Counsel an important bargaining chip in rate cases that came before the board, using the CTA to negotiate better rates for customers.

In its decision, the court did not rule on the merits of the policy, but found the BPU failed to follow the Administrative Procedures Act in adopting the changes in tax adjustments. The court, however, noted the potential effect on customers in its decision.

“The failures are of particular significance here because of the conflicting evidence presented concerning the modified CTA’s potential economic impact on ratepayers,’’ according to the court.

The new policy altered a decades-old provision that had long been criticized by the utilities, who noted New Jersey was one of only a few states that still used such tax treatments.

In adopting the policy, the board’s order argued the changes struck an appropriate balance between the interest of the regulated utilities and their customers.

“We are disappointed that the court reversed it,’’ said Andrew Hendry, president and CEO of the New Jersey Utilities Association, which had joined the case. “At this point, we are reviewing our options.’’

What happens next is unclear. The board must go through a formal rulemaking process, but that will not be completed until well into next year. By then, a new administration will have taken office in the State House.