New Rule Could Cost Utility Customers Millions, Rate Counsel Challenges

Regulation changes how certain savings are split, now giving lion’s share to utilities at the expense of customers

Stefanie Brand, director of the Division of Rate Counsel
The New Jersey Division of Rate Counsel is challenging a new rule that it says could cost utility customer millions, if not hundreds of millions, of dollars in future rate cases.

The regulation, adopted by the state Board of Public Utilities earlier this year, deals with how utilities use the savings they achieve when they file consolidated tax returns with parent companies and affiliates. (All of the state’s utilities are owned as subsidiaries by parent companies.)

The issue has been contentious for years as the policy has been used as a bargaining chip by the Rate Counsel in negotiations over rate increases sought by the state’s utilities. New Jersey is the only state in the nation that uses the so-called consolidated tax adjustment (CTAs), a tool long opposed by utilities who have sought its elimination.

In its appeal, the Rate Counsel argues the state agency adopted the new regulation without complying with the Administrative Procedures Act and the board adopted significant changes to the rule without any explanation of factual or substantive evidence.

A sharp departure

Under the new policy, utilities will receive 75 percent of the savings from CTAs and customers 25 percent, a sharp departure from the past when negotiations led to a 50-50 split, according to Rate Counsel director Stefanie Brand.

“Given the magnitude of calculated CTAs, this single change will cost utility ratepayers millions, if not hundreds of millions, of dollars in rate annually, compared to the formula set forth in the January proposal,’’ the Rate Counsel said in its filing.

The filing refers to a January 2018 rule proposal by the BPU, which had the allocations reversed with 75 percent going to the ratepayer and 25 percent to the utility. That was reversed in a later rule proposal by the agency a month later.

“They have never given us any explanation why the utility share went to 75 percent and ratepayer share to 25 percent,’’ Brand said in an interview yesterday.

In comments submitted to the BPU before the rule proposal was adopted, utilities questioned why the agency was still using consolidated tax adjustments in ratemaking. Atlantic City Electric asked how the state is benefiting from continuing to apply a widely discredited rate adjustment tool.

Expect more heated debate

The CTA is not sound public policy and should be eliminated in its entirety, according to the utility.

In its response to comments, the agency said the board argued it preserved “this benefit to New Jersey ratepayers rather than eliminate’’ it entirely.

The debate over the issue is likely to become more heated with reports of a study yesterday by the Institute on Taxation and Economic Policy that found 60 Fortune 500 companies avoided all federal taxes in 2018, in part due to federal tax reforms pushed into law by the Trump administration.

Among the companies was Newark-based Public Service Enterprise Group, which reported income of $1.8 billion last year. Earlier this month, the BPU approved a $300 million annual subsidy to PSEG Power and Exelon, which own three nuclear power plants in South Jersey. The company claimed the plants would have shut down without the subsidies, dubbed zero emission certificates by the state.

“In the context of the awarding of the ZECs, someone needs to stand up and say it isn’t fair,’’ said Brand, who argued the system forces ratepayers to pay the utility’s phantom taxes. “We may lose, but the fact is, it is just wrong.’’

“The federal tax reform measure enacted last year encourages companies to make large investments by allowing businesses to immediately deduct the cost of major investments, pursuant to the law,” said Michael Jennings, a spokesman for PSEG.

“Our new power plants are examples of investments that fulfill the intent of the tax reform law. Those investments help spur the economy and create jobs, and we took the deductions,” he said.

Customers have benefited tremendously and will save more than $600 million this year because of the federal tax reform, according to Jennings.