Court ruling on utility taxes may save millions for customers

Utilities save on taxes when they file combined tax returns with parent companies. Some want a bigger share to go to customers
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In a victory for consumers, a state appeals court has tossed out a rule that tells utilities how to use the money they save when they file consolidated tax returns with their parent companies and affiliates.

The 20-page decision reversed the existing rule and sent the issue back to the New Jersey Board of Utilities. The board could decide on a different way of how those savings are allocated and that could save ratepayers tens of millions of dollars, according to Rate Counsel Director Stefanie Brand, who challenged the rule before the court.

The fight over this tax rule has bounced  in and out of the courts for years and is significant because the policy has been used as a bargaining chip by the Rate Counsel in negotiations over rate increases sought by utilities in the state. It can help offset the impact to customers’ bills of rate increases ordered by the BPU.

“It will help us enhance our position in settlement discussions,’’ Brand said. “This is a big decision.’’

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New Jersey is the only state with a consolidated tax adjustment, a provision long opposed by utilities, which have argued the policy discourages investment by the companies and negatively impacts the ability to attract investment.

Reducing tax liability

The filing of a consolidated tax adjustment allows a utility to take advantage of tax losses incurred by an affiliate, thereby reducing its tax liability.

In the Rate Counsel’s brief challenging the new version of the rule, her office argued the new policy was adopted without any explanation of factual or substantive evidence of why the change was made, an argument the court also noted.

Under the policy rejected by the court, utilities would receive 75% of the savings from these tax filings and customers 25%, a departure from past policy when negotiations typically led to a 50-50 split. Before the present policy was adopted, the staff of the BPU had earlier proposed a reversal of that allocation with 75% going to customers and 25% to the utilities.

When filing a consolidated tax return with its affiliates and parent company, losses experienced by those entities can be used to reduce tax liabilities of the utility.

“Standing alone, these utilities would pay taxes,’’ said Steven Goldenberg, a lawyer representing the New Jersey Large Energy Users, a party to the case. “The net effect is utilities pay little or no taxes.’’

Customers could save ‘a lot of money’

How much the ruling could save utility customers in future rate cases is uncertain, largely dependent on how the BPU decides to address future allocations. “It is a lot of money,’’ Brand said.

Goldenberg agreed. “There is a lot of money involved, but it will vary utility by utility,’’ he said.

Tom Churchelow, president of the New Jersey Utilities Association, said the trade association will review its options given the court’s decision. “We feel the panel in this case should have gone further to fully acknowledge the BPU’s authority and to give the board due discretion to establish ratemaking authority,’’ he said.

New Jersey is an outlier on this issue and is the only state left that has a consolidated tax adjustment, he added. “That is because it runs counter to principles that isolate ratepayers from the risks borne by affiliate companies.’’

Paul Patterson, an energy analyst at Glenrock Associates in New York, agreed, saying the decision probably represents a negative for the state’s utilities. “It does have the potential to impact customers’ rates,’’ he said.

The BPU declined to comment on the court’s ruling.