January 11, 2018

As winter cold drives up energy bills, tax reform could take bite out of rising utility rates

Matt Pilon
Matt Pilon
Consumer Counsel Elin Swanson Katz (center) is helping lead a push to ensure a federal tax windfall for the state's regulated utility companies is passed onto business and residential ratepayers. Helping her sift through the numbers are OCC rate experts Dave Thompson (left) and Rich Sobolewski (right).
Eversource
Eversource crews perform repairs in snowy weather

Corporations and many taxpayers are celebrating the federal tax cuts signed into law around Christmas, with some employers even issuing worker bonuses and increasing wages.

It turns out Connecticut's utility ratepayers, both residents and businesses, could end up having something to celebrate as well.

Joining regulators in other states around the country, Connecticut's Public Utilities Regulatory Authority (PURA) opened proceedings this month to determine how the tax windfall reaped by the state's electric, natural gas and water utilities — caused by the reduction of the federal corporate income tax rate from 35 percent to 21 percent — will be returned to customers.

Unlike regular corporations, which can book the tax savings as profits or spend the extra capital any way they see fit, utilities are highly regulated and the amount of profits they are allowed to make — as measured by return on equity — is limited by state statute (in Connecticut it's often between 9 and 10 percent).

Since the passage of the Federal Tax Cuts and Jobs Act, there's been pressure from regulators in many states to ensure that the windfall is returned to ratepayers, who ultimately pay utilities' taxes and other costs.

The amount of money in play for Connecticut ratepayers could be somewhere between $75 million and $100 million, according to initial estimates from the Office of Consumer Counsel (OCC), though the exact amount is yet to be determined by PURA, which is looking into rates of 15 electric, gas and water companies.

The relief talks started, coincidentally, as the state entered a near-record cold snap this month, which drove up demand (and prices) for natural gas, which is a fuel source for many electricity generators and a heat source for about one-third of Connecticut residences, leading to higher energy bills for many.

An unknown portion of the savings could be returned to customers in the form of lower rates or credits, while some may be used for programs that benefit ratepayers, including projects that make infrastructure more storm resistant.

"This is going on around the country," said Consumer Counsel Elin Swanson Katz, who was recently named president of the National Association of State Utility Consumer Advocates. "It's been on our radar for more than a year."

While state regulators oversee the occasional ratepayer refund for tax reasons — Aquarion Water Co. issued a $29 million refund in 2014 after a change in IRS accounting rules, for example — this one is big.
"It's the biggest since 1986," said Rich Sobolewski, OCC's supervisor of utility financial analysis, who was referencing tax cuts under President Ronald Reagan.

While the recent tax cut is expected to slow energy price growth, Connecticut ratepayers still pay the highest energy prices in the lower 48 states, federal data shows.

"Any time we can get news in Connecticut that we are getting some relief on our electricity rates, it's something to celebrate," said Eric Brown, a lobbyist for the Connecticut Business & Industry Association. "It's obviously still very expensive in the state."

Realistically, the tax savings may be the biggest impact on rates that Connecticut customers see anytime soon, said Lee Hoffman, an energy attorney at Pullman & Comley in Hartford.

Connecticut will never be able to compete on price with states that have and use coal or have access to large-scale hydropower, and it has made a decision (which costs money) to promote cleaner energy.
"Something like this is really the best we can hope for right now, absent a more regional or global look at how we're handling our energy costs," Hoffman said.

Windfall to blunt Eversource hike

The timing of the new tax law comes as Connecticut's largest utility is in the midst of an electricity rate case with PURA.

Eversource is asking for a rate hike that would boost its 2018 revenues by $255.8 million (a 7 percent increase over a 2017 rate base of $3.68 billion) plus another $45 million and $36 million in 2019 and 2020, respectively.

The requested increase, Eversoure's first in three years, would fund things like capital expenditures, additional staff, a higher rate of return on equity and other items.

[This section has been updated to reflect a settlement OCC filed with PURA]

On Thursday, after this story had been published, OCC announced a deal negotiated with Eversource to reduce the overall three-year increase by $182.4 million, the bulk of it in the first year.

Instead of a 6.6 percent increase on bills, that would amount to a 2.5 percent increase.

Eversource spokesman Mitch Gross said the company believes its customers should receive the benefits of the tax law, and noted that the exact amount and timing of the rate reduction will be for PURA to decide.

For Avangrid's United Illuminating, OCC's calculations say the tax law would nearly wipe out an approved $11 million rate increase this year. Meanwhile, Southern Connecticut Gas customers would see an approximate $5.5 million decrease in overall rates.

Utilities with older rate cases are tougher for OCC's experts to calculate because their latest financial data is unavailable.

Adding to the complexity of determining rate impacts is the fact that most utilities have sizable balances of deferred tax liabilities, which are taxes to be paid in the future. The drop in the federal corporate tax rate also reduces those liabilities, and those savings will be part of the equation PURA is considering.

Assuming regulated utilities pass on the entirety of the savings from the tax law to customers, does the law really matter to them and their shareholders?

Yes, said Eric Grey, senior director of government relations at the Edison Electric Institute, an industry group.

"First and foremost, it's great for our customers," Grey said. "We also view it as a big win for our companies in the sense of, if that corporate rate does lead to additional economic growth, then that's more customers for us."

Correction: This story originally gave an incorrect last name for Dave Thompson. A table of potential rate impacts that accompanied this story in HBJ's Jan. 15 issue included OCC estimates of rate impacts. For Eversource, those initial numbers have changed as a result a settlement reached last week.

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