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House of Representatives
Session of 2015 - 2016 Regular Session


Posted: June 15, 2015 12:59 PM
From: Representative Robert W. Godshall
To: All House members
Subject: Computation of Tax Expense for Ratemaking Puposes for Utilities
In the near future I will be introducing legislation to require that a public utility’s federal income tax expense must be calculated on a “standalone” basis – separate from any gains or losses of an unregulated affiliate – in rate proceedings before the Public Utility Commission (PUC).

By way of background, Federal tax law permits a group of affiliated companies to file a “consolidated” tax return, so that losses of one or more affiliates can offset income earned by other affiliates, and the group has a lower tax liability than it would if each company filed a separate return. This federal policy is intended to leave more money in the hands of the companies for investment and job creation. When a public utility is part of a group of companies that have filed a consolidated return, this raises the question of how to calculate the utility’s federal income tax expense in a rate proceeding before the PUC.

A majority of states and the federal government have concluded that the proper way to calculate a utility’s federal income tax expense in this situation is on a “standalone” basis, so that the utility’s recoverable tax expense is based upon its operations, not those of an unregulated affiliate. This is consistent with the normal regulatory approach of keeping the operations of unregulated companies separate from those of public utilities. Just as the rates of a public utility may not be increased to recover the losses of an unregulated affiliate, a utility’s rates should not be decreased based upon tax deductions arising from the operations of unregulated affiliates.

Pennsylvania, however, is currently part of a small number of states that do not follow the standalone approach and instead, when setting rates, requires a “consolidated tax adjustment” (CTA) to a public utility’s tax expense. The CTA uses tax deductions resulting from the losses of unregulated affiliates to subsidize the rates of the public utility. Pennsylvania’s CTA policy was not established by the General Assembly through legislation. This policy was created by our appellate courts and is an example of judicial policymaking.

Texas, Virginia, New Jersey, California, Maryland, the District of Columbia, Kentucky, Nebraska, Minnesota, New Mexico, and Washington all follow the standalone approach when calculating the income tax expense of a public utility for ratemaking purposes.

Please join me in sponsoring this legislation to encourage utility investment and modernize our ratemaking policies to bring them in line with the strong majority of other states.

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Introduced as HB1436