20170215Genora Rebuttal.pdf

Ronald L. Williams,ISB No. 3034
Williams Bradbury, P.C.
1015 W. Hays St.
Boise,ID 83702
Telephone: [phone]
Email: [e-mail]
Attorneys for Intermountain Gas Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
INTERMOUNTAIN GAS COMPANY FOR
THE AUTHORITY TO CHANGE ITS RATES
AND CHARGES FOR NATURAL GAS
SERVICE TO NATURAL GAS CUSTOMERS
IN THE STATE OF IDAHO
Case No. INT-G-16-02
REBUTTAL TESTIMONY OF DONNA GENORA
FOR INTERMOUNTAIN GAS COMPANY
February 15,2017
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Please state your name, position and business address.
My name is Donna Genora. I am the Tax Director for MDU Resources Group.
My address is 1200 W. Century Ave., Bismarck, North Dakota, 58503.
What are your responsibilities As Tax Director?
I oversee and direct all tax matters ofthe MDU Resources Group companies. Many
areas of responsibility include federal and state income, sales and use, and property
tax compliance; planning, and financial reporting for income taxes.
Would you please describe your educational and professional background?
I graduated from San Jose State University with a Bachelor of Science in
Accounting and I am pursuing a Masters in Taxation from Villanova University
School of Law. I have worked as a tax professional for over 20 years, holding
positions of increasing responsibility in both public accounting and industry. I
have held my current position at MDU Resources since February of 2015. Prior
to joining MDU Resources, I served as the Tax Director for SOAProjects, from
2012 to 2015, and a Senior Tax Manager at Omnicell, Inc., and before that at
Ernst & Young. I am a Certified Public Accountant licensed in the states of
California and North Dakota.
What is the purpose of your rebuttal testimony?
My rebuttal testimony will respond to the direct testimony of Mr. Michael
Gorman, who testifies on behalf of the Northwest Industrial Gas Users
("NWIGU"), that Intermountain Gas Company (o'Intermountain" or the
"Company") should have elected to take bonus tax depreciation, which Mr.
Gorman believes should then cause a reduction in the Company's revenue
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requirement in this case.
What is bonus depreciation?
Since the beginning of the 2008 recession, Congress has used different
approaches to boost the economy, including the allowance of "bonus
depreciation"-which allows more rapid recovery of certain capital investments
than its economic depreciation. The assumption is that the money will be
reinvested. Bonus depreciation allows taxpayers to deduct from taxable income
50 to 100 percent of the cost of the new asset. As with accelerated depreciation,
bonus depreciation reduces the taxable income of the taxpayer and the amount of
taxes it must pay. For regulatory purposes, bonus depreciation increases the
accumulated deferred income taxes in the year claimed, therefore as Mr. Gorman
expressed, decreases the revenue requirement.
Are all taxpayers who are eligible for bonus depreciation deductions
required to claim them?
No. The law permits all taxpayers to elect not to claim bonus depreciation in any
year, without limitation of industry classification.
Are there existing commission regulations or previous rulings requiring gas
utilities to take bonus depreciation?
I am not aware of any such regulations, past orders or economic disincentives to
opting out of using bonus depreciation.
Does an option to elect out of bonus depreciation suggest that it does not
always benefit the taxpayer?
Yes.
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Does the Company intend to claim bonus depreciation in 2016?
No.
WiIl you please explain how Intermountain determines its tax liability and
prepares and files its tax returns?
Yes. Intermountain files its federal income tax return as part of a consolidated tax
group of which MDU Resources Group, Inc. ("MDUR') is the common parent.
Each member of the group reflects its own taxable income and deductions. After
eliminations, the individual items for each member are aggregated and reflected
on the first page of the federal form 1120 as consolidated items. The net
consolidated taxable income or loss is computed, subject to various elections and
limitations, and a tax is calculated on this amount.
Why did the Company choose not to take bonus depreciation?
On a consolidated and business unit basis, a long-term strategic management
decision was made to forego bonus depreciation for qualiffing assets acquired
and placed in service for 2016. Both tax and non-tax factors were considered at
both the Intermountain and consolidated group levels. Management concluded
that the benefit to forego bonus depreciation far outweighed taking bonus
depreciation.
What are some of the tax and non-tax factors considered when deciding to
deduct bonus depreciation?
Factors considered are current and budgeted capital investments, forecast
operating and taxable income, existing federal and state tax credits and net
operating loss carryovers, impact of other permanent tax adjustments, the
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1 likelihood of federal tax reform, economic risk of various industries, and debt.
How did these factors impact the decision to forego bonus?
The most compelling factors in management's decision are rooted in the
unprecedented changes in the oil and gas industry and expiring state tax credits.
Management and its Board of Directors adopted a strategy to lower risk in the
MDUR business portfolio and accordingly sold off assets and lines of business
with high volatility. The disposal of these lines of business generated nearly $868
million of tax losses during 2015 and 2016.
How does bonus depreciation impact expiring state tax credits?
Electing out of federal bonus depreciation would not have an impact for states
which are non-conforming to federal bonus depreciation such as Idaho. However,
for the remaining states that conform to federal bonus depreciation a significant
amount of state tax credits are at risk of expiration. By not deducting bonus
depreciation, we have the ability to utilize approximately $9.5 million of tax
credits that would otherwise expire had we not elected out of bonus and carried
over federal net operating tax losses for the next five years.
Has bonus depreciation been taken in past years?
From acquisition in 2008 through 2014,Intermountain and MDU Resources have
utilized bonus depreciation, therefore reducing the federal income tax that would
otherwise be payable in that year.
Is the decision to deduct bonus depreciation based on whether or not the
Utility Group as a whole benefits?
Yes. The decision was made to promote the best tax outcome for the consolidated
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1 group as a whole. Mr. Gorman's proposal would mean that the group pays more
tax than is necessary.
Is there a benefit in participating in a consolidated tax group?
Yes. It has been MDUR's experience that filing as part of a consolidated group is
beneficial to the group. The MDUR group has complementary business cycles,
diversification, and access to capital, collective regulatory and business process
synergies and expertise. For Intermountain, in years where they have been in a net
operating loss position, the consolidated group was able to utilize their tax losses
or monetize them within the group such that no net operating loss deferred tar
asset remained to increase rate base.
What other objections does Mr. Gorman's proposal creates?
Mr. Gorman recommends adjusting rate base equal to the tax effected amount of
bonus depreciation not taken. This "additional deferred taxes" creates a violation
of the IRS NormalizationRules.
What is normalization?
Normalization spreads the tax benefits associated with utility assets over the same
period that the costs of those assets are recovered from customers. It seeks to
treat current and future utility customers equitably by allowing all customers to
enjoy the tax benefits of depreciation.
Why is Intermountain subject to the IRS normalization method of
accounting?
Normalization came about when accelerated depreciation first became tax law. In
essence, Congtess is using the tax system to extend loans to taxpayers that invest
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in plant and construction assets. The loan is extended when accelerated
depreciation is claimed and it reduces the taxpayer's tax liability. The loan is
repaid as the asset continues to produce taxable revenue when there is no more tax
depreciation, therefore increasing the taxpayer's tax liability. This is commonly
referred to as an "interest-free" loan from the govemment. The complication
came about when utilities were required to pass through the benefit of accelerated
depreciation to ratepayers in the ratemaking process. Rather than meeting the
intent of Congress to stimulate the economy, the tax benefit went to the
ratepayers. As a result, Congress included a provision requiring the normalization
method of accounting to be used in order to ensure that the company claiming the
deduction under the new law received the benefits of accelerated depreciation.
How does Mr. Gorman's proposal create a normalization violation?
The Regulations provide that deferred taxes are calculated with respect to actual
tax liability. By definition, hypothetical defened taxes used in ratemaking is
inconsistent with normalization rules. Furthennore, under these rules, it is
impermissible to flow the tax benefits of accelerated depreciation deductions (i.e.
"bonus depreciation") through to ratepayers ifthe taxpayer has not yetrealized
such benefits. Said another way, the reduction of rate base lowers the revenue
requirement, which transmits the tax benefit of bonus depreciation to the
ratepayer in20l6. Meanwhile, the Company elects out of bonus depreciation and
will receive related tax benefits (i.e. a reduction of its tax liability to the
government) over the lives of the assets. In this example, the ratepayer clearly
receives the related tax benefit faster than does the Company, thus causing a
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normalization violatton.
What are the implications of a normalization violation?
The effect would be to risk the permanent loss to utilize any form of accelerated
depreciation. The net result would be the loss of a zero-cost capital source,
thereby increasing the Company's cost of capital and harming ratepayers through
higher rates.
Please summarize the Company's position?
I do not agree with Mr. Gorman's bonus depreciation adjustment. First, his
proposal creates a normalization violation. The only objective met is a short-term
tax benefit with significant detrimental long-term tax consequences for both
Intermountain and its customers due to the loss of future accelerated depreciation
deductions. Second, the Company's decision to forego bonus depreciation was
grounded in sound, prudent and rational tax planning and business restructuring
strategies.
Does this conclude your testimony?
Yes.
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