20180329Suez Report.pdf

James C. Cagle
Vice President - Regulatory Business
461 From Road, Suite 400
Paramus, NJ 07652
. ^ tel [phone]
I Y email [e-mail]
March 28,2018
Ms. Diane Hanian
Commission Secretary
ldaho Public Utilities Commission
472 W . Washington Street
Boise, ID 83720-0074
In the Matter of the Investigation into the Impact of Federal Tax Code Revisions on
Utility Costs and Ratemaking
Case No. GNR-U-18-01 Order No.33965
Dear Ms. Hanian:
On January 16,2018, the Idaho Public Utility Commission (the "Commission") directed in its
Order in PUC Case No. GNR-U-18-01 ("Generic Tax Order") a requirements for utilities under its
jurisdiction related to the impacts of modifications to the Internal Revenue Tax Code by the
implementation of The Tax Cuts and Jobs Act of 2017 ("TCJA"). In compliance with the requirements
set forth in that Order, please accept the following letter as the report of SUEZ Water Idaho Inc. ("SWID"
or the "Company").
Background
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act which
substantially modifies the Internal Revenue Tax Code ("IRC") effective January 1,2078. At a minimum,
the passage of the TCJA was highly partisan and, according to many projections will add substantially
to the Federal deficit over time. SUEZ believes therefore that it is likely that in the near future, other
substantive changes could again be made to the IRC which could additionally impact SWID. As a result,
due to the ongoing level of uncertainty, the Company's proposed ratemaking treatments in this response
are made with an eye to future changes.
As currently in place, and as related to SWID, the modification having the greatest direct impact
is the immediate reduction of the corporate income tax rate from 35Yo to 2lo/o ("The FIT rate"). This
change reduces both current and deferred Federal Income Tax Expense for the Company and reduces the
amount of Accumulated Deferred Income Tax ("ADIT") required to be recognized on the Company's
balance sheet. In addition, the TCJA eliminated the exemption for water and sewer utilities from
recognizing Contributions in Aid of Construction ("CIAC") as taxable income.
United Water is changing its brand to SUEZ
Head office - 461 From Road, Suite 400, Paramus, NJ 07652 - Tel: [phone] - www.unitedwater.com
SUEZ
RECEIVED
?ilr$HAR29 frH 9:
0hrSS
Re:
@suez
Sinsle Issue Ratemakins
SWID believes that this proceeding constitutes single-issue ratemaking. With any such
proceeding which considers a limited issue, due care should be taken such that any resulting change in
rates fully considers the issue and does not impact other issues more appropriately determined in a full
rate case. The impacts of the TCJA are well defined, the date of change certain, and the ability to calculate
the impact based upon the actual financial information for 2017 sufficiently clear that almost all of the
impacts of the TCJA can be determined and resolved outside of a base rate case.
Accounting issues
The application of provisions of the TCJA are complex. An example of the recognition of this
complexity is Securities and Exchange Commission l7 CFR Part2l I [Release No. SAB 118] Staff
Accounting Bulletin No. 1 18, which is applicable to publicly traded companies under the jurisdiction
of the SEC, allows corrections up to one year from the date of implementation stating: "The
measurement period begins in the reporting period that includes the Act's enactment date and ends
when an entity has obtained, prepared, and analyzed the information that was needed in order to
complete the accounting requirements under ASC Topic 740. During the measurement period, the
staff expects that entities will be acting in good faith to complete the accounting under ASC Topic
740. The staff believes that in no circumstances should the measurement period extend beyond one
year from the enactment date."
Currently, the Company is continuing to review in detail its income tax records in order to
verify the balances of the regulatory liabilities subject to continued normalization ("protected") as
well as those that are not ("unprotected") and has engaged an outside accounting firm to assist in
that review. The Company anticipates that some change could occur to the approximated
amortization period, protected vs. unprotected amounts as well as possible changes in the regulatory
liability itself once all analyses are complete and as the 2017 income tax returns are filed. SWID
anticipates the 2017 income tax returns will be filed by October 15,2018.
The effects of the TCJA on the SWID balance sheet
The effects from the TCJA have been deferred upon the books and records of the Company
consistent with Generally Accepted Accounting Principles ("GAAP"), and consistently applied
regulatory principles. GAAP requires that the Company reflect the effects of the change in ADIT in the
2017 frnancial statements resulting from the change in the FIT rate from35Yo to 2lYo. Also, because the
Company is rate regulated and subject to the jurisdiction of the Commission, that change in the total
balance of ADIT has been reflected as a regulatory liability on the Company's balance sheets as of
December, 31,2017. The effects of the TCJA are neutral to the Company's balance sheet and rate base
2
@suez
SWID has included with this letter Exhibit D showing the transactions and, referencing Exhibit
D, the sum of the regulatory liability and post TCJA ADIT is equivalent to the pre-TCJA ADIT. For
ratemaking purposes, ADIT is a reduction in the Company's rate base and the resultant regulatory
liability would also be considered a reduction to rate base. Therefore, the impact of the TCJA for this
entry is neutral to the Company's balance sheets and "per book" rate base as of December 3 1 , 2017 .
The change in ADIT related to certain items will change the related tax sensitive item if that tax
sensitive item is grossed-up for income taxes. Consequently, the change in ADIT should not be included
in the regulatory liability but should change the related tax sensitive item in the same amount. Schedule
D adjusts for such items.
The effects of the TCJA on the SWID income statement
The immediate change in the Federal Income Tax ("FIT") rate impacts the Company's ongoing
income tax expenses beginning January 1,2018. Consequently, the Company has, and will continue to,
calculate the difference in income tax expense at the 35% vs. the 2lYo rates beginning January 1,2018
and record this difference to a regulatory liability until such time as the SWID's rates are updated to
reflect the reduction in income tax rates. The Company is making this calculation based upon actual
monthly results.
Ratemakine Related to the Established Reeulatorv Liability
The regulatory liabilities established (or portion thereof) which were contributed by customers
should be returned to customers over an appropriate amortization period. This amortization period for
the amount of the regulatory liability which arose from normalized ADIT amounts is considered
"protected" and per the IRC, may be amortized no faster than over the period in which the related ADIT
would have otherwise reversed. As this amount is amortized, the amortization should result in a decrease
in current expenses and an incremental increase in rate base of the amount of the amortization (net of the
ongoing income tax impacts). When rates are reset, the Company believes those impacts on rates must
be taken into account regardless of the direction of the adjustment.
The amortization period for the amount of the regulatory liability which arose from amounts not
considered normalized are "unprotected" and may be amortized over a period different from those
protected. We believe that the Commission should consider carefully the appropriate amortization
periods for this amount. As noted above, while SWID believes that significant changes could be made
to the IRC reversing many of the impacts of the TCJA, it and the Commission must act consistent with
their understanding of the IRC at this time, but should consider within that decision, ways to mitigate
more radical impacts in the event future adjustments are made. A significant change impacting the level
of ADIT required by GAAP and, particularly with the amount of the "unprotected" regulatory liability
3
@suea
if amortized inappropriately quickly, could require a later charge to customers or create a further
permanent regulatory asset.
As the regulatory liabilities are amortized, the amount of the amortization would decrease
customer rates by the amount of such amortization. In addition, the amortizations would also increase
rate base as the balance of the regulatory liabilities (a reduction to rate base) is decreased. Consequently,
For SWID, for each $1 of continued amortization, the resulting revenue requirement would be offset by
approximately $0.10 which is cumulative year over year.
SWID believes the disposition of the amortization of the regulatory liabilities are best addressed
in a base rate filing. The decreasing nature of the regulatory liability calls into question the appropriate
level of rate base adjustment needed over the period before the next base rate case. In the meantime,
SWID believes the regulatory liabilities should be held at their current levels effectively reducing rate
base (net of the associated ADIT). To place context around the amounts, the amount of the amortization
including the rate base impact is approximately 0.5% of current revenues.
Contributions in Aid of Construction
CIAC for both electric and gas utilities have been taxable since the Tax Reform Act of 1986. As
a result of the taxability of the contribution, utilities commonly required the contributor to pay for the
income tax consequences of the taxability of the contribution so that the utility's customers would not
subsidize the contributor. While water and sewer utilities had been exempt from the "taxable CIAC"
since 1996, the TCJA eliminated that exemption. The Commission in its Order 21933 in Case No. U-
1500-176 entered June 3, 1988 addressed the taxability of CIAC. In that Order. SWID (then Boise Water
Company) was allowed to continue a previously authorized methodology (Order No. 20955) whereby
individual agreements were entered into with developers and others. This methodology, while making
the Company whole, was then and, if re-established, would be administratively burdensome.
The Company has investigated how taxable CIAC has been addressed in other of SUEZ'
regulatory jurisdictions and would propose that SWID be authorized to gross-up the CIAC charged to
developers at the net present value of cash flows resulting from the taxability of the CIAC and the future
deductibility for income tax purposes of the resulting asset. Additionally, the Company would propose
that the deferred income tax impact of such a transaction be held outside of the ratemaking process such
that water service customers are not impacted. This is essentially the methodology illustrated in
Schedules 1 through 3 attached to the aforementioned Commission Order.
The TCJA's elimination of the exemption of water and sewer companies does not impact either
SWID's regulatory liability or the ongoing change in total income tax expenses for ratemaking purposes
resulting from the TCJA at this time.
4
@suee
Exhibits Attached
Exhibit A - the calculation of the change in revenue requirement for SWID
In order to calculate the level of income taxes included in current rates, it is appropriate to look
at how income taxes were calculated in the case from which the current rates were derived. In order to
make this calculation for SWID, the components needed are the rate of return and components thereof,
rate base, the components of the revenue conversion factor, and the State and Federal income tax rates.
Unfortunately, except for the State and Federal income tax rates, the remaining information is unknown
within the settlement. In Exhibit A, SWID has utilized calendar year 2017 and has calculated pro-forma
income taxes at 35Yo and at the TCJA income tax rate of 2lYo and has also calculated State income tax
expense utilizing the income tax rate recently updated through the passage of H.B 463. The components
of the revenue conversion factor as filed in the Company's last rate case are included on page 2 of Exhibit
A utilizing the updated income tax rates The calculation indicates that the change in federal income taxes
is $2,722,7 91 or 5.557o/o.
Exhibit B - the proof of rates showing the applicable rates calculated in compliance with the
requirements of this provision of the Generic Tax Order.
In Exhibit B, the proof of revenues utilized to prove rates in the Case was utilized to prove
recalculated rates to be charged to customers after including the impacts ofthe TCJA. Utilizing the billing
determinates, the current water service rates are reduced uniformly by the percentage calculated and
shown on Exhibit A. The calculation does not reduce miscellaneous charges.
As Exhibit B shows the calculation of rates based upon the Company's proposal, the Company
respectfully requests a waiver from the requirement to provide proposed tariff schedules. The Company
anticipates working closely with Staff to determine the exact rates, timing of implementation, and other
issues and will provide tariff schedules once that work is concluded.
Exhibit C - the calculation of the regulatory liability and ADIT reflecting the TCJA
Attached as Exhibit C to this letter are the Company's calculations as of December 31, 2017 of
the Post TCJA Regulatory liability which is grossed-up and the Post TCJA ADIT which includes the
deferred income tax impact of the Regulatory liability gross-up. These amounts reflect SWID's books
and records. As discussed above and as shown on Exhibit C, the impact of the entries to the Company's
balance sheets are neutral as shown on column c. Exhibit C also shows customer contributed "protected"
amounts column (d) and customer contributed "unprotected" amounts are shown in column (e). We
believe those customer contributed amounts are susceptible to ratemaking action.
As mentioned above, the Company is continuing to review in detail its income tax records.
5
@suez
Subject to the completion of the above review, the Company currently believes the amortization period
utilizing the "alternative method" as allowed by the TCJA is approximately 40 years and is required for
the 'protected' portion of the regulatory liability. The Company believes prudence dictates that the
unprotected portion of the regulatory liability should be amortized over the same period.
Conclusion
SWID appreciates the opportunity to file this letter in response to the Generic tax Order and looks
forward to the Comission's continuing process. If the Commission or its Staff have any questions or
discovery regarding this filing, the Company anticipates engaging in a full discussion of any of those
issues and looks forward to working with Staff to provide the benefits of the TCJA to ratepayers in this
complex matter.
Respectfully
James
Vice President -and Regulatory Affairs
Enclosures
6
SUEZ Water ldaho lnc.
Calculation of 2017 Federal lncome Taxes
Description
Exhibit A
Page 1
Calculation
@3s%
Calculation
@21o/o Difference
(a)
1 Total Total Pre-Tax Book lncome
2 Deductible State Tax: [1]
Permanent Differences:3 Reverse FBOS TaxStream included in current state deduction4 Non-deductible Penalties5 Disallowed Meals6 Lobbying Dues7 Total Permanent Differences
(b)
$1 5,743,979
1,111,712
204,746
245
6,004
5,295
(c)
$15,743,979
1,040,352
204,746
245
6,004
5,295
$71,360
2,063,8't2
2,135,172
1.2752091
$2,722,791
$48,997,697
-5.557o/o
I
't0
11
12
13
14
15
216.290 216,290
8 Financial Taxable lncome 14,848,557 14,919,9'17
35.00% 21.O0Yo
5,'196,995 3,1 33,183
Unit Tax Rate
Federal Tax-Current
Total
Gross Revenue Conversion Factor
Change in Revenue Requirement
Revenues as allowed last rate case
Percent reduction
[1] Please note the State income tax rate of 6.925% was utilized in the calculation as a result of the passage of H.B. 463.
The amount in column c represents a reduction of approximately 6.40/o and is calculated as the the State income tax on
line 2 of column c limes 6.925o/o I 7.4o/o.
Line
No.
SUEZ Water ldaho lnc.
COMPUTATION OF GROSS REVENUE FACTOR
Line
Exhibit A
Page 2
Percent lncremental
Gross Revenues
Percent lncremental
Gross Revenues
No Descri ption
1
2
3
4
5
6
7
8
9
10
11
t2
13
13
Net Operating Revenues
Less: Uncollectible Accounts Expense
Less: IPUC Assessment Rate
Rate Applicable to O&M Expense & IPUC Assessment
State lncome Tax a|7.4% and at 6.925%
Effective Net State Tax Rate
Federal lncome Tax Residual
lncremental Federal lncome Tax Rate
Federal lncome Tax at 35% and al27%
Composite: IPUC Fees, uncollectibles & lncome Taxes
Composite Residual
Gross Revenue Conversion Factor
State lncome Tax Rate
Federal lncome Tax Rate
1.0000000
0.0044060
1.00000
0.00441
0.002480.0024810
0.0068870
0.0740000
0.0734904
0.0803774
0.3s00000
0.3218679
0.0068870
0.00048
0.0004736
0.0073506
0.2100000
0.2084543
0.4022453
0.5977547
0.2758749
0.7841851
Composite Rate
7.6729270
7.400%
35.00%
39.81000%
L.275209L
6.925%
21.00%
26.47075o/o
UNITED WATER IDAHO INC.
APPLICATION OF PRESENT RATES AND PROPOSED RATES TO CONSUMPTION ANALYSIS
WITH ADJUSTMENTS FOR THE IMPACT OF TCJA
FOR THE YEAR ENDED DECEMBER 31,2017
Proposed
Rate
Proposed
Revenue
Exhibit B
Percent
Rate Block
ccF
Number Total Present Present Rate
Of Bills Consumption Rate Revenue
(1)
Residential - Bi-Monthly
Customer Charge
5/8
314
1
1 1t2
2
3
Subtotal
Winter Usage
Up to 3 CCF
Summer Usage
Up to 3 CCF
Over 3 CCF
Subtotal
Subtotal
Flat Rate
Total Class
Commercial - Bi-Monthly
Customer Charge
5/8
3t4
1
1 1t2
2
3
4
6
8
Subtotal
Winter Usage
Over 3 CCF
Summer Usage
Up to 3 CCF
Over 3 CCF
Subtotal
Total Class
Other Public Authority - Bi-Monthlv
Customer Charge
s/8
3t4
1
I 1t2
2
3
4
Subtotal
(2)(3)(4)
94,077
328,446
45,397
1,455
619
3
469,997
148
2,852
12,291
15,222
10,304
11,268
776
229
24
0
4,729,400
7,731,150
12,460,550
(5)
$ 2,103,562
7,344,053
1,297,446
71 ,1 50
46,964
444
10,863,619
7,443,130
15,209,491
22,652,621
33,516,240
12,707
$ 33,528,947
$ 63,771
274,827
435,045
503,866
854,903
114,832
63,220
11,062
0
2,321,526
4,071,167
7,841,394
11,912,561
$ 14,234,087
(7)
$ 1,986,906
6,936,780
1,225,265
67,192
44,351
419
'1 0,260,913
7,029,307
14,364,477
21,393,784
31,654,697
12,001
$ 31,666,698
60,234
259,586
410,842
475,839
807,352
108,454
59,707
10,447
0
(8)
-5.55o/o
-5.55o/o
-5.56%
-5.56o/o
-5.567o
-5.55%
-5.56%
-5.56%
-5.56%
-5.55%
-5.55%
-5.56%
-5.56%
-5.56%
-5.55%
-5.56%
-5.56%
-5.56%
-5.56%
-5.56%
-5.55olo
-5.55%
-5.56%
-5.56%
-5.56%
-5.55Yo
-5.56%
(6)
$ 22.36
22.36
28.58
48.90
75.87
't47.98
21.12
21 .12
26.99
46.18
7't.65
139.76
$
0
.5738
.9673
8s.86
1.4863
1.8580
81 09
21.'12
21 .12
26.99
46.18
71.65
139.76
260.73
435.30
569.47
1.4863
1.8580
52,966
17
46
184
107
223
o
o
2,586,839
3,985,866
22.36
22.36
28.58
48.90
75.87
147.98
276.07
460.91
602.98
1 5738
1.9673
$
0 2,192,461
3,844,819
7,405,739
11,250,558
$ 13,443,019
564
6,572,705
22.36
22.36
28.58
48.90
75.87
147.98
276.07
380
1,029
5,259
5,232
16,91 I
888
1,656
3s9
972
4,966
4,941
15,978
839
$$
0589
1 of2
31,363
21.12
21.12
26.99
46.1 8
71.65
139.76
260.73
29,619
UNITED WATER IDAHO INC,
APPLICATION OF PRESENT RATES AND PROPOSED RATES TO CONSUMPTION ANALYSIS
WITH ADJUSTMENTS FOR THE IMPACT OF TCJA
FOR THE YEAR ENDED DECEMBER 31,2017
Proposed
Rate
Proposed
Revenue
Exhibit B
Percent
Rate Block
ccF
Number Total Present Present Rate
Of Bills Consumption Rate Revenue
(1)
Winter Usage
Over 3 CCF
Summer Usage
Up to 3 CCF
Over 3 CCF
Subtotal
Total Class
Private Fire Lines - Bi-Monthlv
Fire Line Size
3" and smaller
4"
o
8"
10"
12"
Hydrants
Sprinkler
Total Private Fire
Total
Variance
Total Water Revenue
(2)(3)(4)(s)
18,505
67,215
85,720
1.5738
1.9673
39.42
59.75
148.40
243.85
380.29
s69.62
23.90
597.28
29j23
132,232
161 ,355
192,718
$ 103,951
210,679
444,310
215,076
20,536
20,506
23,303
3,584
$ 1,041,945
$ 48,997,697
$ (2,722,791)
(6)
1.4863
1.8580
37.23
56.43
140 15
230.30
359.16
537.97
22.57
564.09
124885
-5.56%
-5.56%
-5.56%
-5.56%
-5.56o/o
-5.56o/o
-s.56%
-5.s6%
-5.56%
-5.56%
(7')(8)
27,504
152,389
182,008$
$
$
2,637
3,526
2,994
882
54
36
975
o
98,1 76
198,972
419,609
203,125
19,395
19,367
22,006
11,110
534,810
0
1 9,1 1 8,975
3 385
$ 984,03s
$ 46,275,760
$ 854
$ 46,274,906
-5.557Yo
2 ot2
SUEZ Water ldaho lnc.
Accumulated Defened lncome Tax and Excess Oeferred lncome Tax Regulatory Liability Balances
As of December 31, 2017
ADIT
Balance at
$36,638
10,o41,452
(2,19s,178)
(382,157\
323.379
232,709
I 1,568
(97,443)
11,429
1458,444)
649,'113
(754,400)
916,880
(108,1s4)
(310,942)
464,114
426.875
642,0U
Adjusted
$36,638
10,041,452
o
1382,',|571
323,379
232,709
1 1,568
197,443\
11,429
1458,444\
649,1'13
(754,400',t
91 6,880
(1 08,1 54)
(31 0,942)
468,114
0
0
Rate Base
Related
Exhibit C
$0
Line Balance at Protocted Unprotected
No. Account Descriotion 1231/2017 Adjustments 12/31/2017 ADIT @ 21% FIT Rate @ 21% FIT Rate
IfI
,|
2
4
b
7
R
9
10
11
't2
13
14
15
16
17
'18
19
20
22
19010
28243
282c€'
24211
28300
24341
24342
28303
28304
28305
28306
24347
28308
28310
24311
24313
28314
Def. Federal lnc Taxes- Other
Def. FIT-MACRS
Def. FIT- OCI Pension/PBOP [1]
Def. FIT Benefit on DSIT
Def. FIT-Other
Def. FIT-Tank Painting
Def. FIT-Rate Expenses
Def. F|T-Deferred Charges
Def . FIT-Relocation Expense
Def. FIT-M_S Fees
Def. FIT-Pensions
Def. FIT-PEBOP
Def. FIT-Cost of Removal
Def. FIT-Uncollectibles
Def. FIT-lnjuries and Damages
Def. FIT - AFUDC Equity
Def. FIT - AFUDC Equity GU [2]
Def. FIT - AFUDC Equity GU-TRF [2]
2,195,178
1426,87s)
\u2,o34)
$'10,041,452
(382,157)
232,709
91 6,880
468.114
(4,51 0,799)
$6,1 34,701
$10,041,452
(382,1 57)
9'16.880
468 114
(4,417,716)
$6,008,1 07
232,709
(93,084)
$'126.594
0
Total Deferred Tax before TCJA impact [3]9,453,473
(3,531 ,015)
$4,802,1 91
10,579,743
(700.882)(4,231,897)
$953,202 $5,755,393
24405
28406
Def FIT - New Federal Tax Rate
Def FIT-New Federal TaxRate GU
283 Defered income taxes & ITC
(1,623,901) (1,590,391) (33,510)
-.91lr339!- -E19!!4!- -ll!94t-25316 Regulatory Liab-Tax New Federal Rate
26
27
28
29
Total ADIT and Regulatory Liability after
TCJA impact (line 26 plus line 29)$9,453,473
Amortization of the Rate Base Related
Regulatory Liability amount utilizing the
RSGM (estimated) over 40 years
F] Change in balances is offset by the change in valance of AOCI
[2] Change in balance is offset by the change in balance ot the associated regulatory asset.
[3] Sum of Lines I through 22
$1 0,579,743
$1 53,368