20180531final_order_no_34074_suez_water.pdf

Office of the Secretary
Service Date
May 31,2018
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE INVESTIGATION )CASE NO.GNR-U-18-01
INTO THE IMPACT OF FEDERAL TAX )
CODE REVISIONS ON UTILITY COSTS AND )ORDER NO.34074
RATEMAKING )(SUEZ WATER IDAHO,INC.)
On March 29,2018,SUEZ filed its report on the impact of recent tax law changes on the
costs and rates of SUEZ Water Idaho Inc.(the "Company").SUEZ proposed to address the
deferred tax liabilities in a future general rate case.On May 22,2018 Staff filed a report
recommending the Commission authorize the Company to decrease base rates by $2.7 million on
June 1,2018 (about 5.6%),and take other actions.See Report of the Commission Staff Re:SUEZ
Water Idaho Inc.After the Staff filed its report,the Company notified the Commission that the
Company concurred with Staff's recommendations,and the Company filed conforming tariffs.
Having reviewed the record,the Commission finds that Staff's recommendations are fair,
just,and reasonable,and should be adopted in the public interest.The Commission also finds it
reasonable to approve the Company's conforming tariffs.The Commission's decision is further
explained below.
BACKGROUND
The federal Tax Cuts and Jobs Act of 2017 (the "TCJA")decreased the federal corporate
tax rate from 35%to 21%,effective January 1,2018.After the TCJA passed,the Governor of
Idaho signed House Bill 463 reducing the Idaho State Corporate Income Tax rate from 7.4%to
6.925%.The tax rate reduction materially decreased the current and deferredtax expense included
in customers'rates.
The Commission opened this multi-utilitycase to investigate whether to adjust the rates of
certain utilities that benefit from the reduced tax rates.See Order No.33965.The Commission
directed all affected utilities-including the Company-to immediately account for the tax
benefits as a regulatory liability.The utilities also were to report on how the tax changes affected
them,and how they could pass any resulting benefits to customers.See id.at 1-2.After that,the
Commission's Staff was to audit the utilities and report the audit results to the Commission.Id.at
2.The Commission planned to order utilities to show cause why any changes recommended by
Staff should not be made.Id
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THE COMPANY'S REPORT
The Company filed its report on March 29,2018.In it,the Company proposed to reduce
base rates by $2,722,791,or about 5.6%,to account for the reduction in corporate tax rates and
associated changes to the revenue conversion factor.See Company Report at 5.The Company
noted it had hired an outside consulting firm to help it review its income tax records to verify the
balances of the regulatory liabilities subject to normalization (plant-related),and deferred tax
liabilities that are unprotected(non plant-related).The Company thus proposed no changes for its
deferred tax liabilities at this time,but instead stated it would address the deferred tax liabilities in
a general rate case,after the detailed review has been completed.Id.at 2-4.
The TCJA also eliminated the tax-exempt status of Contributions in Aid of Construction
("CIAC")for water and sewer utilities.'Id.at 4.As CIAC is now taxable,the Company proposed
that the contributor pay the income tax consequences of the taxability of the contribution so the
Company's customers would not subsidize the contributor.The Company proposed 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.And to
eliminate the impact on current customers,the Company proposed that the deferred income tax
impact of such transaction be held outside the ratemaking process.Id.
STAFF REPORT AND COMPANY CONCURRENCE
After the Company filed its report,Staff audited it and reported the audit results to the
Commission.In summary,Staff recommended the Company:(1)decrease base rates by $2.7
million;(2)work with Staff on how to return remaining tax benefits to customers after the
Company has updated its Excess Deferred Income Tax ("EDIT")account balances followinga
third-partyaudit;and (3)gross-up its CIAC calculations to account for their taxability.
The Company subsequently notified the Commission that the Company concurred with
Staff's recommendations,and the Company filed conforming tariffs.See Company's May 30,
2018 filing.
Staff's recommendations,with which the Company concurs,are further explained below.
'In general,CIAC includes money,services,or property provided to a utility at no cost,which the utility uses to
offset the costs to acquire,improve,or construct property,facilities,or equipment used to provideutility services.
ORDER NO.34074 2
1.The Companyshould decrease base rates by $2.7 million.
Staff stated the decreased tax rates,and corresponding changes to the gross revenue
conversion factor,reduced the Company's retail revenue requirement by $2.7 million.Staff noted
the Company used revenues from its last general rate case,Case No.UWI-W-15-01,to calculate
the percentage by which to uniformly reduce rates.Staff stated the percentage reduction would be
more accurately calculated using 2017 billed revenues.Staff thus recommended the Commission
order the Company to decrease its base rates by $2,722,791 (about 5.6%)effective June 1,2018,
as outlined in Attachments A and B to the Staff's report.Staff Report at 2-3.
2.The Companyshould work with Staff on how to return remaining tax benefits to
customers after the Company has updated its EDIT account balances followingathird-party audit.
Staff noted that the TCJA required utilities to revalue deferred tax amounts at the lower
corporate tax rate as of December 20,2017.This revaluation resulted in EDIT balances that would
require the Company to reclassify deferred tax as a deferred regulatory asset or liability on its
balance sheet.Staff noted the revaluation would require the Company to amortize plant-related
EDIT balances over the associated assets'remaining lives to comply with IRS normalization rules,
while non plant EDIT could be amortized over any period the Commission deems appropriate.Id
at 3.
Although the TCJA required these changes,Staff noted the Company's report did not
recommend an amortization period or rate adjustment for EDIT.Instead,the Company explained
it had retained a third-partyaccounting firm to review its tax records and verify regulatory liability
balances,which the Company would prefer to address in a general rate case.Id Staff believes the
third-partyreview would generate information that would ultimatelyassist Staff in evaluating how
the Company should best amortize the EDIT and return the benefits to customers.Staff stated it
would work with the Company to determine the appropriate ratemaking treatment for the EDIT,
and file its recommendations,after the third party has completed its review and the Company has
filed updated EDIT balances later this year.Id.at 3.
Staff also noted that the Company's report did not address the January 1,2018 -May 31,
2018 regulatory liabilitythat resulted from the Commission's direction that utilities immediately
account for the financial benefits from the January 1,2018 tax rate reduction.Id.(citing Order
No.33965).Staff stated it would work with the Company to determine the amount of this
ORDER NO.34074 3
regulatory liability,and how best to retuin it to customeis,atter the ('ompany had filed as updated
EDIT balances.Id.at 3-4.
3.The Companyshould gross-up its CIAC calculation to account for their taxability.
Staff noted that,under the TCJA,CIAC to water utilities are taxable as of January 1,2018.
Because of this,the Company proposed to gross-up CIAC charges to contributing developers at
the net present value of CIAC-related cash flows and the future tax deductibilityof the resulting
asset.Staff recommended the Commission accept the Company's CIAC proposal and review the
Company's CIAC calculations in the Company's next general rate case.Id.at 4.
DISCUSSION AND FINDINGS
The Commission has jurisdiction over the Company,and the issues in this case,under Title
61 of the Idaho Code,includingIdaho Code §61-501,-502,-503,and -524.We have reviewed
the record,including the Company's initial report,and the Staff's report.We note that no one has
intervened as to the Company,or opposed Staff's recommendations.Further,the Company stated
it concurs with Staff's recommendations,and it has filed conforming proposed tariffs.
Based on our review,we find it fair,just,and reasonable to require the Company to return
to customers about $2.7 million effective June 1,2018,as shown on Attachments A and B to
Staff's Report (which we incorporate here by reference).Additionally,the Company shall
promptlyfile an update to its deferred tax accounts after the outside accounting firm the Company
retained has completed its review of the Company's income tax records.We expect the Company
to then work with Staff to determine the amount and manner in which to return to customers the
remaining benefits from the TCJA.Last,we find it reasonable to authorize the Company to gross-
up its CIAC calculations to account for the taxabilityof those contributions.We note that requiring
a contributing developer to pay income tax consequences of CIAC will ensure the Company's
customers do not subsidize the developerthrough rates.
ORDER
IT IS HEREBY ORDERED that the Company shall decrease rates by $2,722,791 effective
June 1,2018,as shown on Attachments A and B to Staff's Report.The Company's proposed
tariffs,filed May 30,2018,are approved.
IT IS FURTHER ORDERED that the Company promptlyfile an update to its deferred tax
accounts after its outside accounting firm finished reviewing the Company's income tax records,
ORDER NO.34074 4
and that the Company then work with Staff to determine the amount and manner in which to return
to customers the remaining benefits from the TCJA.
IT IS FURTHER ORDERED that the Company gross-up its CIAC calculations to account
for the taxabilityof those contributions,as noted above.
THIS IS A FINAL ORDER.Any person interested in this Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order.Within seven (7)
days after any person has petitioned for reconsideration,any other person may cross-petition for
reconsideration.See Idaho Code §61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of May 2018.
PAUI KJELLANDER,PRESIDENT
KIÚSTINE RAPER MMISSIONER
ERIC ANDERSON,COMMISSIONER
ATTEST:
Diane M.Hanian
Commission Secretary
GNRUl801 Suez FinalOrder kk
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