20180522Report - Suez Water Idaho.pdf

KARL T. KLEIN
DEPUTY ATTORNEY GENERAL
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5156
Street Address for Express Mail:
412 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Staff of the
Idaho Public Utilities Commission
IN THE MATTER OF THE INVESTIGATION
INTO THE IMPACT OF FEDERAL TAX CODE
REVISIONS ON UTILITY COSTS AND
RATEMAKING
RECEIVED
iillB FlrlY 22 Al{ l0: lrl+
iil;,,li,f i:iJBLlC
: j.i lr-ii"l IS CCi.ito'llSSl0N
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. GNR-U.18.01
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REPORT OF THE
COMMISSION STAFF RE:
SUEZ WATER IDAHO,INC.
The Staff of the Idaho Public Utilities Commission submits this report about the impact
of the federal Tax Cuts and Jobs Act of 2017 (the "TCJA") on Suez Water Idaho, Inc. (the
"Company"), as directed by Order No. 33965.
BACKGROUND
On December 22,2017, the President signed the TCJA into law. Effective January 1,
2018, the TCJA decreased the federal corporate tax rate from 35Yo to 2lYo. In response, the
Commission opened this multi-utility case to investigate whether to adjust the rates of certain
utilities that benefit from the reduced tax rate. See Order No. 33965. The Commission directed
all affected utilities-including the Company-to immediately account for the tax benefits as a
regulatory liability, and to report on how the tax changes affected them, and how resulting
benefits could be passed on to customers. See id. at l-2.
ISTAFF COMMENTS MAY 22,2018
SUEZ WATER IDAHO REPORT
The Company filed its report on March 29,2018. In it, the Company proposes to reduce
base rates by $2,722,791, or about 5.60A, to account for the reduction in corporate tax rates and
associated changes to the revenue conversion factor. The Company has hired an outside
consulting firm to assist in a detailed review of its income tax records in order to verify the
balances of the regulatory liabilities subject to normalization (plant-related) as well as deferred
tax liabilities that are unprotected (non plant-related). Thus, the Company did not propose any
changes related to revaluing or amortizing deferred tax liabilities, preferring to wait to address
the deferred tax liabilities in a general rate case, after the detailed review has been completed.
The TCJA also eliminated the tax-exempt status of Contributions in Aid of
Construction ("CIAC") for water and sewer utilities.l As a result of the taxability of CIAC, the
Company proposes that the contributor pay the income tax consequences of the taxability of the
contribution so that the Company's customers will not subsidize the contributor. The Company
proposes 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, in order to eliminate the impact on current customers, the
Company proposes that that the deferred income tax impact of such transaction be held outside
of the ratemaking process.
STAFF REVIEW
Staff has reviewed the Company's report and verified the impact of the reduction in tax
rates and changes to the revenue conversion factor. Based upon its review, Staff recommends
the Commission authorize a base rate reduction of $2,722,791 on June l, 2018. The comments
below discuss Staff s recommendation in further detail.
Income Tax Expense
The TCJA's primary provision reduced the federal corporate income tax rate from35Yo
to 2lo/o. After the TCJA passed, the Governor of Idaho signed House Bill 463 reducing the
Idaho State Corporate Income Tax rate to 6.925% (previously 7 .4%) effective January l, 2018.
I 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 provide utility services.
2STAFF COMMENTS MAY 22,2018
The reductions in tax rates, and the corresponding changes to the gross revenue conversion
factor, reduces the Company's retail revenue requirementby $2.7 million as shown on
Attachment A. In its report, the Company used the revenues allowed in its last general rate case,
UWI-W-15-01, to calculate the percentage by which to uniformly reduce water service rates.
Staff believes that 2017 billed revenues would provide a timelier and accurate calculation of the
percentage reduction (5.574% vs. 5.557Yo) and has used the 2017 billed revenues as the basis for
its recommendation. This adjustment does not alter the revenue requirement calculation; it only
affects the percentage decrease. Attachment B shows Stafls proposed rate calculation.
Income Taxe,
As of December 20, 2017, deferred tax amounts had to be revalued at the lower corporate
tax rate, resulting in Excess Deferred Income Tax ("EDIT") balances. Balances associated with
regulated utility operations result in a balance sheet reclassification from deferred tax to deferred
regulatory asset or liability. The revaluation affects both plant and non-plant balances. For
plant-related EDIT, the Company must amortize the balance over the remaining life of the
associated assets in order to comply with the IRS's normalization rules. Balances associated
with non-plant EDIT can be amortized over any period deemed appropriate by the Commission.
The Company's report did not recommend an anortization period or rate adjustment for
EDIT. The Company indicated that it has engaged an outside accounting firm to assist in a
detailed review of its income tax records in order to verify the balances of the regulatory
liabilities. The Company asserts that treatment of the regulatory liabilities is best addressed in a
general rate case.
Staff believes that the third-party review will provide additional information that will
help inform Staff s recommendations on how to amortize the EDIT and return the benefits to
customers. Staff will work with the Company to determine the appropriate ratemaking treatment
of the EDIT, and file its recommendations after the third-party review is completed.
Januaryt I - Mqt 31. 2018 Requlatory) Liabili\)
Commission Order No. 33965 instructed utilities to immediately account for the financial
benelrts from the January 1,2018 tax rate reduction to2lYo by creating a deferred regulatory
liability until they are reflected in customer rates. The Company's report did not address the
regulatory liability. Staff will work with the Company to determine the amount of the regulatory
aJSTAFF COMMENTS MAY 22,20t8
liability and the method in which it should be returned to customers when the Company provides
updates to the EDIT balances later this year.
CIAC
From June 1 3, 1996 to December 3l , 2017 , CIAC to water utilities was not taxable.
Beginning January 1, 2018 CIAC is once again taxable. This change will likely cause water
utilities to require a gross-up payment from the contributor so the utility can cover the additional
taxes it will have to pay on CIAC. Because of this, the Company proposes to gross-up the CIAC
charges to contributing developers at the net present value of cash flows resulting from the
taxable CIAC and the future tax deductibility of the resulting asset. Staff believes the
Company's proposal requiring the contributor to pay for the income tax consequences of the
taxable CIAC will ensure that customers are not subsidizing the contributor. Staff recommends
that the Commission accept the Company's proposal. Staff recommends that the calculation of
CIAC should be reviewed again during the Company's next general rate case.
STAFF RECOMMENDATION
After a thorough review of the Company's report and further discussions with the Company,
Staff recommends that the Commission order the Company to reduce its retail rates by $2,722,791,
or approximately 5.60/o, as shown on Attachments A and B. Staff further recommends that the
Commission order the Company to file an update on its deferred tax accounts after the outside
accounting firm has completed its review of the Company's income tax records. Staff will work with
the Company at that time to determine the amount and manner in which to retum to customers the
remaining benefits of the TCJA. Additionally, Staff recommends the Commission authorizethe
Company to gross-up its CIAC calculations to account for the taxability of the contributions.
Respectfully submitted this Z z *l day of May 2018.
a //<
Karl T. Klein
Deputy Attorney General
Technical Staff: Donn English
4STAFF COMMENTS MAY 22,2018
SUEZ Water ldaho lnc.
GNR-U-I8-01
Calculation of 2017 Federal lncome Taxes
Line Calculation
Description @35'l'
Calculation
@21%Difference
fa)IbI
$15,743,979
1,111 ,712
Tcr
$15,743,979
1,040,352
1 Total Total Pre-Tax Book lncome
2 Deductible State Tax: [1]$71,360
Permanent Differences:3 Reverse FBOS TaxStream4 Non-deductible Penalties
5 Disallowed Meals5 Lobbying Dues
7 Total Permanent Differences
204,746
245
6,004
5,295
204,746
245
6,004
5,295
216,290 216,290
8 Financial Taxable lncome
9 Unit Tax Rate
10 Federal Tax-Current
11 Total
72 Gross Revenue Conversion Factor
13 Change in Revenue Requirement
14,848,557
35.00%
5,196,995
14,919,917
21.00%
3,1 33,1 83 2,063,812
2,L35,t72
t.275209L
$2,722,791
t4 2017 Revenues
15 Percent reduction
48,85L,670.39
-5.574o/o
[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 6.4% and is calculated as the the
State income tax on line 2 of column c times 6.925% / 7.4%.
Attachment A
Case No. GNR-U-18-01
Staff Comments to
Suez's Tax Report
05/22n8
No.
SUEZ 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
Rate Block
ccF
Residential - Bi-Monthlv
Customer Charge
5/8
3t4
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-Monthlv
Customer Charge
5/8
3t4
1
1 1t2
2
3
4
6I
Subtotal
Winter Usage
Over 3 CCF
Summer Usage
Up to 3 CCF
Over 3 CCF
Subtotal
Total Class
Other Public Authoritv - Bi-Monthlv
Customer Charge
5/8
3t4
1
1 112
2
3
4
Subtotal
Number Total Present Present Rate
Of Bills Consumption Rate Revenue
(2)(3)(4)(5)
94,077
328,446
45,397
1,455
619
3-r6-0Fm-
148
2,852
12,291
15,222
10,304
11,268
776
229
24
0
-T2866
$ 22.36
22.36
28.58
48.90
75.87
147.98
$ 2,103,562
7,344,053
1,297,446
71j50
46,964
444
10,863,619
7,443J30
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
$ 21.11 $
21.11
26.99
46.17
71.64
139.73
(7)
1,985,965
6,933,495
1,225,265
67,177
44,345
419
0
Proposed
Rate----(6I-
Proposed
Revenue Percent---i6)-
-5.s9%
-5.59%
-5.56%
-5.58%
-5.58%
-5.58%
-6.76%
-5.57%
-5.58%
-5.59%
-5.59%
-5.56%
-5.58%
-5.58%
-5.58%
-5.57%
-5.57%
-5.57%
-6.76%
-5.57%
10,256,666
4,729,400
7,731,150
12,460,550
1.5738
1.9673
85.86
1.5738
1.9673
22.36
22.36
28.58
48.90
75.87
147.98
276.07
460.91
602.98
1.4674
1.8577
81.07
21.11
21 .11
26.99
46.17
71.64
139.73
260.68
43s.22
569.37
1.4674
1.8577
21.11
21 .11
26.99
46.17
71.64
139.73
260.68
$
6,939,922
14,362,157
21,302,079
31,558,745
11,998
$ 31,570,743
60,206
259,463
410,842
475,736
807,240
108,430
59,696
10,44s
0
2,192,058
3,795,928
7,404,543
11,200,471
$ 13,392,529
0
2,586,839
3,985,866
6,572,705
17
46
184
107
223
6
6
22.36
22.36
28.58
48.90
75.87
147.98
276.07
380
1,029
5,259
5,232
16,919
888
1,656
359
97',!
4,966
4,940
15,976
838
1,564
$$-5.59%
-5.59%
-5.56%
-5.58%
-5.58%
-5.58%
-5.57o/o
29,614
Attachment B
Case No. GNR-U-lg_01
staff comments to
Suez's Tax Report
05/22/18 page I of 2
-- 589
Winter Usage
Over 3 CCF
Summer Usage
0
1 of2
31,363
SUEZ 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
Rate Block
ccF
Number Total Present Present Rate
Of Bills Consumption Rate Revenue
Proposed ProposedRate Revenue
\", \,,
Percentt8-)-(1)(2)(3)(4)(s)
Up to 3 CCF
Over 3 CCF
Subtotal
18,505
67,215
1.5738
1.9673
29,123
132,232
't.4674
1.8577
27,154
124,865
-6.76%
-5.57%
85,720 161 ,355
$ 192,718
152,019
181,633Total Class $
Private Fire Lines - Bi-Monthlv
Fire Line Size
3" and smaller
4"
6"
8"
10.
12"
Hydrants
Sprinkler
2,637
3,526
2,994
882
54
36
975
6
39.42
59.75
148.40
243.85
380.29
569.62
23.90
597.28
$ 103,951
210,679
444,310
215,076
20,536
20,506
23,303
3,584
37.22
56.42
140.13
230.26
359.09
537.87
22.57
563.99
$98,149
198,937
419,549
203,089
19,391
19,363
22,006
3,384
-5.58%
-5.57%
-5.57%
-5.57%
-5.57%
-5.57%
-5.56%
-5.57%
Total Private Fire 11,110
534,810
0 $ 1,041,945
$ 48,997,697
$ 983,868
Total
Variance
1 9,1 I 8,975 $ 46,128,773$ (106)
Total Water Revenue $ (2,722,791)$ 46,128,879
-5.56%
Attachment B
Case No. GNR-U-18-01
staff comments to
Suez's Tax Report
05/22/18 Page2 of 22of2
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 22ND DAY OF MAY 2018,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF TO
suEZ WATERIDAHO'S TAX REPORT, IN CASE NO. GNR-U-18-01, BY
MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
GREGORY P WYATT
SUEZ WATER IDAHO INC
PO BOX 190420
BOrSE rD 83719-0420
E-mail: gr:eg.wyatt(i,suez-na.com
-t ZA,^
-
SECRETARY,.
CERTIFICATE OF SERVICE