GOP tax cut could unlock billions for utility infrastructure
In some states, early signs point to efforts to direct that money toward investments ranging from upgrading the electric grid to retraining workers. | AP Photo
This largely unnoticed side effect of the new law, H.R. 1 (115), could free up many tens of billions of dollars that utilities have collected from customers for years — “deferred” money set aside to pay future years’ taxes for projects like transmission lines and power plants. Thanks to the bill’s massive reduction in corporate tax rates, much of that may now be able to go toward other investments, such as modernizing and strengthening the nation’s pipelines and electric grid.
The windfall is expected to set off a debate in dozens of states about how to spend the money — and whether some of it should go to reducing customers’ rates. It’s also stirring interest among environmental groups, which could push to use a chunk of the cash to build wind or solar projects or retrain displaced coal workers.
“This deferred income tax pool is big money,” said David Springe, executive director of the National Association of State Utility Consumer Advocates, a trade association. “This is where all the money is. That is why the utilities really care.”
The deferred money is separate from the immediate boost to earnings that utilities will see from the cut in their corporate income taxes. That increase was already expected to see customers’ electric and gas bills drop in many states — for instance, shaving $82 million off rates for Exelon’s Baltimore Gas and Electric and $280 million a year for customers of New Jersey-based PSEG.
But those numbers are probably a fraction of the money that the utilities are holding in their deferred tax balances. PSEG estimates it will have at least $1.8 billion in its deferred tax pool to spend on rate cuts or infrastructure upgrades, and bigger utilities have amassed even larger sums. American Electric Power’sregulatory filings list $4.4 billion, while NextEra Energy’s sits at $4.5 billion. Others will start rolling out their “excess” figures over the next several weeks as they file annual financial reports to the SEC.
Because the deferred taxes represent money the utilities have already collected, power and gas suppliers are likely to argue to state utility commissioners that at least some of those funds should go toward new projects they can show will benefit consumers.
“That’ll be the commissioners’ challenge,” said Greg White, a former Michigan energy regulator who is executive director of the National Association of Regulatory Utility Commissioners. “What’s the right balance of appropriate rate treatment — rate reduction — versus allowing the utility to use that working capital for other projects?”
Since no new burden would be placed on ratepayers, it may be easy for utilities to make that case.
“I expect that a lot of utilities will argue that the tax savings will be an opportunity to invest in infrastructure without having to come back and ask for rate increases to recover those costs,” White said.
The utilities accrue the large sums because they generally don’t pay off a transmission line, power plant or other expensive project in a single year, so as to not impose a rate shock on customers’ bills. Instead, they work with state regulators to spread out those costs — and the federal taxes — over decades. Because consumers are already on the hook for those existing, decades-long payment schedules, the tax bill’s 40 percent drop in corporate tax rates means utilities are on track for a sizable over-collection from customers.
In some states, early signs point to efforts to direct that money toward investments ranging from upgrading the electric grid to retraining workers.
“Some commissions may say, ‘We want to give it all back and we’re going to do it over 10 years,’” said Casey Herman, who leads PricewaterhouseCoopers’ U.S. power and utilities advisers unit. “Or they may say that this is a unique opportunity for us to implement something we wanted to implement but it wasn’t affordable to our customers before.”
If natural gas and water utilities were rolled in with the electricity sector, Herman said the deferred tax balances would add up to hundreds of billions of dollars. The Edison Electric Institute, a trade group of investor-owned power utilities, estimates that deferred tax balances across the power industry alone total around $165 billion, although the portion that is “excess” under the new tax rate is not yet known.
“It’s up to the utilities commissions to decide what to do, and the default position is to just reduce the rates,” said John Finnigan, a senior regulatory attorney with the Environmental Defense Fund, but there’s no reason that the money couldn’t be used investing in the grid, energy efficiency or renewable energy.
The International Energy Agency has estimated the U.S. power grid would need $2.1 trillion in new investments between 2014 and 2035 to accommodate the transition to newer energy sources, such as wind or solar.
Most utilities keep a to-do list of projects, said Eric Grey, the Edison Electric Institute’s director of government relations, so the money freed up because of the tax change is “going to fuel our member companies to move forward with those advancements in infrastructure.”
Two factors have really driven a spike in deferred tax balances over the past 15 years: a dramatic increase in capital spending on infrastructure, and the generous bonus depreciation incentives put into place after the 2008 recession that gave companies bigger write-offs for equipment purchases.
“Since 2004, we’ve almost been in this super-cycle as far as a build cycle that has tripled [capital expenditures] to somewhat north of $100 billion,” Grey said. “At the end of the day, it’s our customers’ money. It’s our due diligence to make sure that that goes back to them whether that’s in rates or in infrastructure that is needed by them.”
And it’s the state utility commissions that will ultimately navigate the currents of local politics, long-term energy planning, business concerns and their own legal boundaries on what to do with the deferred tax windfalls.
For big utilities, the issue gets complicated by their spread across multiple jurisdictions. Ohio-based AEP, for example, has to sort out how its $4.4 billion return plays out in the 11 states it operates in.
Even state-backed consumer advocate offices, which tend to negotiate for less spending, aren’t unified in pushing to translate every excess dollar into rate deductions.
“My membership probably leans more towards drawing that money back,” NASUCA’s Springe said, but “every state is going to be different and in every one of those states the consumer advocate may or may not have the same view as the utilities.”
Still, the large amount of money expected to be freed up may give utilities and regulators the ability to cover a lot of their bases.
“I struggle to think that a state would simply take all of that money and use it for some particular project, then you’re not getting any rate reductions,” he said.
EDF’s Finnigan said his group will advocate for particular projects at state commissions once utilities start saying how much money is at stake. But as this unfolds in every state over the next year or so, his group plans to focus on nine states, particularly those with the largest greenhouse gas emissions and energy consumption, such as California, Texas, Ohio and New York, he said.
Even critics of President Donald Trump’s energy and environmental policies see the deferred tax money as a silver lining of the GOP law. The Sierra Club is pondering a strategy for using the excess tax funds to retrain coal power plant workers at sites slated for closure in rural areas.
“The Trump administration is not offering a coherent policy for economic transition for coal communities. Instead, it’s giving them false promises that coal’s getting revived,” said Bill Corcoran, the Western director of the group’s Beyond Coal campaign. “In that gap … or even an acceptance that the transition is happening, we should strive to make use of this tax bill.”
Charging utility consumers to retrain power plant workers facing job losses isn’t without precedent. Last month,California regulators approved a plan to close the state’s last two nuclear reactors by 2025. But the deal included $223 million for a retention and retraining program for plant employees who are being forced to move on. Corcoran also pointed to the pending closure of a coal-fired power plant in Washington state where the owner, TransAlta, agreed to pour $55 million into a local economic development fund.
“It’s important to have robust models for that transition,” Corcoran said, noting coming coal plant closures in New Mexico, Colorado and Montana.
“We want to make sure that in the understandable rush to return money to ratepayers that important community questions aren’t missed in the process,” he said. “This moment is a prod to have that conversation.”