The Tax Cut and Jobs Act, passed by Congress and signed by the president in December 2017, represents the most dramatic change in tax policy in the United States in three decades. One of the most prominent features of the law is a permanent cut in the corporate tax rate, from 35 percent to 21 percent.
Who will gain from this windfall? Electric utility customers have good reason to be optimistic.
Re-Examining the State of Utility Rate Development
Regulated electric utilities set rates in coordination with each state’s public utility commission. Those commissions regularly review and adjudicate rate cases to ensure a reasonable return for utilities while protecting consumer interests.
In the wake of the new tax law, each state has begun evaluating its implications. Several states are requesting information and responses to specific questions from regulated utilities, in the interest of adjusting rates appropriately for the changes that took effect on Jan. 1.
When collections are in excess of that reasonable rate of return, there are two primary groups likely to benefit: shareholders and ratepaying utility customers. It is the commissions’ responsibility to strike the appropriate balance between these interests, which it’s important to note are not necessarily in opposition to each other.
The simple truth is that both shareholders and customers are likely to benefit in most scenarios.
- Many customers of regulated electric utilities will see their rates reduced and their bills lower. Any break for the customers will mean immediate money back in their pockets.
- If some of the windfall goes to shareholders, there will similarly be immediate benefits seen because the value of the stock is likely to increase, potentially resulting in increased dividends as well as having more money available to invest in grid modernization.
More Money for Improving Infrastructure
It’s too soon to know exactly what opportunities the tax law will generate for utilities and their customers, but they are exploring the possibilities already.
Some utilities with multistate service areas will face additional challenges, addressing potentially differing guidance from each of their state commissions. Different states may strike different balances in who reaps the financial benefits.
However, given the sheer scale of the reduction in the tax burden, there should be ample rewards to apportion.
The Edison Electric Institute (EEI), an organization representing the nation’s investor-owned electric companies, had lobbied for the tax reform and cheered its passage as a boon offering myriad benefits for consumers.
“This legislation will grow our economy and encourage much-needed investment in our nation’s infrastructure,” said Tom Kuhn, president of EEI. The group expects this ongoing investment to help keep utility customers’ bills affordable and relatively predictable.
The legislation even included a benefit for customers of public power utilities, which do not pay federal taxes. After much negotiation during the bill’s development, the final act maintained the tax exemption for municipal bonds. This was a top issue for the American Public Power Association (APPA), a nonprofit representing a majority of public power utilities. Loss of the exemption could have discouraged investment in the tools that help finance infrastructure development in those communities.
Through direct rate reductions for utility customers as well as investment in critical energy infrastructure, the Tax Cut and Jobs Act is a winning proposition.
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