Tax Cuts and Jobs Act Impact on Con Edison Rates

Effective as of October 1, 2018, Con Ed steam rates will include a tax sur-credit as a result of the Tax Cuts and Jobs Act of 2017 impact.  Joining over 100 documented utilities across the country thus far issuing credits for electric, gas, steam, and/or water service, tax sur-credits for Con Ed steam rates range from about $1.02 to $2.25 per Mlb.  Read on to learn more about the TCJA impact, why credits are being issued, the applicable credit for your steam service class, and what to expect from Con Ed electric and gas in 2019.

Why Are Utilities Issuing Rate Credits?

In exchange for monopoly rights to provide utility service in a given territory (otherwise we’d have multiple companies competing to build pipes and wires like in the late 1800s), utilities are regulated by state public service commissions (or equivalent – BPU, PUC, DPU, etc.).  Rates charged by utilities are set via a public rate-making process (involving multiple intervenors and consumer advocacy groups, such as the New York Energy Consumers Council), ultimately approved by the state public service commission.  Regulated utility rates are based on projected operating expenses, depreciation and amortization, approved rate of return on equity, and taxes.  Since the Tax Cuts and Jobs Act of 2017 (TCJA) reduced the federal income tax from 35% to 21% (and impacts the accumulated excess deferred tax reserves), utilities’ tax liabilities have decreased accordingly.  Rates approved before TCJA include the assumption of 35% federal tax, so current active rates are overcollecting taxes from consumers (since the 35% tax rate is baked into the utility rate).  In many cases, utilities are distributing these tax savings back to customers in the form of credits, or in the form of lower rates moving forward in the next approved rate case.  In some cases, utilities are looking to use the money they’re saving on taxes to make capital improvements (rather than pass savings to customers).

In New York, the Public Service Commission issued its Order Determining Rate Treatment of Tax Changes on August 9, directing Con Ed to implement sur-credits related to tax savings from TCJA.

Con Ed Steam Credit

Effective October 1, 2018, Con Edison is ordered to implement sur-credits related to TCJA for its steam service.  “The following tax saving elements are included in [Con Ed’s] steam Tax Sur-credit calculation: (1) the annual ongoing tax savings effective October 1, 2018, (2) an amortization of the January 1, 2018 through September 30, 2018 tax savings over a three year period unless a cash flow or credit quality concern is demonstrated, and (3) an amortization of the protected and unprotected excess accumulated deferred federal income tax reserve balances over the life of the assets.”  The sur-credits are applicable for the 12 month period October 1, 2018, to September 30, 2019, and will continue for each 12-month period thereafter until the net benefits of the tax sur-credit are fully reflected in the next rate case.

The sur-credits are as follows:

What About Con Ed Electric and Natural Gas?

In comments filed in response to the PSC Case 17-M-0815 – Proceeding on Motion of the Commission on Changes in Law that May Affect Rates, Con Ed argues that while “the implementation  of a sur-credit effective October 1, 2018, is appropriate for CECONY’s gas and steam services, it is not in the long-term interest of CECONY’s electric customers  to implement  a sur-credit  at this time as it would result in  unnecessary rate volatility for customers  and could  affect CECONY’s credit rating.” Con Ed states that its electric service has had a significant build-up of deferrals and “the next rate filing is also expected to include substantial investments in energy efficiency projects to comply with state public policy objectives, as well as new storm hardening and resiliency investments.   Under these circumstances, returning the tax benefits to customers through a sur-credit is not in the best interest of the customer,” and Con Ed would rather use the tax benefits as a rate moderator in the next rate case.  The Public Service Commission disagrees – “the Commission recognizes the substantial tax savings that Con Edison will realize on an ongoing basis. It is, therefore, not in customers’ interest to delay the pass back of savings from electric service until 2020.” (The next expected electric rate case filing is Feb 2019, effective Jan 2020)

The Public Service Commission has ordered Con Ed to implement an electric sur-credit effective January 1, 2019, limited to the ongoing savings from January 1, 2019, forward, with savings realized in 2018 deferred and addressed in the next rate case.

Additionally, the Public Service Commission has ordered Con Ed to implement a natural gas sur-credit effective January 1, 2019, but unlike electric, sur-credits will also include the amortization of 2018 tax savings over the next 3 years (rather than deferred until the next rate case).

While the sur-credits for electric and gas have not been filed as of yet, it is anticipated that the gas credit will be applied on a cents per therm basis (prorate to each service class based on contribution to revenue) and the electric credit will be applied “on a cents per kWh basis for non-demand billed customers, on a dollars per kW basis  for demand-billed customers (for standby service customers, the sur-credit will be applied on a per kW of contract demand basis), and on a monthly basis for customers who are billed on a monthly basis  (e.g., NYPA).”

Keeping track of changes to your utility bills is important for your business’ utility budgeting process and overall operations.  EnergyWatch utilizes our expertise of the energy markets, utility tariff, consumption, and real estate to forecast your electric, natural gas, steam, fuel oil, water/sewer, chilled water, and hot water budgets for the future.  Our budgeting algorithm accounts for factors such as occupancy, weather, energy conservation measures, and capital projects, regulatory changes, and more, to provide data-driven, defensible energy budget for your building(s).  Contact us to learn more about how we can help simplify your utility budgeting process.