Federal Tax Cut Lowers Utility Transmission Costs
CMPAS members are seeing lower transmission network formula rates as a direct result of the Federal Tax Cuts and Jobs Act (TCJA) that became law at the beginning of 2018. On average, utilities in the Midcontinent System Operator (MISO) footprint have seen a decline in transmission formula rates from $3.26 to $3.09 per kW/month, a 5.2 percent decrease.
For CMPAS members who operate in the ITC-Midwest zone, rates decreased from $10.27 to $9.113 per kW/month. For those who operate in the NSP zone, rates decreased from $4.15 to $3.94 per kW/month. These network formula rates reflect the cut in the federal corporate income tax from a maximum rate of 35 percent to a 21 percent flat rate on profit.
Since transmission involves interstate commerce, it is federally-regulated rather than state-regulated, and the jurisdictional agency, the Federal Energy Regulatory Commission (FERC) approves the rates. Transmission network formula rates are cost-based and a utility’s zonal location in the grid determines the formula rate charged to deliver power to customers.
Earlier in the year, discussions ensued at the FERC about how the tax cuts should be treated and how quickly. Advocating for the swift lowering of transmission rates, American Public Power Association President Sue Kelly noted in a letter to FERC that “… it is difficult to see how cost-based rates reflecting a 35 percent tax rate remains just and reasonable” given the new lower level.
For the most part, public power utilities purchase access to the transmission grid in order to deliver reliable power to their customers. Unless a utility is neutrally-invested in the transmission (transmission revenue equals transmission tariff paid), it must purchase access, or thought of another way, pay rent from a grid that is predominantly owned by for-profit companies who pay federal income tax and pass on that cost of doing business to customers.
Interestingly enough, the FERC opened a notice of inquiry in March because natural gas pipeline companies have retained the corporate income tax rate instead of passing it on to customers. The American Public Gas Association submitted comments to the FERC supporting a return of the excess income tax collected by interstate pipeline customers to ratepayers.