Texas is known for its pro-business stance, lack of overly burdensome regulations, and fair and reasonable tax structure. And in order to maintain Texas’ position as an economic and energy leader and support its swiftly growing population, utilities must continue to invest in the electric grid. Unfortunately, today’s regulatory treatment of federal income tax for Texas regulated utilities can distort the cost of providing electricity in affected areas by inappropriately including non-utility operations when determining the impact of a company’s taxes on its regulated rates.

As a result of the way taxes for ratemaking purposes are currently calculated by the Public Utility Commission, investors in regulated electric utilities in Texas end up on the losing side of an unfair ratemaking process. One of only five states with a Consolidated Tax Adjustment structure, regulated electric utilities in Texas have to take away tax benefits from their unregulated affiliates, which have nothing to do with electricity production, and use those tax losses produced by other companies to subsidize electric rates. If the Texas electric utility is in a tax loss position, it conversely has to give away some of that benefit to other unregulated affiliates. This ratemaking approach makes no sense, because it forces one business to subsidize another, which is why almost every other state and the federal regulators have rejected it. Because it penalizes firms that choose to invest in Texas, it hurts consumers, affected companies, and the electric power marketplace.

On April 23, SB 1364, a bill aimed at revising how the PUC calculates taxes for ratemaking purposes, passed the full Texas Senate on a 24-7 vote. In the coming days, the full Texas House may review the legislation, which would remedy this unfair approach to regulating businesses that are providing a much-needed public good.

As noted in a May 1 article from SNL’s RRA Regulatory Focus titled, “Texas House to consider consolidated tax legislation,”

“the CTA ranks as one of the more troublesome policies for utility investors that can be imposed by regulators….the issue of whether an unregulated affiliate is earning a profit or generating losses should be irrelevant to the calculation of the utility’s recoverable tax expense.”

Additionally, utility customers should be shielded from financial risks associated with non-utility operations; they should also not be forced to subsidize non-utility operations. Not only does the current structure create an unfair tax treatment, it unintentionally has the effect of suppressing state revenues. By removing this tax treatment for regulated electric utilities, the state will promote greater financial stability in this sector, and will attract necessary capital investment in Texas’ current electric infrastructure.

CSSB 241 Socializes Costs and Cuts Reliability

CSSB 241 provides carte-blanche opt-out of advanced meters and funds this initiative by socializing the costs to all consumers. Said another way, it requires those customers who do not opt-out to fund the removal, re-installation and monthly reading of traditional meters by utility personnel on the opt-out customers’ premises. This forces utilities to take a step backwards in providing reliable service.

CSSB 241 Imperils Legislative Directive

The Legislature encouraged utilities to invest in advanced metering systems in both 2005 and 2007. Multiple stakeholders helped the PUC develop rules for implementing this technology. CSSB 241 jeopardizes this technological investment.

CSSB 241 Thwarts Resource Adequacy in ERCOT

CSSB 241 would diminish resource adequacy by eliminating ERCOT’s long-standing interconnection to neighboring grids, used to ensure reliability during times of exceptionally high demand. In addition, CSSB 241 could reduce the potential for residential participation in demand response programs.

CSSB 241 Impedes Opt-Out Programs Currently Under Development at the PUC

CSSB 241 impedes the ability of the PUC to study and implement an opt-out program for advanced meters that treats all parties fairly and ensures that, as a whole, customers benefit from the outage restoration, reduced need to dispatch trucks, and energy efficiency enhancements created by advanced meters.

Click here to download a copy of this issue paper.

AECT Supports SB 1364 by Schwertner and HB 711 by Murphy

Overview

• As currently written, the Public Utility Regulatory Act (“PURA”) has been interpreted to allow the PUC to negatively adjust the income tax portion of regulated rates for utilities, to compensate for tax benefits received by affiliated companies – whose operations have nothing to do with the provision of electric service in Texas.
• This adjustment, referred to as a consolidated tax savings adjustment (CTSA) results in the commingling of electric utility and non-electric utility costs, a practice generally prohibited.
• Forty-five other states, the Texas Railroad Commission, and the FERC do not make a CTSA.
• This tax treatment is counter to Texas’ reputation of treating businesses fairly, promoting investment and maintaining a reliable electric system.

AECT Position: Support SB 1364/HB 711

• This proposal would remove the CTSA calculation for affected regulated electric utilities.
• Patterned on how the process works already for gas utilities in Texas, electric utility rate treatment should reflect income tax expense calculated on a stand-alone basis using only the regulated utility’s income and the applicable income tax rates.
• This solution will further the general regulatory principle that the activities of an electric utility’s affiliates should not affect the service provided to ratepayers or the rates they pay for that service.
• The result? Texas would join the 45 other states that have rejected imposing such a penalty, enhancing the State’s attractiveness for investment by utilities.
• This solution does not reduce the State’s, or the federal government’s, tax collections by even one dollar, and is clearly equitable.
• This solution results in a less expensive rate review process by eliminating an unnecessarily complex issue.