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.