Hartford Business Journal

14 Hartford Business Journal • January 15, 2018 • www.HartfordBusiness.com By Matt Pilon mpilon@HartfordBusiness.com C orporations and many tax- payers are celebrating the federal tax cuts signed into law around Christmas, with some employers even issuing worker bonuses and increasing wages. It turns out Connecticut's utility ratepay- ers, both residents and businesses, could end up having something to celebrate as well. Joining regulators in other states around the country, Connecticut's Public Utilities Regulatory Authority (PURA) opened pro- ceedings this month to determine how the tax windfall reaped by the state's electric, natural gas and water utilities — caused by the reduction of the federal corporate in- come tax rate from 35 percent to 21 percent — will be returned to customers. Unlike regular corporations, which can book the tax savings as profits or spend the extra capital any way they see fit, utili- ties are highly regulated and the amount of profits they are allowed to make — as measured by return on equity — is limited by state statute (in Connecticut it's often between 9 and 10 percent). Since the pas- sage of the Federal Tax Cuts and Jobs Act, there's been pressure from regulators in many states to ensure that the windfall is returned to ratepayers, who ultimately pay utilities' taxes and other costs. The amount of money in play for Con- necticut ratepayers could be somewhere between $75 million and $100 million, according to initial estimates from the Office of Consumer Counsel (OCC), though the exact amount is yet to be determined by PURA, which is looking into rates of 15 electric, gas and water companies. The relief talks started, coincidentally, as the state entered a near-record cold snap this month, which drove up demand (and prices) for natural gas, which is a fuel source for many electricity generators and a heat source for about one-third of Connecticut residences, leading to higher energy bills for many. An unknown portion of the savings could be returned to customers in the form of lower rates or credits, while some may be used for programs that benefit ratepayers, including projects that make infrastructure more storm resistant. "This is going on around the country," said Consumer Counsel Elin Swanson Katz, who was recently named president of the National Association of State Utility Consumer Advocates. "It's been on our radar for more than a year." While state regulators oversee the oc- casional ratepayer refund for tax reasons — Aquarion Water Co. issued a $29 million refund in 2014 after a change in IRS account- ing rules, for example — this one is big. "It's the biggest since 1986," said Rich Sobolewski, OCC's supervisor of utility financial analysis, who was referencing tax cuts under President Ronald Reagan. While the recent tax cut is expected to slow energy price growth, Connecticut rate- payers still pay the highest energy prices in the lower 48 states, federal data shows. "Any time we can get news in Connecticut that we are getting some relief on our elec- tricity rates, it's something to celebrate," said Eric Brown, a lobbyist for the Connecticut Business & Industry Association. "It's obvi- ously still very expensive in the state." Realistically, the tax savings may be the biggest impact on rates that Connecti- cut customers see anytime soon, said Lee Hoffman, an energy attorney at Pullman & Comley in Hartford. Connecticut will never be able to compete on price with states that have and use coal or have access to large-scale hydropower, and it has made a decision (which costs money) to promote cleaner energy. "Something like this is really the best we can hope for right now, absent a more regional or global look at how we're handling our energy costs," Hoffman said. Windfall could blunt Eversource hike The timing of the new tax law comes as Connecticut's largest utility is in the midst of an electricity rate case with PURA. Eversource is asking for a rate hike that would boost its 2018 revenues by $255.8 mil- lion (a 7 percent increase over a 2017 rate base of $3.68 billion) plus another $45 million and $36 million in 2019 and 2020, respectively. The requested increase, Eversoure's first in three years, would fund things like capital expenditures, additional staff, a higher rate of return on equity and other items. If PURA grants Eversource its full ask, OCC estimates that federal tax savings would lop off about $45 million from the hike in the first year. For the average residential ratepayer, that would amount to a monthly increase of $11.27 instead of $13.69. The math would change if PURA approves a lower increase. Eversource spokesman Mitch Gross said the company believes its customers should receive the benefits of the tax law, and not- ed that the exact amount and timing of the rate reduction will be for PURA to decide. For Avangrid's United Illuminating, OCC's calculations say the tax law would nearly wipe out an approved $11 million rate increase this year. Meanwhile, Southern Connecticut Gas customers would see an approximate $5.5 million decrease in overall rates. Utilities with older rate cases are tough- er for OCC's experts to calculate because their latest financial data is unavailable. Adding to the complexity of determin- ing rate impacts is the fact that most utili- ties have sizable balances of deferred tax liabilities, which are taxes to be paid in the future. The drop in the federal corporate tax rate also reduces those liabilities, and those savings will be part of the equation PURA is considering. Assuming regulated utilities pass on the entirety of the savings from the tax law to customers, does the law really matter to them and their shareholders? Yes, said Eric Grey, senior director of government relations at the Edison Elec- tric Institute, an industry group. "First and foremost, it's great for our customers," Grey said. "We also view it as a big win for our companies in the sense of, if that corporate rate does lead to addi- tional economic growth, then that's more customers for us." Ratepayer Relief As winter cold drives up energy bills, tax reform could take bite out of rising utility rates 2018 CT Utility Rate Impacts The Office of Consumer Counsel has taken a stab at calculating the impact federal tax cuts could have on utilities' recent rate hike requests. PURA will examine the rate impacts of all 15 regulated utilities in Connecticut. Here is a snapshot of the potential impacts on three energy companies. 2018 rate hike 2018 est. rate requested/approved Est. tax increase/ (in total dollars) savings decrease Connecticut Light & Power (Eversource) $255.8M $45M $210.8M United Illuminating $11.5M $11M $500,000 Southern Connecticut Gas $1M $6.5M $(5.5M) Source: OCC estimates Eversource crews perform repairs in snowy weather. Consumer Counsel Elin Swanson Katz (center) is helping lead a push to ensure a federal tax windfall for the state's regulated utility companies is passed onto business and residential ratepayers. Helping her sift through the numbers are OCC rate experts Dave Thomas (left) and Rich Sobolewski (right). HBJ PHOTO | MATT PILON PHOTO | EVERSOURCE

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