In light of federal tax law, Kentucky regulators reduce total annual revenue of KU, LG&E

The Kentucky Public Service Commission (PSC) on March 19 said that it has reduced the total annual revenue of Kentucky Utilities (KU) and Louisville Gas & Electric (LG&E) by $203.8m to reflect the reduction in federal corporate income taxes that took effect at the first of the year.

According to the order, KU’s retail electric rates will be reduced by about $108m, LG&E’s retail electric rates will be reduced by about $78.9m, and LG&E’s retail gas rates will be reduced by about $16.9m.

The federal tax law enacted in December 2017, reduced the corporate income tax rate from 35% to 21% beginning this year, reducing the tax burden on for-profit, investor-owned utilities, the PSC said. The reduced tax burden in turn reduces the amount of revenue that utilities need in order to offer their investors an opportunity to earn a reasonable rate of return, the PSC noted.

As a result of the revenue reduction, KU and LG&E residential electric customers will see their average monthly bills decrease by about 6%, while LG&E residential natural gas customers will see about a 4.5% reduction in the base rate portion (not including the commodity cost of gas) of their bills, the PSC said.

The PSC said that in its order, it modified a settlement reached between the two utilities and the Kentucky Industrial Utility Customers (KIUC), which had filed a case seeking a tax reduction, as well as the Kentucky Office of the Attorney General, which also was a party to the case. The settlement called for a total revenue decrease of $176.9m, the PSC said.

The reduction ordered by the PSC is $26.9m larger because of modifications it made to the manner in which the impact of the tax reduction was calculated, the PSC said.

KIUC filed cases against LG&E and KU, as well as Duke Energy Kentucky and Kentucky Power Co., seeking reductions in rates that would reflect the lower taxes, the PSC said, adding that the PSC opened similar cases to examine the effect of the tax changes on other investor-owned utilities.

Most of the tax bill’s impacts fall into two areas: savings from the immediate reduction in the corporate tax rate and the effect on deferred tax liabilities that utilities carry on their books and that may need to be refunded to ratepayers, the PSC said, noting that the KU and LG&E case addresses both.

The revenue reduction will be reflected in a credit, the Tax Cut and Jobs Act (TCJA) Surcredit, that will appear on KU and LG&E customer bills, the PSC said, noting that the TJCA Surcredit will take effect April 1, and will extend through April 30, 2019; it will reflect both ongoing tax savings and an additional credit for the first three months of this year.

The credit expires on April 30, 2019, because KU and LG&E have indicated that they intend to file for rate adjustments that will, among other things, reflect the changes in the federal corporate income tax, the PSC said, adding that the timing of the filing will be such that the new rates would take effect May 1, 2019.

If LKU and LG&E rates do not change at that time, the TJCA Surcredit would remain in place, but would be recalculated, the PSC noted.

The tax changes also will result in slight reductions in surcharges that include a capital cost component. They include environmental surcharges and demand-side management surcharges for KU and LG&E electric customers, and a gas-line-replacement surcharge assessed to LG&E natural gas customers, the PSC added.

The PSC noted that it issued a final order in January adjusting the rates of Kentucky Power, but it reflected only the impact of current tax payment and did not address the question of deferred taxes, which are being dealt with in a separate proceeding.

The PSC also said that it has indicated that the full impact of the tax changes on the electric rates of Duke Energy Kentucky will be addressed in that utility’s current electric rate case; the company’s natural gas rates are being addressed separately.

About Corina Rivera-Linares 3063 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.