February 06, 2018
How Trump has already scored a win on infrastructure
The Republican tax cut could spark the multibillion-dollar infrastructure program that almost nobody expected.
Electric and gas utilities are finding themselves with vast amounts of excess cash as a side effect of last year's tax code rewrite — money that could easily total tens of billions of dollars, based on initial corporate filings. Those funds could become available for a massive buildout of energy infrastructure, for projects such as modernizing the electric grid, installing pipelines or putting up wind farms.
The cash surge could exceed anything that comes out of President Donald Trump’s still-unreleased $1.5 trillion infrastructure plan if that proposal runs aground in Congress. The debate about how to spend the utility windfall will take place in dozens of states and is already crossing ideological divides — environmental groups, for example, are discussing whether some money should go to uses like retraining displaced coal workers.
The cash would come from "deferred" money that the utilities set aside to pay future years' taxes. After Congress slashed the corporate tax rate, many utilities are finding they’ve set aside too much. And in the regulated environment most power companies operate in, excess funds need to go to uses that benefit their customers.
"This deferred income tax pool is big money," said David Springe, executive director of the National Association of State Utility Consumer Advocates, a trade association. "This is where all the money is. That is why the utilities really care."
One utility owner, New Jersey-based PSEG, estimates it will have at least $1.8 billion in its deferred tax pool to spend on rate cuts or infrastructure upgrades. American Electric Power's regulatory filings list $4.4 billion, while NextEra Energy's sits at $4.5 billion. Virginia’s Dominion Energy has $988 million. Others will start rolling out their "excess" figures over the next several weeks as they file annual financial reports to the Securities and Exchange Commission.
Deferred tax balances across the power industry alone total around $165 billion, according to the Edison Electric Institute, a trade group of investor-owned power utilities — although the portion that would be considered excess under the new tax rate is unknown.
Instead of letting utilities spend the excess portion, state utility commissions could tell the companies to return it to their customers in the form of reduced rates. But power and gas suppliers are likely to argue that at least some money should go to projects that will benefit consumers, especially since the utilities have already collected the money.
“Some commissions may say, 'We want to give it all back and we're going to do it over 10 years,'" said Casey Herman, who leads PricewaterhouseCoopers' U.S. power and utilities advisers unit. "Or they may say that this is a unique opportunity for us to implement something we wanted to implement but it wasn't affordable to our customers before."
Because no new burden would be placed on ratepayers, it may be easy for utilities to make the case for spending it.
"I expect that a lot of utilities will argue that the tax savings will be an opportunity to invest in infrastructure without having to come back and ask for rate increases to recover those costs," said Greg White, a former Michigan energy regulator who is executive director of the National Association of Regulatory Utility Commissioners.
The utilities accrued the large sums because they generally don't pay off a transmission line, power plant or other expensive, long-term project in a single year, in order to avoid rate shocks on customers. Instead, they work with state regulators to spread out those costs — and the federal taxes — over decades. And because consumers are already on the hook for those decades-long payment schedules, the tax bill's 40 percent drop in corporate tax rates means utilities are on track for a sizable over-collection.
In some states, early signs point to efforts to direct that money toward investments ranging from upgrading the electric grid to retraining workers.
"It's up to the utilities commissions to decide what to do, and the default position is to just reduce the rates," said John Finnigan, a senior regulatory attorney with the Environmental Defense Fund, but there's no reason the money couldn't be invested in the grid, energy efficiency or renewable energy.
The International Energy Agency has estimated that the U.S. power grid would need $2.1 trillion in new investments between 2014 and 2035 to accommodate the transition to newer energy sources, such as wind or solar.
Most utilities keep a to-do list of projects, said Eric Grey, the Edison Electric Institute's director of government relations, so the money freed up because of the tax change is "going to fuel our member companies to move forward with those advancements in infrastructure."
Two factors have really driven a spike in deferred tax balances over the past 15 years: a dramatic increase in capital spending on infrastructure, and the generous bonus depreciation incentives put in place after the 2008 recession that gave companies bigger write-offs for equipment purchases.
"Since 2004, we've almost been in this super-cycle as far as a build cycle that has tripled [capital expenditures] to somewhat north of $100 billion," Grey said. "At the end of the day, it's our customers' money. It's our due diligence to make sure that that goes back to them whether that's in rates or in infrastructure that is needed by them."
Low-profile state utility commissions are the bodies that will ultimately navigate the currents of local politics, long-term energy planning, business concerns and their own legal boundaries on what to do with the deferred tax windfalls.
For big utilities, the issue gets complicated by their spread across multiple jurisdictions. Ohio-based AEP, for example, has to sort out how its $4.4 billion return plays out in the 11 states it operates in.
Even state-backed consumer advocate offices, which tend to negotiate for less spending, aren't unified in pushing to translate every excess dollar into rate deductions.
"My membership probably leans more towards drawing that money back," said Springe, from the utility consumer advocates' association. But he said that "every state is going to be different, and in every one of those states the consumer advocate may or may not have the same view as the utilities."
Still, the significant sums in play present an enticing opportunity for utilities and regulators.
"I struggle to think that a state would simply take all of that money and use it for some particular project — then you're not getting any rate reductions,” Springe said. “I think it’s equally likely that states will take some of that money and use it on projects.”
EDF's Finnigan said his group will advocate for particular projects at state commissions once utilities start saying how much money is at stake. But as this unfolds in every state over the next year or so, he said, his group plans to focus on nine states, particularly those with the largest greenhouse gas emissions and energy consumption, such as California, Texas, Ohio and New York.
Even critics of Trump's energy and environmental policies see the deferred tax money as a silver lining of the GOP law. The Sierra Club is pondering a strategy for using the excess tax funds to retrain coal power plant workers at sites slated for closure in rural areas.
"The Trump administration is not offering a coherent policy for economic transition for coal communities. Instead, it's giving them false promises that coal's getting revived," said Bill Corcoran, the Western director of the group's Beyond Coal campaign. "In that gap ... or even an acceptance that the transition is happening, we should strive to make use of this tax bill."
Charging utility consumers to retrain power plant workers facing job losses isn't without precedent. Last month, California regulators approved a plan to close the state's last two nuclear reactors by 2025. But the deal included $223 million for a retention and retraining program for plant employees who are being forced to move on. Corcoran also pointed to the pending closure of a coal-fired power plant in Washington state where the owner, TransAlta, agreed to pour $55 million into a local economic development fund.
"It's important to have robust models for that transition," Corcoran said, noting coming coal plant closures in New Mexico, Colorado and Montana.
"We want to make sure that in the understandable rush to return money to ratepayers that important community questions aren't missed in the process," he said. "This moment is a prod to have that conversation."