Electric utilities come out as winners under GOP-led nationwide tax reform

Published on December 22, 2017 by Kim Riley


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The final version of the Tax Cuts and Jobs Act passed this week in Congress and soon to be signed into law bodes extremely well for the electric industry.

Tom Kuhn, president of the Edison Electric Institute (EEI), the Washington, D.C.-based organization representing the nation’s investor-owned electric companies, called final passage on Dec. 20 of the Tax Cuts and Jobs Act “a win for America’s electricity customers and for investment in critical energy infrastructure.”

Since discussions on tax reform first began, EEI has emphasized that any final legislation must include provisions that benefit electricity customers.

The group is particularly pleased, Kuhn said, that the Tax Cuts and Jobs Act maintains the federal income tax deduction for interest expense for regulated electric companies and the federal income tax deduction for state and local taxes; provides for the continuation of normalization, including addressing excess deferred taxes resulting from a reduction in the tax rate; and keeps dividend tax rates low and on par with capital gains.

“This legislation will grow our economy and encourage much-needed investment in our nation’s infrastructure,” Kuhn added. “We look forward to President Trump signing this critical bill into law as soon as possible.”

Considered the largest tax overhaul in 30 years, the legislation contains the biggest one-time reduction in the corporate tax rate in American history, dropping the tax rate for large corporations from 35 percent to 21 percent beginning Jan. 1, 2018.

Republicans say this reduction, which would total about $1 trillion in tax cuts for businesses over the next decade, will create a booming U.S. economy. Expected to be signed into law in late December or January, the legislation makes policy changes worth nearly $10 trillion over 10 years, including roughly $4 trillion of tax increases to partly offset the cost of $5.5 trillion of tax cuts, according to the American Public Power Association. And the Heritage Foundation projects that the bill will increase the nation’s gross domestic product by 2.2 percent over its 10-year budget window, translating into an almost $3,000 increase per U.S. household.

The decreased corporate tax rate stands to provide myriad benefits and “will be passed directly through to our customers’ bills,” Eric Grey, director of government affairs for EEI, told Daily Energy Insider earlier this week.

EEI is pleased with the changes in the final conference agreement, which “had a number of provisions that are hugely important to not only our member companies, but also to our customers,” Grey said.

The decreased corporate tax rate is one such item. Existing customer rate structures could potentially remain the same since they’re set using the current 35-percent corporate rate, so electric utilities would be able to invest more funds in infrastructure under the tax reform.

The tax bill also would let companies deduct 100 percent of their capital project costs from their taxes in year one, instead of deducting smaller amounts over time. This also could free up infrastructure investment funds.

Both infrastructure-related items are important to EEI, which supports investments in America’s critical energy infrastructure; keeping customers’ bills affordable and as predictable as possible; and pushing down the cost of capital.

Marco Giamberardino, executive director of government affairs at the National Electrical Contractors Association (NECA), told Daily Energy Insider that NECA members also will benefit from the lower corporate tax rate.

“By and large, our members are going to do very well under this final version,” Giamberardino said, “especially C corporations” under the new tax rate.

NECA, which represents the $130 billion electrical construction industry bringing power, light and communication technology to buildings and communities across the United States, has long advocated for lower tax rates and a simpler tax code. The time and money NECA contractors spend to comply with the complex federal tax code, the group says, could be better spent on growing their businesses and creating jobs.

The final bill will give all pass-through firms, including those organized as trusts, a tax deduction of 20 percent, providing those companies with an effective tax rate of 29.6 percent, Giamberardino explained, a positive result that NECA thinks will allow all types of businesses to be treated more fairly.

NECA also fought to successfully include a provision in the bill that would allow companies to deduct up to 30 percent of their annual earnings before interest, taxes, depreciation and amortization. “Those are some of the wins NECA contractors all over the country will be able to take advantage of in the coming years,” he added.

Giamberardino also said there are a few areas in the tax bill that may make tax planning for NECA members more challenging. For example, NECA would have liked to have seen Congress provide “a more detailed plan to lay the groundwork for infrastructure investment,” he said.

The Conference Agreement also will repeal many other exemptions, deductions and credits for individuals in the pursuit of rate reduction, simplicity and fairness. Significantly, all of the individual tax provisions will expire at the end of 2025 — potentially leaving it up to a future Congress to extend them or make them permanent, according to NECA analysis.

More wins
The newly approved bill also maintains the federal income tax deduction for interest expense, another important item for EEI, Grey said.

“Without the deduction, the expense would directly be put on our customers. Maintaining the deduction helps us make investments and also keeps cost of service and capital low,” he said.

“We’re very, very pleased that House and Senate tax writers recognized that and provided an exception for utilities,” added Grey.

Maintaining the federal income tax deduction for interest expense was also positive news for the American Gas Association (AGA), which represents roughly 200 local energy companies that deliver natural gas to some 69 million residential and business customers.

Jake Rubin, AGA director of public relations and executive communications, also told Daily Energy Insider that the organization’s priorities for the tax reform bill were the same as those held by EEI, which includes members that are companies using natural gas to generate electricity.

Natural gas utilities, according to AGA, also like to keep interest deductibility intact to maintain low costs and affordable bills for consumers.

“Natural gas utilities are capital intensive industries and the Tax Cuts and Jobs Act supports the unique nature of the long-term investments that are at the heart of the safe and reliable service that our members provide,” said AGA President and CEO Dave McCurdy.

“Long-term investments in energy infrastructure, including natural gas distribution systems, strengthen our economy, make the country more attractive for corporate investment and create jobs,” McCurdy said.

Another more technical, “in-the-weeds issue” that’s equally important for EEI in tax reform, Grey said, is the federal income tax deduction for state and local taxes, which wasn’t touched in the new bill.

“Because we’re the largest payor of property taxes in pretty much everything, that’s huge for us,” said Grey.

McCurdy of AGA agreed.

“Maintaining the federal income tax deduction for state and local taxes will avoid taxing local infrastructure investments twice,” said McCurdy. “As some of the biggest taxpayers across the country, this will help natural gas utilities maintain low costs for consumers.”

There was another win, too, according to the American Public Power Association (APPA), the nonprofit representing about 1,400 of the nation’s roughly 2,000 public power utilities, which in total provide electricity to 49 million people in 49 states.

The tax reform bill maintains the tax exemption for municipal bonds, which allows the interest paid to holders of municipal bonds to be taxed, and it was the No. 1 issue for APPA, John Godfrey, APPA senior government relations director, said in an interview.

APPA members have “financed over $100 billion in new investments with municipal bonds,” Godfrey said, adding that the pressure to tax municipal bond interest has come from several fronts.

Small-government conservatives, for example, wanted to increase the cost of financing public investments to create an economic incentive to privatize public facilities, he said, while Democrats worried that bonds that finance the nation’s roads, bridges, schools, airports, and public power infrastructure are owned by – and therefore benefit – upper-income bondholders.

“While diametrically opposed on the issue of whether bonds are too efficient or not efficient enough, the two sides agreed on the policy solution of imposing an unprecedented federal tax on bond interest,” Godfrey wrote in an APPA blog this week.

“Because of a huge amount of work by stakeholders — including public power utilities — we got the message across to Congress that bonds finance the investments that make our communities livable and commerce possible,” he said.

Tax credit wins
Other sectors of the industry are also optimistic about the tax reform bill.

The American Wind Energy Association (AWEA), for instance, supports the bill’s preservation of the phaseout through 2019 of wind energy tax credits, which the group says will ensure the stability of American factories that build wind turbines and the investors who back new wind farms.

Specifically, the bill leaves intact the Production Tax Credit (PTC) and Investment Tax Credit (ITC), despite earlier variations of the bill suggesting they could be cut.

This more predictable phaseout could unleash roughly $85 billion in economic activity, AWEA says, while creating some 50,000 new wind jobs by 2020, according to Navigant Consulting.

Likewise, the Solar Energy Industries Association (SEIA) also supports specific tax credits contained in the comprehensive tax reform legislation, such as maintaining the solar ITC for both commercial developers and homeowners is “a great victory for the solar industry and its 260,000 American workers,” said Abigail Ross Hopper, president and CEO of SEIA.

However, the bill does make a change to the Base Erosion Anti-Abuse Tax (BEAT), which is designed to prevent multinationals from shifting profits overseas.

Under the compromised change, tax credits like the ITC and PTC now may offset 80 percent of the impact of the BEAT.

That’s not the best news for the wind industry, according to Gregory Wetstone, president and CEO of the American Council on Renewable Energy.

“The 80-percent repair applies only through 2025,” said Wetstone in a statement. “Therefore, it devalues the later years of the 10-year wind PTC.”

Overall, most members of the energy industry seemed to come out fairly well under the tax reform bill.

The biggest challenge, Grey noted, is that everyone “should start preparing to implement what is, hands down, the largest rewrite of the U.S. tax code in more than 30 years. The sheer implementation of it will be daunting.”

“That’s a heavy weight on not just our industry, but on all industries,” Grey said.