2018 General Rate Case. Tax Update Rebuttal

Transcription

1 Application No.: Exhibit No.: Witnesses: A SCE-61 M. Childs J. McCarson S. Menon (U 338-E) 2018 General Rate Case Tax Update Rebuttal Before the Public Utilities Commission of the State of California Rosemead, California March 9, 2018

2 TAX UPDATE REBUTTAL Table Of Contents Section Page Witness I. INTRODUCTION...1 S. Menon II. TAX LEGISLATION CHANGES...1 M. Childs A. B. C. SCE Agrees With TURN s Proposal For A Private Letter Ruling ( PLR ) Clarifying The Average Rate Assumption Method ( ARAM ) Calculations...1 ORA s Proposal To Expand The Scope Of SCE s Tax Accounting And Memorandum Account ( TAMA )...2 Energy Division Letter Re: Implementation Of the Tax Cuts and Jobs Act ( TCJA ) Of III. WORKING CASH CALCULATIONS...3 IV. RATEMAKING CONSIDERATIONS...3 J. McCarson S. Menon i

3 I. INTRODUCTION This testimony responds to the testimony received from the Office of Ratepayer Advocates ( ORA ) and The Utility Reform Network ( TURN ) on March 5, 2018, regarding SCE s Tax Update testimony (Exhibit SCE-60). We address the tax-related, working cash, and ratemaking issues in the sections below. TURN proposed two additional adjustments associated with postage expense and operational cash. TURN updated its forecast for postage expenses to reflect the changes in postage rates. 1 SCE has already presented its rebuttal to the volume of postage in SCE-19, 2 and expects the adopted postage expenses will reflect the adopted volume of postage and the updated postage rate. II. TAX LEGISLATION CHANGES In response to SCE s updated testimony related to the impacts of tax legislation changes on rates, ORA and TURN have made several proposals. SCE agrees to these proposals, as summarized below. A. SCE Agrees With TURN s Proposal For A Private Letter Ruling ( PLR ) Clarifying The Average Rate Assumption Method ( ARAM ) Calculations TURN recommends the Commission require SCE to file for a PLR to help clarify the definition of book depreciation 3 and address whether the inclusion of cost of removal recovery in book depreciation when computing ARAM would be a normalization violation. We agree with TURN s proposal and look forward to working with the Commission, TURN, and other interested parties in preparing a PLR to help answer this and potentially other normalization issues that may arise as SCE computes ARAM and returns excess deferred tax benefits to our customers. 1 SCE-59, pp SCE-19, pp TURN-15, p. 1. 1

4 B. ORA s Proposal To Expand The Scope Of SCE s Tax Accounting And Memorandum Account ( TAMA ) In light of the new tax legislation and uncertainties regarding interpretation of some aspects of the law, ORA recommends the Commission adopt a broadened tax accounting memorandum account, consistent with those instituted for SDG&E, SoCalGas, and PG&E. 4 This expanded scope would track any revenue differences resulting from forecast income tax expense included in the GRC and the tax expenses incurred during the GRC period. We agree with this proposal, and, while not specifically requested by TURN, we also believe that the expanded scope of the TAMA proposed by ORA should satisfy TURN s request to establish a memorandum account 5 to track the impacts resulting from a PLR filing. ORA also proposes that SCE file an annual advice letter to make appropriate adjustments to SCE s base rate revenue requirement. 6 We agree. ORA s proposal is consistent with the current tariff language as filed in AL 3314-E, which, upon Energy Division s approval of SCE s Tier 2 TAMA advice letters, authorizes the transfer of the balance in the TAMA to the Base Revenue Requirement Balancing Account ( BRRBA ) on an annual basis. C. Energy Division Letter Re: Implementation Of the Tax Cuts and Jobs Act ( TCJA ) Of 2017 This GRC will determine SCE s level of base rate revenues for the cycle. In addition to base rates, the tax legislation also affects other ratemaking. SCE has received a letter dated March 2, 2018, from Mr. Edward Randolph, Director of the Energy Division, addressed to several California utilities, addressing how each utility should incorporate tax legislation changes into customer rates. Regarding SCE, Mr. Randolph s letter states: SCE has already responded to rulings in its TY 2018 GRC and served additional testimony providing a revised TY 2018 result of operations (RO) model and revenue requirement that reflects the impact of the TCJA. Other parties will file testimony soon, to be followed by evidentiary hearings. The Commission s decision in this proceeding will reflect the Commission s determination regarding how the TCJA should be reflected in customer rates. 4 ORA-02-T, p TURN-15, p ORA-02-T, p. 7. 2

5 We are addressing Mr. Randolph s letter here because this 2018 GRC will not capture all revenue requirement amounts affected by the TCJA. SCE has other deferred tax amounts 7 that are also affected by the change in tax rates. SCE plans to submit an advice letter by June 30, 2018 that will identify these other, non-base rate amounts along with a proposal for how to reflect those additional tax benefits in customer rates. While we have not yet completed our analyses to quantify those amounts, we expect the overall amount to result in a reduction to customer rates. III. WORKING CASH CALCULATIONS TURN also proposed changes to SCE s Working Cash calculations of 2018 average deferred tax balances for Workers Compensation and Unfunded Pension Reserves. 8 We agree with these adjustments. Separately, TURN provides 2018 average deferred tax balances for Other Accounts Receivables and Long-Term Incentive Plan based on its forecasts proposed in TURN We agree that TURN s computation of 2018 average deferred tax balances for these two items is correct based on its proposed forecast. IV. RATEMAKING CONSIDERATIONS SCE proposed that the 2018 GRC Revenue Requirement Memorandum Account ( 2018 GRC RRMA ) balance be amortized over 2019 and 2020 to facilitate rate stability similar to the mechanism used in the 2015 GRC. Both ORA and TURN support the concept of rate stability, but proposed a threeyear amortization schedule for the 2018 GRC RRMA over TURN further adds that part of the logic behind the two-year amortization adopted in the 2015 GRC was driven by the timing of the decision itself, which was not voted out until November 5, 2015, very near the end of the test year. 10 SCE does not oppose a three-year 2018 GRC RRMA amortization over if the final decision 7 One example of this type of deferred liability is the timing differences on when balancing account revenue is accrued (book recognition) and when the cash is received (tax recognition). 8 TURN s computation of average deferred tax balances for these two items results in a working capital reduction of $28,557 compared to the $13,726 reduction proposed by SCE in SCE-60. Please refer to Appendix A for additional information. 9 TURN-15, p. 5 ( TURN does not disagree with Edison s method for estimating the impact of the tax law change for these two accounts, but has different numbers because of its different forecast. ). 10 TURN-16, p. 3. 3

6 in the 2018 GRC is received before September 30, However, if the final decision is received in the last quarter of 2018, then implementing a two-year amortization would be more practical. Both TURN and ORA take issue with alternate ratemaking considerations of setting aside the reduced revenue requirements associated with the Tax Legislation in a new balancing account to be used for specific wildfire-related risk mitigation activities. SCE agrees with both parties that tax benefits should ultimately flow back to customers; the only difference we had with those parties is the timing of whether the benefits are passed on to customers with the 2018 GRC revenue changes, or after offsetting authorized costs associated with wildfires. While SCE continues to believe there is merit in using the savings that arise from the federal income tax legislation to offset increased wildfire costs, SCE will not contest the ORA and TURN positions on this issue. 11 4

7 EXHIBIT SCE-61 APPENDIX A

8 Southern California Edison 2018 GRC Changes in Cash Working Capital $ in Thousands Changes in Cash Working Capital SCE-60 SCE-61 Changes Line Working Capital Items Unfunded Pension Reserves (84,631) (96,799) (98,622) (92,613) (96,799) (98,622) (7,983) 2 Workers Compensation (61,680) (50,768) (40,156) (68,526) (50,768) (40,156) (6,847) Adjustment Required in RO Model 1) Unfunded Pensions: cap_dep_other Rate Base Items.xlsb -> User Inputs -> Adjust Cell M62 by (15,965), Adjust Cell N62 by 15,965, Adjust Cell O62 by (15,965) 2) Workers Compensation: cap_dep_other Rate Base Items.xlsb -> Workers Compensation -> Adjust Calculation as shown in SCE-61 Workers Compensation tab of this workbook

9 Southern California Edison 2018 GRC Working Cash Capital - Unfunded Pension Reserve $ in Thousands Line SCE SCE-59 SCE-60 Change No. Account Description Share Actuary Forecast EXECUTIVE RETIREMENT PLAN 99% (109,899) (117,949) (123,505) (124,835) (109,899) (117,949) (123,505) (124,835) SPECIAL PENSION PROV-ACCRUAL 100% EMPLMT AGRMT SURV BNFT 100% SPECIAL PEN PROV-SURV BEN-JFD 100% EXEC SURVIVOR BENEFIT 0% SURVIVOR INCOME CONTINUATION 100% (7,189) (6,786) (6,497) (6,189) (7,189) (6,786) (6,497) (6,189) EXEC 1985 DEF COMP DEATH BNFT 100% (6,545) (6,352) (6,163) (6,001) (6,545) (6,352) (6,163) (6,001) SUPPL SURV INC/RETIR INC 100% (2,832) (2,473) (2,088) (1,678) (2,832) (2,473) (2,088) (1,678) SUPPLEMENTAL LTD 100% Total Actuary Forecast (126,465) (133,560) (138,253) (138,703) (126,465) (133,560) (138,253) (138,703) Less: Non-SCE Share 1,363 1,460 1,526 1,541 1,363 1,460 1,526 1, Total SCE Unfunded Pension (125,102) (132,100) (136,727) (137,162) (125,102) (132,100) (136,727) (137,162) Tax Rate 40.75% 40.75% 40.75% 40.75% 40.75% 27.98% 27.98% 27.98% 0.00% % % % Tax Adjusment 50,974 53,826 55,711 55,888 50,974 36,967 38,262 38,383 - (16,859) (17,449) (17,505) Total Unfunded Pension Net of Tax (74,128) (78,275) (81,016) (81,274) (74,128) (95,133) (98,465) (98,778) - (16,859) (17,449) (17,505) Avg After Tax Balance (76,201) (79,645) (81,145) (84,631) (96,799) (98,622) (8,429) (17,154) (17,477) Rebuttal - Based on TURN's proposal Line SCE SCE-59 SCE-61 Change No. Account Description Share Actuary Forecast EXECUTIVE RETIREMENT PLAN 99% (109,899) (117,949) (123,505) (124,835) (109,899) (117,949) (123,505) (124,835) SPECIAL PENSION PROV-ACCRUAL 100% EMPLMT AGRMT SURV BNFT 100% SPECIAL PEN PROV-SURV BEN-JFD 100% EXEC SURVIVOR BENEFIT 0% SURVIVOR INCOME CONTINUATION 100% (7,189) (6,786) (6,497) (6,189) (7,189) (6,786) (6,497) (6,189) EXEC 1985 DEF COMP DEATH BNFT 100% (6,545) (6,352) (6,163) (6,001) (6,545) (6,352) (6,163) (6,001) SUPPL SURV INC/RETIR INC 100% (2,832) (2,473) (2,088) (1,678) (2,832) (2,473) (2,088) (1,678) SUPPLEMENTAL LTD 100% Total Actuary Forecast (126,465) (133,560) (138,253) (138,703) (126,465) (133,560) (138,253) (138,703) Less: Non-SCE Share 1,363 1,460 1,526 1,541 1,363 1,460 1,526 1, Total SCE Unfunded Pension (125,102) (132,100) (136,727) (137,162) (125,102) (132,100) (136,727) (137,162) Average Balance (128,601) (134,414) (136,944) Tax Rate 40.75% 40.75% 40.75% 40.75% 40.75% 27.98% 27.98% 27.98% 0.00% % % % Tax Adjusment 50,974 53,826 55,711 55,888 50,974 35,988 37,614 38,322 - (17,838) (18,096) (17,565) Total Unfunded Pension Net of Tax (74,128) (78,275) (81,016) (81,274) (74,128) (92,613) (96,799) (98,622) - (14,339) (15,783) (17,348) Avg After Tax Balance (76,201) (79,645) (81,145) (92,613) (96,799) (98,622) (16,412) (17,154) (17,477)

10 Southern California Edison 2018 GRC Working Cash Capital - Workers Compensation $ in Thousands Line SCE-59 SCE-60 Change No. Item Expense 35,758 30,608 31,283 31,993 35,758 30,608 31,283 31, Less: Payments (51,374) (54,897) (56,311) (36,435) (51,374) (54,897) (56,311) (36,435) Net Expense (15,616) (24,289) (25,029) (4,442) (15,616) (24,289) (25,029) (4,442) Pre Tax Balance (107,299) (83,010) (57,981) (53,539) (107,299) (83,010) (57,981) (53,539) Tax Rate % % % % % % % % 0.000% % % % 6 After Tax Balance (63,579) (49,187) (34,356) (31,724) (63,579) (59,780) (41,756) (38,557) - (10,594) (7,400) (6,833) 7 Avg After Tax Balance (56,383) (41,771) (33,040) (61,680) (50,768) (40,156) (5,297) (8,997) (7,116) Rebuttal - Based on TURN's proposal Line SCE-59 SCE-61 Change No. Item Expense 35,758 30,608 31,283 31,993 35,758 30,608 31,283 31, Less: Payments (51,374) (54,897) (56,311) (36,435) (51,374) (54,897) (56,311) (36,435) Net Expense (15,616) (24,289) (25,029) (4,442) (15,616) (24,289) (25,029) (4,442) Pre Tax Balance (107,299) (83,010) (57,981) (53,539) (107,299) (83,010) (57,981) (53,539) Average Balance (95,154) (70,496) (55,760) (95,154) (70,496) (55,760) 6 Tax Rate % % % % % % % % 0.000% % % % 7 Avg After Tax Balance (63,579) (56,383) (41,771) (33,040) (63,579) (68,526) (50,768) (40,156) 0 (12,144) (8,997) (7,116)