Tucson Electric Power Company Tax Adjustment Plan of Administration

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Georgia Marshall
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1 Tucson Electric Power Company Tax Adjustment Plan of Administration 1. GENERAL DESCRIPTION The purpose of the Tax Adjustment is to address changes in the Company s federal income tax rate until such changes are reflected in the Company s next general rate case. The savings will be returned through a combination of (i) a per kilowatt-hour ( kwh ) bill credit for all customer classes and (ii) a regulatory liability that reflects the deferral of the return of a portion of the savings (which will be returned to customers in the Company s next rate case). The initial Tax Adjustment shall go into effect for an 8-month period beginning with the May 2018 billing cycle. TEP shall make an annual informational filing with Docket Control ( Informational Filing ) no later than October 1 st of each year that includes its Tax Adjustment for the next January to December 12-month period based on the federal income tax rate in effect for the calendar year and expected sales for the 12-month bill credit period. The Tax Adjustment will also include a balancing account for estimates of (i) differences in actual kwh sales versus forecasted sales from the preceding 12-month bill credit period, (ii) differences in the actual versus forecasted excess deferred income tax ( EDIT ) amortization resulting from adjustments to accumulated deferred income taxes ( ADIT ) related to the change in the income tax rate for the applicable calendar year, and (iii) changes, if any, in the effective federal income tax rate. The Tax Adjustment shall be terminated on the effective date of new rates in the Company s next rate case. Upon termination of the Tax Adjustment, any remaining amounts that have not been returned to customers will be reflected in the regulatory liability to be returned to Customers in the Company s next rate case. 2. CALCULATION OF TAX ADJUSTMENT The calculation of the Tax Adjustment is set forth in Table 1 below and in the attached schedules. The tax savings to be returned to customers starting in May 2018 will include the direct tax savings resulting from the tax rate change plus an estimate of the EDIT amortization resulting from adjustments to ADIT related to the change in the federal income tax rate. The per kwh bill credit will be calculated based on these calendar year 2018 tax savings and the estimated kwh sales for the initial 8-month bill credit period ( 7 of Table 1). For 2019 (and subsequent years), the tax savings to be returned to customers will be calculated as for 2018 and will reflect the effective federal income tax rate applicable for that tax year. In addition, a balancing account will be used to true up the actual EDIT impact and the difference between forecasted and actual kwh sales for the preceding calendar year ( 2 of Table 1). 1 P age

2 The bill credit portion of the Tax Adjustment shall be 75% in 2019, 50% in 2020, and shall remain at 50% until the effective date of new rates in TEP s next rate case ( 4 of Table 1). In Years 2 and 3 (and until new rates become effective in the Company s next rate case), the portion of the Tax Adjustment not returned to customers as a bill credit will be deferred and returned to customers in the Company s next rate case (s 8 and 10 of Table 1). The deferred amounts shall accrue interest at an annual rate of 4.32% ( 9 of Table 1). TABLE 1 May 1, Dec For Illustrative Purposes Only Jan. 1, Dec. 31, 2019 Jan. 1, Dec. 31, Gross Tax Adjustment $ 36,471 $ 36,471 $ 36,471 2 Total Balancing Account N/A Net Annual Tax Adjustment ( 1 + 2) $ 36,471 $ 36,471 $ 36,471 4 Bill Credit % 100% 75% 50% 5 Total Annual Tax Adjustment $ 36,471 $ 27,353 $ 18,236 6 Forecasted Credit Period Retail Sales (MWh) 6,498,556 8,941,920 9,173,036 7 Annual $/kwh Credit ( 3 / 6) $ $ $ Total Deferred Tax Adjustment ( 3 5) $ - $ 9,118 $ 18,236 9 Accrued Interest $ - $ - 10 Accumulated Deferred Tax Adj. ( 8 + 9) $ - $ 9,118 $ 27, FILING AND PROCEDURAL DEADLINES TEP will file the Informational Filing, which includes the Tax Adjustment for the coming 12- month period and all supporting data and documentation used in calculating the bill credit, with the Commission each year no later than October 1. The Informational Filing shall also include the current balance of the deferred tax savings that will be credited to customers in the Company s next rate case. The Tax Adjustment proposed in the Informational Filing shall be effective in the first billing cycle in January. 2 P age

3 Schedule 1 ANNUAL TAX ADJUSTMENT $PER KWH CREDIT FOR MAY 1, 2018 TO DECEMBER 31, 2018 Current Year Ending 12/31/2018 Annual Tax Adjustment $per kwh Credit Reference May 1, Dec For Illustrative Purposed Only Jan 1, Dec Jan 1, Dec Gross Tax Adjustment Schedule 3, A-1, 12 $ (36,471) $ (36,471) $ (36,471) 2 Total Balancing Account Schedule 2, Net Annual Tax Adjustment $ (36,471) $ (36,471) $ (36,471) 4 Bill Credit % 100% 75% 50% 5 Total Annual Tax Adjustment $ (36,471) $ (27,353) $ (18,236) 6 Forecasted Credit Period Retail Sales (MWh) Company Records 6,498,556 8,941,920 9,173,036 7 Annual $/kwh Credit 5 / 6 $ (0.0056) $ (0.0031) $ (0.0020) 8 Total Deferred Tax Adjustment 3-5 $ - $ (9,118) $ (18,236) 9 Accrued Interest* Accumulated Deferred Tax Adjustment $ - $ (9,118) $ (27,353) * Tucson Electric Power Company shall accrue interest on tax savings deferred as a regulatory liability at an annual interest rate of 4.32%.

4 Schedule 2 BALANCING ACCOUNT Current Year Ending 12/31/2018 (A) (B) (C) Current Year Balancing Account Reference $ Previous Filing Schedule 1 1 Prior Period Annual Adjustment 5 2 Accumulated & Deferred Income Tax Estimate (a) Update Previous Filing 3 Amount Applied to Customer's Bills in Prior Credit Period (b) Company Records 4 Balancing Account (a) Represents any difference between prior period annual tax adjustment credit and actual tax adjustment credit pass to customers. (b) Represents the amount applied to customers for the prior year approved credit period. True-up is the result of utilizing forecasted jurisdictional retail sales for the credit period.

5 Schedule 3-A1 COMPUTATION OF INCREASE IN GROSS REVENUE REQUIREMENTS ACC JURISDICTION Description Original Cost RCND Fair Value (A) (B) (C) 1 Adjusted Rate Base $ 2,045,203 $ 3,633,028 $ 2,839,116 2 Adjusted Operating Income 118, , ,118 3 Current Rate of Return 5.78% 3.25% 4.16% 4 Required Operating Income 143, , ,913 5 Required Rate of Return on OCRB 1.00% 3.96% 5.07% 6 Adjusted Operating Income Deficiency on OCRB 25,795 25,795 25,795 7 Gross Revenue Conversion Factor Increase/(Decrease ) in OCRB Revenue Requirements $ 34,432 $ 34,432 $ 34,432 9 After Tax Return on Fair Value Increment 10, Revised Increase/(Decrease) in Base Revenue Requirements $ 45, Less: Approvred Increase in Base Revenue Requirements 81, Tax Expense Adjustment - Increase/(Decrease) in Base Revenue Requirements $ (36,471) (A) Source: Schedule 3-B1 (1) (F), Schedule 3-C1 (2) (B) Source: Schedule 3-B1 (2) (F), Schedule 3-C1 (2) (C) Calculation

6 Schedule 3-B1 (1) SUMMARY OF ORGINAL COST RATE BASE ELEMENTS TOTAL COMPANY AND ACC JURISDICTION Original Cost Total Company ACC Tax Reform Adjusted Tax Reform Adjusted Description Settlement Pro Formas Settlement Settlement Pro Formas Settlement (A) (B) (C) = (A) + (B) (D) (E) (F) = (D) + (E) 1 Gross Utility Plant in Service $ 5,164,934 $ - $ 5,164,934 $ 3,931,039 $ - $ 3,931, Less: Accumulated Depreciation & Amortization 2,109,158-2,109,158 1,566,272-1,566, Net Utility Plant in Service $ 3,055,775 $ - $ 3,055,775 $ 2,364,767 $ - $ 2,364,767 3 Deductions: 4 Customer Advances for Construction $ (11,046) $ - $ (11,046) $ (11,046) $ - $ (11,046) 4 5 Customer Deposits (19,400) - (19,400) (19,400) - (19,400) 5 6 Deferred Credits (1,338) - (1,338) (1,286) - (1,286) 6 7 Accumulated Deferred Investment Tax Credits (1,330) - (1,330) (1,330) - (1,330) 7 8 Accumulated Deferred Taxes (510,622) - (510,622) (407,615) - (407,615) 8 9 Total Deductions $ (543,737) $ - $ (543,737) $ (440,678) $ - $ (440,678) 9 Additions: 10 Regulatory Assets $ 22,260 $ - $ 22,260 $ 22,260 $ - $ 22, Allowance for Working Capital * 110, ,520 98,855-98, Other 5,386-5, Total Additions $ 138,166 $ - $ 138,166 $ 121,115 $ - $ 121, Total Rate Base $ 2,650,204 $ - $ 2,650,204 $ 2,045,203 $ - $ 2,045, * The tax savings would have an immaterial impact on cash working capital. For simplicity, the company chose to exclude from this calculation.

7 Schedule 3-B1 (2) SUMMARY OF RCND RATE BASE ELEMENTS TOTAL COMPANY AND ACC JURISDICTION RCND Total Company ACC Tax Reform Adjusted Tax Reform Adjusted Description Settlement Pro Formas Settlement Settlement Pro Formas Settlement (A) (B) (C) = (A) + (B) (D) ( E) (F) = (D)+ (E) 1 Gross Utility Plant in Service $ 10,291,502 $ - $ 10,291,502 $ 7,721,753 $ - $ 7,721, Less: Accumulated Depreciation & Amortization 4,553,979-4,553,979 3,292,259-3,292, Net Utility Plant in Service $ 5,737,523 $ - $ 5,737,523 $ 4,429,494 $ - $ 4,429,494 3 Deductions: 4 Customer Advances for Construction $ (15,465) $ - $ (15,465) $ (15,465) $ - $ (15,465) 4 5 Customer Deposits (19,400) - (19,400) (19,400) - (19,400) 5 6 Deferred Credits (1,338) - (1,338) (1,286) - (1,286) 6 7 Accumulated Deferred Investment Tax Credits (1,330) - (1,330) (1,330) - (1,330) 7 8 Accumulated Deferred Taxes (1,102,508) - (1,102,508) (880,100) - (880,100) 8 9 Total Deductions $ (1,140,042) $ - $ (1,140,042) $ (917,581) $ - $ (917,581) 9 Additions: 10 Regulatory Assets $ 22,260 - $ 22,260 $ 22,260 - $ 22, Allowance for Working Capital * 110, ,520 98,855-98, Other 5,386-5, Total Additions $ 138,166 $ - $ 138,166 $ 121,115 $ - $ 121, Total Rate Base $ 4,735,647 $ - $ 4,735,647 $ 3,633,028 $ - $ 3,633, * The tax savings would have an immaterial impact on cash working capital. For simplicity, the company chose to exclude from this calculation.

8 Schedule 3-B2 ORGINAL COST RATE BASE PRO FORMA ADJUSTMENTS Tax Reform Settlement Accumulated & Deferred Income Tax Adjusted Settlement at End of Test Year 6/30/2015 Impact Test Year 6/30/2015 Description Total Company ACC Total Company ACC Total Company ACC (A) (B) (C) (D) (E)= (A) - (C) (F) = (B) - (D) 1 Gross Utility Plant in Service $ 5,164,934 $ 3,931,039 $ 5,164,934 $ 3,931,039 $ - $ Less: Accumulated Depreciation & Amortization 2,109,158 1,566,272 2,109,158 1,566, Net Utility Plant in Service $ 3,055,775 $ 2,364,767 $ 3,055,775 $ 2,364,767 $ - $ Total Deductions $ (543,737) $ (440,678) $ (543,737) $ (440,678) $ - $ Total Additions 138, , , , Total Rate Base $ 2,650,204 $ 2,045,203 $ 2,650,204 2,045,203 $ - $ - 6

9 Schedule 3-B3 RCND RATE BASE PRO FORMA ADJUSTMENTS Tax Reform Settlement Accumulated & Deferred Income Tax Adjusted Settlement at End of Test Year 6/30/2015 Impact Test Year 6/30/2015 Description Total Company ACC Total Company ACC Total Company ACC (A) (B) (C) (D) (E)= (A) - (C) (F) = (B) - (D) 1 Gross Utility Plant in Service $ 10,291,502 $ 7,721,753 $ 10,291,502 $ 7,721,753 $ - $ Less: Accumulated Depreciation & Amortization 4,553,979 3,292,259 4,553,979 3,292, Net Utility Plant in Service $ 5,737,523 $ 4,429,494 $ 5,737,523 $ 4,429,494 $ - $ Total Deductions $ (1,140,042) $ (917,581) $ (1,140,042) $ (917,581) $ - $ Total Additions 138, , , , Total Rate Base $ 4,735,647 3,633,028 4,735,647 3,633,028 $ - $ - 6

10 Schedule 3-C1 (1) TOTAL COMPANY TEST YEAR INCOME STATEMENT Description Total Company Tax Reform Settlement Test Year Ended 6/30/2015 Proforma Adjustments After Proforma Adjustments (A) (B) (C)=(A) + (B) Operating Revenues 1 Revenues from Base Rates $ 889,944 $ - $ 889, Miscellaneous Service Revenues 6,462-6, Rent from Electric Property 24,901-24, Other Electric Revenues 19,457-19, Total Revenues $ 940,764 $ - $ 940,764 5 Operating Expenses 6 Fuel and Purchased Power $ 289,140 $ - $ 289, Operations and Maintenance Excluding Fuel 284, , Depreciation and Amortization 153, , Income Taxes 38,638 (23,092) 15, Other Taxes 53,907-53, Interest on Customer Deposits Total Expenses $ 819,988 $ (23,092) $ 796, Net Operating Income $ 120,776 $ 23,092 $ 143,868 13

11 Schedule 3-C1 (2) ACC JURISDICTION TEST YEAR INCOME STATEMENT Description ACC Jurisdiction Tax Reform Settlement Test Year Ended 6/30/2015 Proforma Adjustments After Proforma Adjustments (A) (B) (C)=(A) + (B) Operating Revenues 1 Revenues from Base Rates $ 889,944 $ - $ 889, Miscellaneous Service Revenues 6,462-6, Rent from Electric Property 24,901-24, Other Electric Revenues Total Revenues $ 921,673 $ - $ 921,673 5 Operating Expenses 6 Fuel and Purchased Power $ 289,140 $ - $ 289, Operations and Maintenance Excluding Fuel 334, , Depreciation and Amortization 124, , Income Taxes 30,805 (16,451) 14, Other Taxes 40,971-40, Interest on Customer Deposits Total Expenses $ 820,007 $ (16,451) $ 803, Net Operating Income $ 101,667 $ 16,451 $ 118,118 13

12 Schedule 3-C2 COMPUTATION OF GROSS REVENUE CONVERSION FACTOR Description Settlement Percentage of Incremental Gross Revenues (A) Pro Forma Percentage of Incremental Gross Revenues (B) 1 Gross Revenue % % 1 2 Less: Uncollectible Revenue % % 2 3 Taxable Income as a Percent 99.81% 99.81% 3 4 Less: Federal and State Income Taxes * 38.17% 24.89% 4 5 Change in Net Operating income 61.64% 74.92% 5 6 Gross Revenue Conversion Factor * Effective Tax Rate at 24.94% (Tax Reform) & 38.24% (Settlement)

13 Schedule 3-C1 Wokpaper Detail TOTAL COMPANY AND ACC JURISDICTION DETAIL OF PRO FORMA ADJUSTMENTS AS SHOWN ON SCHEDULE 3-C1 Description Total Company ACC Jurisdiction Tax Reform Pro Forma Settlement Income Tax Tax Reform Pro Forma Settlement Income Tax (A) (B) (A) (B) 1 Pre-Tax Operating Income $ 159,414 $ 159,414 $ 132,472 $ 132, Allocated Interest Expense (57,210) (57,210) (44,150) (44,150) 2 3 Adjusted Operating Income $ 102,204 $ 102,204 $ 88,322 $ 88, Effective Tax Rate at 24.94% (Tax Reform) & 38.24% (Settlement) 25,491 39,086 22,028 33, Tax Effected Permanent Items 5 6 Federal Tax Credits (7) (7) (5) (44) 6 7 AZ Tax Credits net of 35% Fed Benefit (1,426) (1,173) (1,100) (7,798) 7 8 Excess Deferred items (9,631) (939) (7,432) (6,240) 8 9 Meals & Entertainment , Fuel Tax Credit Addback Federal & NM Flow Thru Items 814 1, , AZ Flow Thru Items AZ Coal Crdit Addback Total Adjustments $ (9,945) $ (447) $ (7,674) $ (2,972) Tax Expense $ 15,546 $ 38,639 $ 14,354 $ 30, Pro Forma for Tax Reform impact $ (23,092) $ (16,451) 16

UNS Electric, Inc. Tax Adjustment Plan of Administration

UNS Electric, Inc. Tax Adjustment Plan of Administration Tax Adjustment Plan of Administration 1. GENERAL DESCRIPTION The purpose of the Tax Adjustment is to address changes in the Company s federal income tax rate until such changes are reflected in the Company