Founded in 1852 by Sidney Davy Miller SHERRI A. WELLMAN TEL (517) 483-4954 FAX (517) 374-6304 E-MAIL wellmans@millercanfield.com Miller, Canfield, Paddock and Stone, P.L.C. One Michigan Avenue, Suite 900 Lansing, Michigan 48933 TEL (517) 487-2070 FAX (517) 374-6304 www.millercanfield.com MICHIGAN: Ann Arbor Detroit Grand Rapids Kalamazoo Lansing Troy FLORIDA: Tampa ILLINOIS: Chicago NEW YORK: New York CANADA: Windsor CHINA: Shanghai MEXICO: Monterrey POLAND: Gdynia Warsaw Wrocław January 19, 2018 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 7109 West Saginaw Highway Lansing, MI 48917 Re: In the matter, on the Commission's own motion, to consider changes in the rates of all Michigan rate regulated electric, steam, and natural gas utilities to reflect the effects of the pending federal Tax Cuts and Jobs Act Case No. U-18494 Dear Ms. Kale: Pursuant to the Michigan Public Service Commission s December 27, 2017 Order in Case No. U-18494, Upper Peninsula Power Company hereby submits its Comments in this docket. If you have any questions, please kindly advise. Very truly yours, Miller, Canfield, Paddock and Stone, P.L.C. SAW/kld Enclosure cc w/enc: Gradon Haehnel 30601543.1\130062-00001 By: Sherri A. Wellman
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the Commission s own motion, ) to consider changes in the rates of all of the ) following Michigan rate-regulated electric, ) steam, and natural gas utilities to reflect the effects ) of the federal Tax Cuts and Jobs Act of 2017; ) ALPENA POWER COMPANY, CONSUMERS ) ENERGY COMPANY, DETROIT THERMAL, LLC, ) DTE ELECTRIC COMPANY, DTE GAS COMPANY, ) Case No. U-18494 INDIANA MICHIGAN POWER COMPANY, ) NORTHERN STATES POWER COMPANY, ) UPPER PENINSULA POWER ) COMPANY, UPPER MICHIGAN ENERGY ) RESOURCES CORPORATION, ) WISCONSIN ELECTRIC POWER COMPANY, ) PRESQUE ISLE ELECTRIC & GAS CO-OP, ) MICHIGAN GAS UTILITIES CORPORATION, and ) SEMCO ENERGY GAS COMPANY. ) ) UPPER PENINSULA POWER COMPANY S COMMENTS On December 27, 2017, the Michigan Public Service Commission ( MPSC or the Commission ) issued its order in Case No. U-18494 addressing the enactment of the Tax Cuts and Jobs Act of 2017 ( TCJA ), and directing named MPSC regulated utilities to apply regulatory accounting treatment for all impacts resulting from the TCJA beginning January 1, 2018. These named utilities were also directed to file comments by January 19, 2018 (i) identifying the impacts of the TCJA, inclusive of current and deferred taxes, on revenue requirements with and without the TCJA, and (ii) outlining the preferred method to flow any
benefits arising from the enactment of TCJA to customers. Pursuant to these directives, Upper Peninsula Power Company ( UPPCO or the Company ) has as of January 1, 2018 established applicable regulatory accounts for the purpose of addressing all impacts arising from the TCJA, and hereby files these Comments addressing the estimated impacts of the TCJA and the Company s recommend method to addressing UPPCO s individual circumstances. A. Impacts of TCJA. 1. Overview. With the enactment of the TCJA on December 22, 2017, sweeping changes were made to the federal tax laws. As relevant to these Comments, these changes include, but are not limited to: (i) a reduction in the corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018, (ii) a one-time re-measurement of deferred tax liabilities from 35 percent to 21 percent ( Excess Deferred Taxes ), and (iii) a re-measurement of pre-existing regulatory tax assets and liabilities arising from the change in tax gross-up 1. These changes will materially affect UPPCO s tax expense and related revenue requirement; however, determining the estimated effects of these changes on the Company and its customers by January 19, 2018, is a significant challenge given the narrow timeframe for responding and the Company s limited resources. As such, UPPCO should be allowed more time to accurately calculate the impacts of the tax law change. 2. Estimated Impact of TCJA on UPPCO s Current Taxes. The total impact of the TCJA on UPPCO s annual tax expense and related revenue requirement will likely be affected by a number of items yet to be quantified. Notwithstanding, only accounting for the reduction in the federal corporate income tax rate from 35 percent to 21 1 UPPCO does not have any Deferred Income Tax Credits. 2
percent results in an estimated reduction from UPPCO s tax expense, without the TCJA to with the TCJA, of $3.8 million. See Exhibit 1 for the supporting schedules calculating this reduction. 3. Estimated Impact of TCJA on UPPCO s Deferred Taxes. Financial Accounting Standards Board Accounting Standards Codification ( ASC ) 740 requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws, with the effect to be recorded in the period of enactment either as a regulatory asset or liability (ASC 980) to be addressed in the future by the regulator. The MPSC has a policy of deferring the net income effects of a change in tax law by requiring the establishment of a regulatory asset or liability, e.g. Case Nos. U-10083 & U-16794. In accordance with ACS 740, because TCJA was enacted on December 22, 2017, UPPCO s deferred taxes were revalued as of December 22, 2017. Prior to the enactment of TCJA, UPPCO had approximately $13.6 million of deferred tax liabilities at a 35 percent tax rate, related to regulated operations. After the enactment of TCJA, UPPCO estimates that the Company s deferred tax liabilities at a 21 percent tax rate to be approximately $9.0 million. UPPCO has established a regulatory liability related to the net difference between the tax liabilities, the excess deferred tax, as of December 31, 2017. It should be noted, however, this calculation is the Company s best estimate as of the date of these Comments, and may be subject to final accounting adjustments to be reflected in UPPCO 2017 Federal tax return likely to be filed in the fourth quarter of 2018. B. Recommended Method to Address Impact. The Court of Appeals affirmed the power of the MPSC to order, sua sponte, a rateadjustment hearing limited to one issue: the impact of reduced federal corporate tax rates, under the Tax reform Act of 1986, on the rates charged by a utility. Consumers Power Co. v Public 3
Service Comm, 181 Mich App 161; 448 NW2d 806 (1989). However, because the decision in Consumers Power was issued before November 1, 1990, Consumers Power does not bind a future panel of the Court of Appeals under MCL 7.215(J)(1). See, e.g. People v McGhee, 268 Mich App 600, 613 n. 4; 709 NW2d 595 (2005) ( [t]his case is not binding on this Court because it was decided before November 1, 1990. MCR 7.215(J)(1). ) Further, and notwithstanding prior decisions to adjust rates based on a single issue, the Commission must be cognizant that an order which establishes a rate so low as to be confiscatory is unconstitutional. See, Michigan Consolidated Gas v Public Service Comm, 264 Mich App 424, 428; 691 NW2d 29 (2004), wherein the Court of Appeals cited Duquesne Light Co v Barasch, 488 US 299, 314; 109 S Ct 609; 102 Led 2d 646 (1989) ( the Court held that the United States Constitution protects the utility from the net effect of the rate order on its property. In other words, an isolated part of determining a utility s rate for a given period, such as the adjustment at issue in this case, cannot violate the utility s constitutional protection against a confiscatory rate. ) UPPCO s most recent general rate case was filed on September 18, 2015, in Case No. U-17895, with a final order issued by the Commission on September 8, 2016. Since Case No. U-17895, UPPCO has had many other changes in customer sales and cost of service for various rate classes. Therefore, it is recommended that the Commission order UPPCO to make the final determination of the revenue requirement impact of the corporate tax reduction as part of a general rate case and with full consideration by the Commission of all relevant issues 2. As a small, newly independent company, the challenge of performing a single-issue tax rate case in addition to a full requirements rate case would be difficult for UPPCO. UPPCO anticipates making this filing by 2 UPPCO is aware that there are several general rate cases pending before the Commission, and it is likely that the Commission will address the impact of the federal corporate tax change in those cases. 4
no later than the third quarter of 2018. During the interim between January 1, 2018 and final rate relief in the future rate case, pursuant to the Commission s December 27, 2017 Order in this case, UPPCO will continue to maintain a regulatory liability account, and will recommend in its future filing the method for customers to receive the benefit of tax savings. As another consideration, rate stability is of paramount importance to UPPCO. Recently, UPPCO has made great strides in reducing overall energy costs for customers. Effective January 2018, UPPCO anticipates a typical residential customer s bill should decrease by approximately 6 percent. Commercial and industrial customers are also expected to see decreases of approximately 15 and 24 percent, respectively. UPPCO is continually making investments in its distribution infrastructure in order to provide safe and reliable service to its customers. For example, Advanced Metering Infrastructure ( AMI ) is currently being evaluated by the Company for implementation beginning in mid-2018. UPPCO believes it is in the best interest of customers to utilize the savings gained by reduced taxes, or a portion thereof, to infrastructure investment such as AMI 3. If the Commission were to authorize this, it would appear to be consistent with one of the stated purposes for enacting TCJA, that being: reinvestment in the country s infrastructure. Therefore, in order to levelize rates, the timing of the implementation of the TCJA tax savings flow-back to customers should be thoughtfully contemplated within the context of other prospective rate changes on UPPCO s horizon, including but not limited to potential changes, in PSCR rates (January 1, 2019), rate realignment (September 23, 2018) and general rates (in 2019). 3 Deferred cost accounting treatment should also be considered for incremental distribution infrastructure expenditures, including AMI, similar to that ordered for tax treatment. 5
UPPCO also recommends a separate rate proceeding to address the manner and timing of return of the one-time Excess Deferred Tax liability. C. Conclusion. In accordance with the December 27, 2017 Order, UPPCO has (i) established regulatory assets and liabilities to reflect the impacts of the TCJA, (ii) provided an estimate of the impact of TCJA, and (iii) recommended a preferred methodology to address the impact of the TCJA. UPPCO respectfully requests that the Commission consider these comments. Respectfully submitted, UPPER PENINSULA POWER COMPANY, Dated: January 19, 2018 By: Its Attorney Sherri A. Wellman (P38989) MILLER, CANFIELD, PADDOCK and STONE, P.L.C. One Michigan Avenue, Suite 900 Lansing, Michigan 48933 (517) 487-2070 30583480.3\130062-00001 6