February 08, 2018

New Tax Legislation Jump-Starts Energy Infrastructure

The Tax Cuts and Jobs Act, signed into law at the end of last year, features a number of provisions that will impact the energy sector. The provision that may ultimately have the most far-reaching impact is the “creation” of a new pot of money: the deferred income tax pool. That money can be used for a number of different purposes, from customer rebates to new investments in infrastructure spending. The total dollar amount that will become available will be measured in the tens of billions — and perhaps even hundreds of billions.

Utilities collect taxes from their customers on a regular basis and, under accounting practices, they are allowed to defer the payments to the government. Since the new tax law lowers the corporate tax rate from 35 percent to 21 percent, utilities in particular will be sitting on billions of dollars from customers for taxes that will no longer need to be paid. Each individual state utility commission will determine how this money will be dispersed. The commissions may require utilities to provide rebates to the customers, or they may allow the utilities to use the funds to pay for infrastructure investments or repairs in order to avoid rate hikes in the future.

The Edison Electric Institute, the trade association for the investor-owned utilities, estimates that the deferred tax balances across the power industry total around $165 billion. This is without the natural gas or water utilities totals, which could double that amount. According to SEC filing, the deferred tax balance amount varies depending upon the size of the utility. For PSEG, estimates are at least $1.8 billion; for AEP, the amount is estimated around $4.4 billion.

Everyone has an opinion on how the money should be spent. Some consumer groups believe that the funds should be returned directly to the consumers. Some utilities and public commissions see an opportunity to fund new grid infrastructure projects, which would have been difficult to fund otherwise. Environmental organizations, such as the Environmental Defense Fund (EDF) and Sierra Club, have begun advocating for investments in green energy projects. EDF specifically is citing the funding availability in Ohio as a reason to reject attempts by the utilities to bail out some of the older coal plants. They also plan to lobby for specific projects to be funded at the state level. The Sierra Club is considering a call for the funds to be used to train coal workers for other careers.

Considering the size of the available cash pool, even a percentage of the funding would be a large influx of resources for energy infrastructure spending. As the federal government, both Congress and the Trump administration, turn to the larger issue of an infrastructure package, the availability of this funding source will not be lost on the utilities or the state utility commissions. We expect funding trends to appear across the states, particularly as third-party interest groups, and potentially Congress, weigh in with funding recommendations.

This issue and the larger infrastructure programs will be the topic at Faegre Baker Daniels Fifth Annual Energy and Environmental Symposium on March 14 in Washington, D.C.

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