State Utilities Commission reverses itself, says regulated companies need not pass along corporate income tax cut to consumers
Now is a good time to be a monopoly provider of public utilities in North Carolina. The state population continues to grow and demand for service is high and expanding. The Governor is a former 28-year employee of the state’s largest electric power company, Duke Energy. The almost-always pliant General Assembly is friendlier than ever and the seven-member Utilities Commission , bolstered by three new McCrory administration appointees, appears to be in full-on “lapdog” mode.
For confirmation of this latter observation about the Commission, one need look no further than a ruling handed down last Thursday  in which consumers lost out for the umpteenth time to corporate profits.
The case involved the question of whether an array of public utility companies including Duke Energy should be forced to pass along corporate tax cuts they realized as a result of the major tax changes enacted by the General Assembly and Governor McCrory in 2013. According to a sharply-divided Commission, they need not do so and can actually keep millions of dollars that would have otherwise flowed to consumers. To make matters even more troubling, the ruling came about in such a way as to raise major concerns about due process and basic questions of fairness in Commission proceedings.
The question now is whether the matter will be appealed to the courts by the Commission’s Public Staff and/or Attorney General Cooper. Let’s hope so.
The proceeding (what is referred to in the arcane world of Utilities Commission practice as a “docket”) was first initiated last fall in response to the new tax law because of the changes it made to the state’s corporate income tax, as well as the sales, gross receipts and franchise taxes. The underlying premise, simply put, was that since the tax changes affected the cost of doing business for various regulated utility providers, there was good reason to explore whether rates should be adjusted so that utility profits would remain fair.
After several months of pleadings and interventions by numerous parties and countless document filings, the Commission finally issued a ruling  this past May in which it concluded that all of the tax changes should, indeed, be accounted for and “passed on” (for good and ill) to consumers. As the Commission noted in its 6-1 ruling:
“In passing HB 998, entitled An Act to Simplify the North Carolina Tax Structure and to Reduce Individual and Business Tax Rates, the General Assembly took a comprehensive approach to tax reform. The legislation is comprised of numerous tax repeals, reductions, and increases designed to work as one comprehensive set of reforms. The Commission concludes that such a comprehensive approach is also appropriate when implementing the many tax changes contained in HB 998 that affect utility rates.”
The ruling came over the objections of several utilities who argued that it would be improper to pass on the cut in the corporate income tax (which was lowered from 6.9% to 6.0% in 2014 and will be lowered again to 5.0% next year) because, among other things, a) the new tax law made no such specific directive that the cut be factored into rate calculations (as it did for some of the other tax changes) and b) because the rate change was not “substantial and material” (i.e. significant enough) to give rise to the need for a change under the rather complex precedents of the Commission.
In rejecting the utilities’ arguments, the Commission found that the reduction in the corporate income tax rates were indeed significant – both from a percentage perspective and from the standpoint of average consumers who could see individual reductions of at least a few dollars each per year. It also rejected the notion that the legislature’s silence on the matter somehow forbade them from taking the matter into account.
Not over till it’s over
Here, however, is where things got interesting. After the Commission order was entered, an appeal  was eventually filed in July by two of the major utilities. In support of their motion, the companies reiterated their previous arguments and cited those of the one person who dissented in the 6-1 ruling — Commission chair, former utility company lawyer and Perdue appointee Ed Finley.
All was quiet thereafter – except for the filing of several documents related to the implementation of the May order – until the sudden issuance of last week’s 4-3 order written by Finley and the three McCrory administration appointees  (who had obviously been prevailed upon to change their minds). According to the newly-formed majority, not only was the May order in error, but there wasn’t even a need for further arguments in the matter – something that always accompanies an appeal.
In other words: “Game, set and match Duke and the other utility giants. Sorry about that consumers, better luck next time.” The order gives the utilities discretion to go ahead and keep their tax savings or pass them on to consumers – whatever they feel like. Wonder how that will go.
An angry dissent
Not surprisingly, the abrupt and brazen move by Finley and the McCrory trio prompted a scathing dissent from the other three Commissioners – all holdover appointees from the Easley and Perdue administrations.
“The Majority’s decision, rescinding, in part, the Commission’s May 13, 2014 Order in this docket, allows the utilities to charge ratepayers in perpetuity to collect for taxes that the utilities no longer pay. The Majority’s decision errs with respect to fairness to ratepayers; errs procedurally with respect to due process and the limitations of the Commission’s right to rescind, alter, or amend an Order; and errs in its content with respect to its legal conclusions.”
The dissent (which ran 24 pages – click to page 24 of the order to find it ) was especially contemptuous of the process (or lack thereof) employed:
“The Majority takes this action without a hearing, or even requesting comment from other parties, and without a finding that a change of circumstances or misapprehension of a material fact has occurred….This action is a clear abuse of the Commission’s authority.…The Majority has not provided, and we have been unable to locate, a single instance in the history of the Commission in which the Commission has rescinded, altered, or amended an Order, and/or affirmed exceptions, based solely on authority [cited by the majority].“
It concludes this way:
“When the Commission has the authority to offset a portion of these increases by including all the changes effectuated by [the 2013 tax law changes], including the State corporate income tax rate, the Commission should exercise that authority to yield both a fair and lawful result, rather than create a windfall for utilities as the Majority’s decision does. Furthermore, the Majority’s decision to allow the utilities to choose in their own discretion whether to pass through the State corporate income tax rate is wholly inconsistent with the Majority’s own determination that the Commission lacks the authority to require such a change and is inconsistent with the Commission’s obligation to set fair rates.”
At this point, the ball appears to be in the court of the Public Staff (which is designated by law to protect the interests of ratepayers) and the small team of lawyers in the Utility Division of Attorney General Cooper’s Consumer Protection Division. If there’s any justice in the Old North State, both of them will be raising heck as soon as possible. While a pro-consumer outcome would hardly be assured in the increasingly-conservative and corporation-friendly state judicial system, one can at least hope that the utilities will be forced to jump through a few hoops in order to prove that they run the state.