1. New Tax Law and its Impact on Rates – Cost-of-Service
May 7, 2018
C. Drew Cayton, Kinect Energy Group

2. Cost-of-Service Impacts
Cost-of-Service is effected in 3 ways:
Income Tax Allowance Calculation
Rate Base ∴ Return and Income Tax Allowance
Tax Credit

3. What is an Income Tax Allowance?
Is it income taxes actually paid by the pipeline/utility?
So what is it?
Based on the taxable portion of income/return
Recognizes the “tax on tax” effect by grossing-up tax rates

4. Tax Gross What?
Without grossing-up tax rates, pipelines/utilities would never recover their allowed return Gross up = Tax Rate/(1-Tax Rate)
No Gross-up
Gross-up
Allowed Eq. Return
$1,275,000
Tax Rate
35%
53.85%*
Tax Allowance
$446,250
$686,538
Total Return & Tax
$1,721,250
$1,961,538
Taxes 35%
$602,438
Actual Return
$1,118,812
Difference
($156,118) $0

5. Income Tax Allowance Change
At 35% Tax Rate
35%/(1-35%) = 53.85%
At 21% Tax Rate
21%/(1-21%) = 26.58%
Particulars
35% Tax Rate
21% Tax Rate
Equity Return
$1,275,000
Tax Rate
53.85%
26.58%
Taxes
$686,538
$338,924
Difference
($347,614)

6. ADIT and EDIT Accumulated Deferred Income Taxes (ADIT)
Early in an asset’s life, tax depreciation exceeds book depreciation
These dollars are “stored” to pay taxes in the future when book deprecation exceeds tax deprecation
Excess Deferred Income Taxes (EDIT)
Normalization rules require pipelines/utilities to re-measure ADIT for the lower tax rate
EDIT is created when the amount of ADIT exceeds what would be on the books if tax rate had always been lower

8. Rate Base Particulars 35% Tax Rate 21% Tax Rate Net Plant $20,000,000
ADIT
($3,000,000)
($1,800,000)
EDIT
($1,160,400)
Total Rate Base
$17,000,000
$17,039,600
Rate of Return
10%
Return
$1,700,000
$1,703,960

9. Cost-of-Service Credit
EDIT is flowed back to rate payers over time
Can use 1 of 2 methods
ARAM
Reverse South Georgia
Cannot flow back faster
Here – EDIT is being flowed back over 30 years
Particulars
Amount
1/1/18
($1,200,000)
Amortization Rate
3.3%
Credit
$39,600
1/1/2019
($1,160,400)

10. Putting It All Together
35% Tax Rate
21% Tax Rate
Difference
Operating Expenses
$2,000,000 -
Depreciation
$1,000,000
Taxes other than Income
$250,000
Return
$1,700,000
$1,703,960
$3,960
Income Tax Allowance
$686,538
$339,714
($346,824)
Tax Credit
($39,600)
(39,600)
Cost-of-Service
$5,636,538
$5,254,074
($382,464)
~ 7% reduction

11. Questions C. Drew Cayton Sr. Regulatory Analyst (571)466-0524