On June 21, 2018, FERC issued an order instituting several proceedings, pursuant to section 206 of the Federal Power Act, to examine the methodology utilized by certain public utilities for calculating Accumulated Deferred Income Tax (“ADIT”) balances in their projected test year and annual true-up calculations for their formula transmission rates.

Many FERC-jurisdictional formula transmission rates include a true-up mechanism through which the public utility calculates adjustments to its formula rate inputs for the differences between projected costs or investments, and the costs or investments that were actually incurred.  In calculating ADIT balances under these formula rates, FERC has historically permitted certain transmission-owning public utilities to use a “two-step” averaging methodology, based on the understanding that this methodology was necessary to comply with Internal Revenue Service (“IRS”) normalization rules.

In its June 21, 2018 order, FERC stated that, in light of an April 2017 Private Letter Ruling from the IRS, among other things, it had concluded that the two-step averaging methodology is no longer necessary to be in compliance with the IRS’s normalization rules.  Additionally, FERC expressed concern that “the continued use of a two-step averaging methodology may understate ADIT balances relative to the value of other rate base items, thus increasing rate base, and may result in unreasonably higher rates.”  Accordingly, FERC stated that it was initiating proceedings to examine the use of the two-step averaging methodology in the formula transmission rates of certain public utilities.  FERC provided that, upon initial review, its concerns might be addressed by revising the formula transmission rates of the identified public utilities to eliminate the use of the two-step averaging methodology to determine ADIT balances, and stated that “[i]n particular, Respondents could modify their transmission formula rates to apply the first step of the two-step averaging methodology to generate a prorated ADIT value for the year, without taking the second step of averaging the prorated value for the year with the beginning-of-year balance.”

Interventions are due July 12, 2018.  Respondents and other interested parties must file initial briefs no later than 30 days after the publication of notice in the Federal Register.

A copy of the June 21, 2018 order is available here.