On January 17, 2019, FERC denied North Carolina Electric Membership Corporation’s (“NCEMC”) Formal Challenge and Complaint against Duke Energy Progress, LLC’s (“DEP”) transmission formula rate and Joint Open Access Transmission Tariff (“Joint OATT”) for failing to reflect in its wholesale transmission rates reductions related to federal, and North Carolina state, corporate income tax changes.  For various reasons discussed below, FERC denied NCEMC’s Complaint because it found that DEP had correctly applied its historical test year formula rate methodology.

DEP’s cost-based transmission formula rate is the product of a settlement agreement with DEP’s transmission customers and is generally based on historical costs incurred in the prior calendar year.  In its Complaint, NCEMC alleged that DEP violated, and continues to violate, its transmission formula rate and Joint OATT by failing to reflect in three aspects of its transmission rates:  1) the reduction in the federal corporate income tax rate that went into effect on January 1, 2018; 2) the return of excess Accumulated Deferred Income Taxes (“ADIT”) that relates to the reduction in the federal corporate income tax rate; and 3) the reductions in the North Carolina state corporate income tax rate that went into effect on January 1, 2014, and thereafter.  NCEMC asserted that although DEP’s transmission formula rate is generally based on historical costs from the prior calendar year, the calculation of the federal and state corporate income tax allowance is an exception, such that DEP should use the federal and state corporate income tax rates in effect during the rate period to calculate its annual transmission revenue requirement in any given year.

Regarding 1), NCEMC argued that, because the DEP’s formula rate does not specify FERC Form No. 1 data or DEP’s books and records as the input source for the federal corporate income tax rate, as DEP’s formula rate protocols suggest, DEP must use the federal corporate income tax rate in effect during the rate period despite the fact that DEP’s formula rate is based on a historical test year.  FERC, however, disagreed.  FERC explained that it generally requires that formula rate inputs be calculated on a synchronized basis over the same test period, such that DEP’s use of a historical formula rate methodology generally would dictate that DEP use the federal corporate income tax rate in effect during the historical test year period, absent a contrary statement in the filed rate.  FERC stated it was clear that DEP’s formula rate uses a historical test year without a true-up based on actual costs.  Thus, FERC found that DEP correctly applied its historical test year methodology used in the 2018 Annual Update (for the period June 1, 2018, through May 31, 2019), as well as to the period January 1, 2018, to May 31, 2018, because DEP used the federal corporate income tax rate in effect in 2017 in preparing the 2018 Annual Update, and appropriately did not adjust its January 1, 2018, to May 31, 2018 wholesale transmission rates to reflect the reduction in the federal corporate income tax rate that took effect on January 1, 2018.   FERC similarly denied NCEMC’s Formal Challenge and Complaint with regard to the reductions in the North Carolina state corporate income tax rate that took effect on January 1, 2014, and thereafter because the analysis and conclusion of the timing for reflecting the reduction in the federal corporate income tax rate applied with equal force to the reductions in the North Carolina state corporate income tax rate.

Regarding 2), FERC summarily denied NCEMC’s Complaint as to the excess ADIT issue because it found that NCEMC failed to meet its burden to show that the Joint OATT is unjust and unreasonable in its treatment of ADIT.  FERC explained that, rather than claiming that DEP had failed to flow back the excess ADIT that resulted from the reduction in the federal corporate income tax rate, NCEMC focused only on the potential need for a refund effective date if DEP’s transmission formula rate does not already provide for the flow back of excess ADIT to its wholesale transmission customers.  FERC stated that NCEMC’s effort fell short of the burden imposed on complainants pursuant to section 206 of the Federal Power Act because NCEMC did not even allege that DEP’s transmission formula rate or DEP’s practices thereunder are unjust, unreasonable, unduly discriminatory, or preferential.

FERC’s order can be found here.