The recently passed federal tax reform legislation included a reduction in the corporate income tax rate, from 35 percent to 21 percent. Dan Cregg, CFO of PSEG, answers questions on how this will impact PSEG.
Q. How will the tax reform benefit PSE&G customers?
DC: Income taxes are a cost for utilities that are passed on to customers. When taxes go up, the amount we collect from customers must also go up to cover that cost. When taxes go down, those savings are passed along to customers, as well. We expect that the tax benefits that are received by PSE&G, the regulated New Jersey utility, will be passed through to customers and this has been reflected in our regulatory rate review filing.
Q. The 8K document filed last week by PSE&G indicated that there are $1.8 billion to $2.2 billion in “excess deferred tax liabilities.” What is this and will it be passed along to customers, as well?
DC: This reflects the impact of the change in the federal corporate tax rate on our deferred taxes. When PSE&G makes an investment, we are able to deduct an accelerated expense for tax purposes. To the extent that the tax expense is accelerated, and not incremental to what will be expensed for accounting purposes, a deferred tax liability is established, representing the accounting expense to follow. To the extent the tax rate has been lowered from 35 percent to 21 percent, that liability needs to be lowered to reflect the lower accounting expense to come. The lowering of that liability for us is approximately $1.8 billion to $2.2 billion.
Since our customers had paid at 35 percent during the period of accelerated expense for tax purposes, the reduction of the liability will be returned to them.
Q. What will the net impact on rates be?
DC: It is too early to say with precision. We will be working with the New Jersey Board of Public Utilities to determine exactly how and over what time period benefits will flow through to customers. We are still determining the overall impact, which is why we presented these expected impacts as a range.
Q. Will tax reform also impact transmission rates for NJ customers?
DC: Yes. PSE&G has filed to reduce its transmission revenue by approximately $140 million to reflect the lower federal tax rate on that portion of PSE&G’s business. These benefits will follow the cost of transmission, not all of which is borne by PSE&G customers.
Q. Will the changes to the federal tax code positively impact customers of PSEG Long Island?
DC: PSEG Long Island is the service provider for the Long Island Power Authority (LIPA), a not-for-profit public utility. LIPA does not pay federal taxes and unlike PSE&G, LIPA has no excess deferred taxes. There are no federal taxes included in the delivery charges portion of the bill so there are no benefits to pass on to customers.
Q. Will the reduction in federal taxes paid by PSEG Power mean that the nuclear plants no longer need assistance?
DC: No. While tax reform will reduce the level of federal taxes paid for by PSEG Power, it is important to remember that if a plant is not making money, a change in the tax rate will not change its profitability. We still expect that our nuclear plants will be losing money within two years (as contracts that pre-sold electricity at higher than current prices end). It is critical that the nuclear plants be recognized for the contribution they are making to reducing carbon emissions and for enhancing reliability through fuel diversity.
Q. In its 8K, PSEG indicated that Power is going to realize a one-time non-cash benefit of between $530 million and $650 million. Is that a windfall for your shareholders?
DC: This is a one-time non-cash benefit that will be reflected in 2017 earnings when reported on a GAAP basis. (It will not have an impact on operating earnings, which PSEG also reports.) When Power makes an investment, we are able to deduct an accelerated expense for tax purposes. To the extent that the tax expense is accelerated, and not incremental to what will be expensed for accounting purposes, a deferred tax liability is established, representing the accounting expense to follow. To the extent the tax rate has been lowered from 35 percent to 21 percent, the liability needs to be lowered to reflect the lower accounting expense to come. As a result, we booked a one-time non-cash benefit for the reduction of that liability.
Q. How do you plan to use the cash savings from tax reform, not the one-time benefit in 2017, but the cash from lower income taxes in 2018 and beyond?
DC: Beginning in 2018, PSE&G has proposed to return the effect of the lower tax rate in recent transmission and distribution filings. PSEG and PSEG Power will incur lower tax expense based on its level of income. Consistent with our long-term strategy, we intend to use available cash to fund the growth of the business, particularly our regulated utility, without the need for new equity.