Here’s how the federal tax cut could affect your utility bills

Duke Energy said Monday customer bills could fall less than 1 percent on average over the next four years, as it complies with an order from a state regulator to reduce rates.
Duke Energy said Monday customer bills could fall less than 1 percent on average over the next four years, as it complies with an order from a state regulator to reduce rates.

Customers of Duke Energy, PSNC Energy and other utilities could benefit by more than $40 a year from the new federal tax cut.

But how and when the money is returned to customers will be argued over for months by consumer advocates and the companies.

The federal tax cut passed by Congress in December, will slash Duke Energy’s corporate income tax from 35 to 21 percent this year, and that reduction will ultimately deliver a windfall of more than $300 million a year to Duke’s customers in North Carolina. Customers who also have utility service from Aqua North Carolina, Piedmont Natural Gas, PSNC Energy and other utilities whose corporate taxes are also being reduced should also see savings.

But customers may not know for years how much they will benefit from the tax cut because some utility companies in the state are asking the N.C. Utilities Commission to delay adjusting rates until their next rate case, which may not be filed for several years.

Nothing is ever simple in corporate accounting, and the Utilities Commission will consider various sorts of combinations – delays, refunds, credits, rate cuts and other approaches – as the best way to pass the savings to customers. But the first order of business is calculating exactly how the tax cut translates to customer savings. Some details are just now beginning to emerge.

The Public Staff, the state agency that represents utility customers, estimates that the federal tax cut will shave about $3.64 a month from a typical residential bill from Duke Energy Carolinas, based on 1,000 kilowatt hours of usage. Duke Energy Carolinas, with 2 million customers in the state, is the utility that sells power in the western part of the state, including Chapel Hill and Durham. Duke last week countered with a preliminary estimate that was about 18 percent lower than the Public Staff’s, translating to about $2.99 a month for a typical residential customer.

On Tuesday, the company told the Utilities Commission that the Public Staff overestimated the effects of the tax cut, and added that only part of the money should be returned to customers directly in a rate cut; the rest should be used to pay for business expenses – such as hurricane damage and coal ash cleanup – so that those costs won’t be charged to customers later.

The Public Staff has not calculated a savings for customers of Duke Energy Progress, Duke’s other utility, which sells power in Raleigh. But the company provided a preliminary estimate that would translate to $2.77 a month for a typical residential customer.

The reason customers receive savings from a lower corporate tax rate is because Duke’s customers pay the utility’s federal taxes in their monthly power bills. When the tax rate is cut, Duke will collect a smaller amount from its customers.

“It’s not their money,” said James McLawhorn, director of the Public Staff’s electric division. “They’re just collecting it and passing it on.”

“We want to make sure the customers get what they have coming to them in a fair manner,” he added.

Consumer advocates – including Attorney General Josh Stein – are urging the Utilities Commission to cut customer rates by the maximum amount and as soon as possible. Waiting for a year or more, and then calculating refunds, is not the best option, they contend.

Duke suggests several options: apply the tax cuts to offset a pending rate request by Duke Energy Carolinas, avoid billing customers for hurricane damage repairs and environmental compliance costs, or make accounting adjustments now that will reduce future corporate expenses that customers would have to pay.

Duke spokeswoman Meredith Archie said customers will see some benefits soon.

“Our focus is on customer savings and we are using an approach to ensure this happens in both the near-term and long-term,” she said by email. “We are proposing an approach to reduce customer bills in the near term and help to offset rate increases in the future.”

Duke says the Tax Cuts and Jobs Act will have multiple effects, some increasing costs and some reducing costs. One unintended consequence: A sudden reduction in cash flow could force a utility to take out temporary corporate loans at higher interest rates that would have to be passed on to consumers.

“Adjusting utility rates solely to account for the impact of the reduction in the federal corporate tax rate ... is not appropriate,” Duke told the Utilities Commission in a filing. “The Tax Act represents a unique opportunity to deliver savings to customers, but as with all ratemaking actions, the interests of customers and the Companies should be balanced.”

Duke Energy Carolinas is in the midst of a rate increase request with a public hearing coming up Feb. 27. The company is seeking to raise rates by an average of 13.6 percent, which would increase a typical residential bill by $18.72 a month, to $122.68. By the Public Staff’s reckoning, the total should be reduced by $3.64 a month in whatever final amount the Utilities Commission ends up approving.

Duke Energy Progress also has asked for a rate increase and the Utilities Commission is expected to issue its decision in the coming weeks. The utility, with 1.3 million customers in the state, wanted a 9.5 percent average rate increase, which would translate to about more $12 more a month for its Raleigh customers. A typical Duke Progress residential customer currently pays $108.27 a month, based on 1,000 kilowatt hours of usage.

McLawhorn said Duke’s concern about cash flow disruptions does make sense and will have to be considered. After all, Duke won’t see the benefits of the corporate tax cut until it files its corporate tax returns, more than a year from now, so reducing revenue by more than $300 million for Duke Energy Carolinas and Duke Energy Progress is not a rounding error to the company’s budget planning.

For all its corporate largesse, it is acknowledged that the massive federal tax cut could have temporary side effects. Moody’s Investors Service, the credit rating service, on Jan. 19 lowered its rating outlook from stable to negative on 24 regulated utilities, including Duke.

Moody’s said the downgrade reflects a revenue shortfall that could result if the federal tax cut is passed through to customers, as well as the uncertainty over regulatory actions in response to the tax cut.

John Murawski: 919-829-8932, @johnmurawski