Corporate Tax Cuts Hold Promise of Lower Utility Bills
Posted January 9, 2018 10:05 p.m. EST
The newly passed tax law could save Americans billions of dollars on their utility bills.
In recent days, electric companies in Massachusetts, Illinois, Oregon and other states have announced plans to pass their tax cuts on to customers through lower rates. On Tuesday, Pepco, which provides power to nearly 300,000 customers in Washington, D.C., said it would cut rates beginning in the current quarter.
Other utilities might be forced to follow suit. In much of the country, investor-owned utilities have a monopoly on providing electricity and gas to homes and businesses. State regulators allow them to charge rates high enough to recoup their costs — including the cost of paying taxes — and to provide a guaranteed return to their shareholders. Those regulators periodically scrutinize rates to ensure that they are reasonable. When taxes go down, so should customers’ utility bills.
State regulators across the country have said they will make sure that actually happens. And in a letter to the Federal Energy Regulatory Commission on Tuesday, the attorneys general of several states, including Massachusetts, Texas and New York, asked the agency to act as well.
“This is a significant windfall for these entities,” said Attorney General Maura Healey of Massachusetts, who organized the appeal. “It’s entirely appropriate for that savings to be passed on to ratepayers.”
The savings will be modest for most Americans, perhaps a few dollars off the average family’s monthly electric bill. But multiplied across tens of millions of households, the savings will be significant.
Economists at the Penn Wharton Budget Model at the University of Pennsylvania estimated that the new law would reduce the industry’s federal tax bill by $1 billion this year, compared with what it would have been if the law had not passed. In 2021, the savings would grow to $5 billion. The Penn economists projected that the law would yield a reduction of about 0.5 percent in electricity prices.
Economists have long debated how corporate tax cuts are distributed among shareholders, workers and customers. President Donald Trump and other backers of the tax bill have argued that it will lead to higher wages, more jobs and greater investment. Independent analysts, however, have tended to assume that most of the gains will go to shareholders, especially in the short term.
For utilities and other regulated industries, however, the situation is different. They are granted a legal monopoly but in return are expected to see that their customers benefit from any savings.
“When you’re insulated from market competition and subject to regulation, the benefits should mostly pass through to consumers,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy.
That doesn’t mean customers should expect every dollar in tax savings to show up as savings in their monthly bills. Some states may allow utilities to use part of their savings to fund infrastructure upgrades or to offset future rate increases. And utilities may challenge regulators’ findings about how much they have saved as a result of the tax bill.
Bordoff said there might be one good reason for utilities to hold rates constant, as opposed to reducing them. Consumers, he noted, tend to react angrily to rate hikes — so if a utility knows it needs to make investments in the years to come, it might be better off using the tax savings to do so now, instead of cutting rates only to increase them later.
David Springe, executive director of the National Association of State Utility Consumer Advocates, said regulators in most states would be willing to negotiate with utilities. But one way or another, he said, any tax savings should ultimately benefit consumers, not shareholders.
“The simple underlying absolute is that’s consumer money and should in some form or fashion come back to consumers,” Springe said.
Still, that doesn’t always happen. After the last major overhaul of the corporate tax system, in the mid-1980s, regulators in many states were slow to act — in effect allowing utilities to pocket tax savings until new rates took effect. Some states are trying to prevent that from happening again. Some state utility regulators, such as those in Montana and South Dakota, have ordered their utilities to calculate the windfall they will receive from the tax bill, with an eye toward negotiating lower rates for consumers or freezing rates in the future. Elsewhere, local industry groups or consumer advocates have begun pressing regulators to act. And after Healey made similar moves in Massachusetts, one utility there, Eversource, announced a rate cut retroactive to the start of the year, when the tax law took effect.
“There are huge differences in the quality of state utility regulation,” said Tyson Slocum, director of Public Citizen’s Energy Program. “Some states are fantastic at holding utilities accountable. Others, not so much.”