PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
E-5 I. D. #1192
ENERGY DIVISION RESOLUTION G-3337
NOVEMBER 21, 2002
Resolution G-3337. Southern California Gas Company (SoCalGas), Pacific Gas and Electric Company (PG&E), San Diego Gas and Electric Company (SDG&E), and Southern California Edison Company (Edison) request authority to revise the tax factor applied to Contributions in Aid of Construction (CIAC) to reflect a recent change in the Internal Revenue Code. The utilities' requests are approved, except for the requested effective date. The effective date of the revised tax factor shall be September 11, 2002.
By SoCalGas Advice Letter 3154 Filed on May 22, 2002.
By PG&E Advice Letter 2387-G/2243-E Filed on May 22, 2002.
By SDG&E Advice Letter 1412-E/1315-G Filed on May 22, 2002.
By Edison Advice Letter 1624-E Filed on May 22, 2002.
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SUMMARY
This Resolution approves four advice letters submitted by SoCalGas, PG&E, SDG&E and Edison for authority temporarily to lower their Income Tax Component of Contribution (ITCC) rates to 27%, with the exception of the proposed effective date. Current rates vary from 34% for Edison to 37% for SDG&E. Contributors, including developers and new customers, will benefit from this tax law revision.
The protest of the Bay Area Rapid Transit District (BART) to move the effective date from July 1, 2002 to September 11, 2001 is granted. The four utilities shall reduce their ITCC as of September 11, 2001 and provide refunds to those contributors that have paid the higher rate since September 11, 2001.
BACKGROUND
As explained in Decision (D.) 87-09-026 "Contributions-in-aid-of-construction are any amounts contributed to a regulated public utility to the extent that the purpose of the contribution is to provide for the expansion, improvement, or replacement of the utility's facilities." Ref. D.87-09-026, 15 CPUC 2d, page 305. (CIAC excludes customer connections.)
D.87-09-026 lists three examples of contributions-in-aid-of-construction proposed at that time under I.R.C. Sec 1181:
1. "A developer constructs utility facilities (e.g. water lines and a water tower) and turns over these facilities to a utility;
2. A developer furnishes the necessary funds to the utility to construct the facilities; and
3. A municipality pays a utility to relocate facilities which are being destroyed in connection with road construction."
Decision (D.) 87-09-026 authorized the methods that utilities may adopt to recover the federal tax imposed upon contributions-in-aid-of-construction and advances for construction pursuant to the Tax Reform Act of 1986. Prior to 1987 contributions and advances were not taxed. D. 87-09-026 placed the burden of the tax on the contributor or advancer and is based on the premise that the person who causes the tax pays the tax. If no contribution or advance were made, no tax would result.
D. 87-09-026 authorizes, as the principal method of recovering the tax, a method by which the contributor of the property or cash or the person making the advance pays the tax by paying, in addition to the contribution or advance, the present value of the future tax burden. D. 87-09-026 provides a formula, called Method 5, for computing this present value.
D. 87-09-026, Appendix G, states:
1. "Contributions in Aid of Construction and Advances for Construction shall include, but are not limited to, cash, services, facilities, labor, property, and income taxes thereon provided by a person or agency to (utility). The value of all contributions and advances shall be based on (utility's) estimates. Contributions and advances shall consist of two components for the purpose of recording transactions as follows:
a. Income Tax Component (ITC), and
b. The balance of the contribution or advance.
2. The ITC shall be calculated by multiplying the balance of the contribution or advance by the tax factor of_____%."
This tax factor, the ITCC rate, is also referred to as the "gross up rate".
D.87-09-026, OP 7, authorized advice letter filings to reflect any changes in the gross-up rate that would increase or decrease the rate by five percentage points or more.
On March 9, 2002, President Bush signed into law the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147; the "Act"). Section 101(a) of the Act adds a new depreciation provision - Section 168(k) to the Internal Revenue Code - entitled, "Special Allowance for certain property acquired after September 10, 2001, and before September 11, 2004." Section 168(k) states:
"The depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to 30 percent of the adjusted basis of the qualified property..."
The additional depreciation allowed under this Act temporarily reduces the utilities' current Income Tax Component of Contributions (ITCC) factor.
With their advice letters, the four utilities propose to revise their Preliminary Statements to reflect a temporary reduction in the ITCC rate to 27 from 35 percent in the case of SoCalGas, from 34 percent in the case of Edison and PG&E, and from 37 percent in the case of SDG&E on property contributed to the utility after the effective date of these advice letters and before September 10, 2004. The development of the proposed gross-up rate is shown in Attachment A of the advice letters.
Following September 11, 2004, this additional allowance may no longer be allowed, and property contributed will be subject to the ITCC tax factors currently authorized. The proposed revisions apply to both electric and gas facilities.
The utilities request that their advice letters become effective July 1, 2002.
NOTICE
Notice of Advice Letters 3154, 2387-G/2243-E, 1412-E/1315-G, and 1624-E was made by publication in the Commission's Daily Calendar. SoCalGas, PG&E, SDG&E, and Edison stated that a copy of the Advice Letter was mailed and distributed in accordance with Section III-G of General Order 96-A.
PROTESTS
The Bay Area Rapid Transit District (BART) protested the electric portion of PG&E's AL 2387-G/2243-E. BART's protest is based on electric service contracts, including a charge for ITCC, executed between September 10, 2001, the effective date of the new federal tax legislation, and July 1, 2002, the proposed effective date of AL 2243-E. BART said that the time lag produces a windfall to PG&E, and burdens BART with the obligation to expend public funds that should remain dedicated to serve BART needs.
BART acknowledged that AL 2243-E requests that the Commission allow PG&E to reflect lowered ITCC rates, from the current 34% to 27%, based on accelerated depreciation resulting from changes in federal tax laws provided in the Job Creation and Worker Assistance Act of 2002, section 101(a). BART states that the Act permits such treatment for qualified property acquired after September 10, 2001.
BART protests the PG&E proposal to lower the ITCC rate that it charges to customers making Contributions in Aid of Construction, not as of September 11, 2001 but rather as of July 1, 2002. BART said that ITCC charges collected by PG&E at a rate of 34% are excessive when compared to the reduced 27% rate, and this reduction in rate cannot be considered de minimus.
BART identified several contracts executed with PG&E after September 10, 2001, and before the proposed effective date of PG&E's filing, that involve contributions of property which would qualify for treatment under the lower ITCC rate. At least five contracts associated with the provision of service for BART's San Francisco Airport Extension project would be reduced in cost under the lower ITCC rate, by an estimated $40,000. BART is continuing to examine its files, to determine whether there are any additional contracts within this 9-1/2 month time window that could have significant ITCC cost reductions.
BART requested that the Commission not allow AL 2243-E to become effective until PG&E modifies the filing to make it effective for qualified property contributed on and after September 11, 2001, and to provide for appropriate refunds or credits to those who paid the ITCC under the higher rate.
PG&E responded to BART's protest on June 18, 2002. The Energy Division had earlier requested that PG&E explain 1) why it cannot include qualified property contributed on and after September 11, 2001, and 2) why it cannot provide refunds/credits to customers who paid the ITCC under the higher tax rate since September 10, 2001. PG&E addressed the Energy Division's request in its response to BART. PG&E denied any windfall, explained the complicated nature of determining eligibility, and the approximate nature of the gross-up rate.
PG&E believes that it should not be required to review retroactively literally thousands of past transactions for bonus depreciation eligibility and undertake refunds that may often be less than PG&E's administrative cost to review the transaction and process the refund. PG&E pointed to D.87-09-026, wherein the Commission recognized that the gross-up rate was only "an approximation."
PG&E says that it will receive no windfall from the delay in the effective date of the lower ITCC rate. Gross-ups received are passed through to ratepayers. PG&E explained that it treats the taxes it incurs as an addition to rate base. The gross-up received from contributors offsets the cost to ratepayers of including these taxes in rate base. PG&E states: "All gross-up revenues are tracked and returned to customers as deferred revenue." PG&E quoted D.87-09-026, Finding of Fact No. 4:
"Because the gross-up amount paid by the contributor is estimated to offset the future revenue requirements attributable to the tax actually paid, the ratepayers are, to the extent the estimate turns out to be accurate, indifferent."
PG&E then explained that if the gross-up rate is too high ratepayers benefit through lower retail rates; if the gross-up is too low ratepayers subsidize other customers through retail rates. Because PG&E will treat only the taxes it pays as rate base additions and because all gross-ups received are reflected as deferred revenues (resulting in reduced rates), there is no windfall (or shortfall) to the utility from a gross-up rate that turns out to be either too high or too low.
PG&E said that it proposed this methodology to make the best of a complex situation. PG&E's approach does not unduly burden either the utility or the Commission and it reasonably balances the competing interests of ratepayers and contributors. In some cases contributors will actually benefit from PG&E's approach of lowering the gross-up rate for all post July 1, 2002 contributions because, if a case-by-case approach were required, some post July 1, 2002, contributions would be determined ineligible for the lower gross-up rate2.
PG&E pointed to D.87-09-026, 2d CPUC 25 329 that states:
"We are not seeking a perfect system; we are seeking a workable system. We understand that the Method 5 gross-up is only an approximation. We would expect that Method 5 would require one computation in regard to the contributor: the present value of the revenue requirement over time. Once that is determined the contributor makes the contribution gross-up for taxes by an amount equivalent to the net present value of the revenue requirement for the tax. The contributor has no further interest in the transaction. Should any part of the equation prove erroneous, the ratepayer will bear the burden or reap the benefit absent any imprudence on the part of the utility. Should there be imprudence, then routine Commission practice would correct the imprudence"
PG&E stated that BART inadequately characterized the tax law "bonus depreciation" provisions; further, determination of eligibility for bonus depreciation will be neither straightforward nor non-controversial.
PG&E sets out "qualified property" as an example of bonus depreciation eligibility. Property that is acquired after September 11, 2001, will not be eligible if it is acquired pursuant to a binding contract entered into before September 11, 2001.
If the suggestions in BART's protest were implemented, PG&E said it would need to analyze every post September 11, 2001 transaction. BART suggests that it may be entitled to reductions of $40,000 for contributions made prior to July 1, 2002, (PG&E's proposed effective date), but subject to contracts entered into after September 11, 2001. But, PG&E states that it is equally likely that BART would not be entitled to any reduction for many contributions that PG&E will receive from BART after July 1, 2002, that otherwise would be subject to the gross-up rate reduction. If PG&E receives contributions post July 1, 2002 from BART that are attributable to contracts entered into by BART before September 11, 2001, the contribution would not be eligible for bonus depreciation. PG&E said that it is quite possible a case-by-case analysis will actually increase BART's costs when compared to PG&E's proposal.
PG&E introduced more interpretive issues that may become disputes between the utility and contributors. When does a contract become binding? What contract applies for purposes of determining the September 11, 2001, rule (i.e. is it the date of the master contract, or the individual contract)? Is property (e.g. poles, lines, transformers) that PG&E acquired pursuant to a contract prior to September 11, 2001, eligible for bonus depreciation merely because it was installed after September 11, 2001, pursuant to a contract signed after September 11, 2001? Do the self-constructed3 property rules apply to IRC Sec 168(k)(D)(i)4 Can a project be segmented or is the relevant date the commencement of construction of an overall project (e.g. BART to the airport)? What if some of the contributed property (or reconstructed5 property) in a project has been recycled and does not qualify as "original use" property within the meaning of Section 168(k)(2)(A)(ii)6
PG&E further explains that the Internal Revenue Service has answered none of these and numerous other questions and it may take years to issue guidance on such matters. In the meantime, says PG&E, the utility, the contributor, and the Commission will become needlessly ensnared in disputes over bonus depreciation eligibility over relatively small dollar amounts.
PG&E said its approach is a reasonable approximation and consistent with Commission guidance.
PG&E said it made the best of a possibly complex situation by making all contributions received on or after July 1, 2002, and before September 11, 2004, eligible for the reduced gross-up rate. PG&E said its approach will be unlikely to unduly burden the utility or the Commission and it reasonably balances the interests of ratepayers and contributors. In some cases, PG&E said, contributors will actually benefit from PG&E's approach of lowering the gross-up rate for all post-July 1, 2002 contributions because, if a case-by-case approach were required, some post-July 1, 2002 contributions would be determined ineligible for the lower gross-up rate.7
DISCUSSION
PG&E, as well as SoCalGas, SDG&E and Edison, submitted advice letters requesting authority to revise the ITCC factor downward to 27%. All four utilities propose to apply the lower ITCC rate to all contributions received on or after July 1, 2002 and before September 11, 2004.
The Energy Division reviewed PG&E's work papers for its CIAC Gross-up Computation submitted with PG&E's Advice Letter 2387-G/2243-E and found that PG&E's methodology is in compliance with D.87-05-026.
SoCalGas, SDG&E and Edison submitted the same spreadsheet and their gross-up computations also comply.
BART protested PG&E's AL 2243-E on the basis that the tax law revision allows the reduction from September 10, 2001, but PG&E proposes to make the reduction effective from only July 1, 2002. BART said that the 9-month time lag produces a windfall to PG&E and burdens BART with the obligation to expend public funds that should remain dedicated to serve BART needs. BART asks that the Commission require PG&E to modify its filing to make it effective for qualified property contributed after September 11, 2001, and to provide for refunds or credits to those who paid the ITCC under the higher rate.
In its response to BART's request PG&E made three points. First, making the ITCC reduction effective September 10, 2001 would require PG&E to review thousands of past transactions for bonus eligibility and the administrative costs may be more than any benefit to the contributor. Second, the utility, the Commission and the contributor may become needlessly ensnared in disputes over bonus depreciation eligibility involving small dollar amounts.
Third, PG&E's proposal is reasonable and consistent with Commission guidance.
PG&E does not know how, whether, or to what extent such review will be productive. Some contributors will benefit in the period from September 11, 2002 to July 1, 2002, and others may not. We are not swayed by PG&E's assertion that they will be required to review thousands of applications. PG&E has a staff to review those applications and will undoubtedly do so for income tax purposes. PG&E will compute income tax depreciation benefits as of September 11, 2001 in accordance with tax law. Since the tax law change was intended to benefit the contributor, it should do so.
We will order PG&E and the other utilities to review contributions in aid of construction and customer advances from September 11, 2001 for tax benefits under Section 168(k) of the Internal Revenue Code. We grant BART's protest.
COMMENTS
Public Utilities Code section 311(g)(1) provides that this resolution must be served on all parties and subject to at least 30 days public review and comment prior to a vote of the Commission. Section 311(g)(2) provides that this 30-day period may be reduced or waived upon the stipulation of all parties in the proceeding.
The 30-day comment period for the draft of this resolution was neither waived nor reduced. Accordingly, this draft resolution was mailed to parties for comments, and will be placed on the Commission's agenda no earlier than 30 days from today.
FINDINGS
1. SoCalGas, PG&E, SDG&E, and Edison submitted advice letters requesting authority to revise the ITCC factor determining the contributor's payment of income taxes on contributions-in-aid-of-construction.
2. Revision of the ITCC factor is necessitated by Title I Section 101 that modifies Section 168(k) of the Internal Revenue Code.
3. All four utilities submitted the same development of the ITCC factor, and proposed a reduction in ITCC factor to 27%.
4. All four utilities requested an effective date of July 1, 2002.
5. The Bay Area Rapid Transit District protested that the effective date of Advice Letter 2243-E should be September 11, 2001 rather than PG&E's proposed date of July 1, 2002.
6. BART's protest is based on the effective date of IRC Section 101 of September 10, 2001.
7. BART's proposal is equitable and would result in greater benefit to contributors.
8. There is no windfall to the utilities if they developed their ITCC by Method 5 of D.87-09-026.
9. PG&E's, SoCalGas', SDG&E's and Edison's gross-up computations are in compliance with D.87-09-026.
10. It is reasonable to grant BART's protest.
THEREFORE IT IS ORDERED THAT:
1. Southern California Gas Company Advice Letter 3154, Pacific Gas and Electric Company Advice Letter 2387-G/2243-E, San Diego Gas and Electric Company Advice Letter 1412-E/1315-G, and Southern California Edison Company Advice Letter 1624-E are approved with the exception of the effective date.
2. BART's protest to move the effective date of the lower ITCC to September 11, 2001 is granted.
I certify that the foregoing resolution was duly introduced, passed and adopted at a conference of the Public Utilities Commission of the State of California held on November 21, 2002; the following Commissioners voting favorably thereon:
_____________________
WESLEY M. FRANKLIN
Executive Director
1 25 CPUC2d 305
2 An example of post July 1, 2002, contributions ineligible for bonus depreciation under Internal Revenue Code Sec 168(k), is a contribution received pursuant to contracts executed prior to September 11, 2001.
3 Under Title I 101.(k)(C)(i) Self-Constructed Property is property manufactured, constructed or produced by a taxpayer for that taxpayer's own use.
4 Under this section the taxpayer must have begun manufacturing, constructing, or producing the property after September 10, 2001, and before September 11, 2004.
5 Examples of reconstructed property are refurbished transformer, capacitor or other equipment that is installed in a new work order.
6 This section sets forth criteria for sale-leasebacks that were placed in service after September 10, 2001 and sold and leased back by such person within 3 months.
7 Post-July 1, 2002 contributions could be ineligible for bonus depreciation under IRC Sec 168(k), if such contributions were received pursuant to contracts executed prior to September 11, 2001.
