[Federal Register Volume 85, Number 91 (Monday, May 11, 2020)]
[Rules and Regulations]
[Pages 27681-27687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08634]
[[Page 27681]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 35
[Docket No. RM19-5-001; Order No. 864-A]
Public Utility Transmission Rate Changes To Address Accumulated
Deferred Income Taxes
AGENCY: Federal Energy Regulatory Commission.
ACTION: Order on rehearing and clarification.
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SUMMARY: The Federal Energy Regulatory Commission (Commission)
addresses requests for rehearing and clarification and reaffirms its
determinations in Order No. 864. In Order No. 864, the Commission
required public utilities with transmission formula rates to propose
tariff revisions to implement certain excess and deficient accumulated
deferred income taxes (ADIT)-related mechanisms in their transmission
formula rates as a result of the Tax Cuts and Jobs Act of 2017 (Tax
Cuts and Jobs Act). The Commission continued to require public
utilities with transmission stated rates to address excess and
deficient ADIT resulting from the Tax Cuts and Jobs Act in their next
rate cases.
DATES: The effective date of the document published on November 27,
2019 (84 FR 65281), is confirmed: January 27, 2020.
FOR FURTHER INFORMATION CONTACT:
Noah Lichtenstein (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426, (202) 502-8696, noah.lichtenstein@ferc.gov.
Jonathan Taylor (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street NE, Washington,
DC 20426, (202) 502-6649, jonathan.taylor@ferc.gov.
SUPPLEMENTARY INFORMATION:
Table of Contents
Paragraph
Nos.
I. Introduction............................................. 1
A. Background....................................... 2
B. Notice of Proposed Rulemaking.................... 3
C. Order No. 864.................................... 5
II. Discussion.............................................. 7
A. Transmission Stated Rates........................ 7
1. Order No. 864............................ 7
2. APPA's Request for Clarification or 11
Rehearing..................................
3. Commission Determination................. 16
B. Transmission Formula Rates....................... 23
1. Order No. 864............................ 23
2. Exelon Orders............................ 26
3. Exelon Companies' Request for Rehearing.. 29
4. Commission Determination................. 32
III. Document Availability.................................. 38
IV. Dates................................................... 41
I. Introduction
1. On November 21, 2019, the Federal Energy Regulatory Commission
(Commission) issued Order No. 864, which is a final rule addressing
accumulated deferred income taxes (ADIT) for public utilities.\1\ On
December 23, 2019, American Public Power Association (APPA) requested
clarification, or in the alternative, rehearing, and Exelon Corporation
and its public utility subsidiaries (collectively, Exelon Companies)
\2\ requested rehearing of Order No. 864. For the reasons discussed
below, we deny the requests for rehearing and grant APPA's request for
clarification in part.
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\1\ Public Utility Transmission Rate Changes to Address
Accumulated Deferred Income Taxes, Order No. 864, 84 FR 65281, 169
FERC ] 61,139 (2019).
\2\ Exelon Corporation's public utility subsidiaries include
Commonwealth Edison Co., Delmarva Power & Light Co., Atlantic City
Electric Co., Baltimore Gas and Electric Co., and Potomac Electric
Power Co.
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A. Background
2. On December 22, 2017, the President signed into law the Tax Cuts
and Jobs Act of 2017.\3\ The Tax Cuts and Jobs Act, among other things,
reduced the federal corporate income tax rate from 35 percent to 21
percent, effective January 1, 2018. This means that, beginning January
1, 2018, companies subject to the Commission's jurisdiction must
compute income taxes owed to the Internal Revenue Service (IRS) based
on a 21% tax rate. This tax rate reduction will result in a reduction
in ADIT liabilities and ADIT assets on the books of public
utilities.\4\ As a result of the tax rate reduction, a portion of an
ADIT liability that was collected from customers will no longer be due
from public utilities to the IRS and is considered excess ADIT, which
must be returned to customers in a cost of service ratemaking
context.\5\ Consistent with the Commission's regulations, public
utilities are required to adjust their ADIT assets and ADIT liabilities
to reflect the effect of the change in tax rates in the period the
change is enacted.\6\
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\3\ An Act to provide for reconciliation pursuant to titles II
and V of the concurrent resolution on the budget for fiscal year
2018, Public Law 115-97, 131 Stat. 2054 (2017) (Tax Cuts and Jobs
Act).
\4\ ADIT balances are accumulated on the regulated books and
records of public utilities based on the requirements of the Uniform
System of Accounts. ADIT arises from timing differences between the
method of computing taxable income for reporting to the IRS and the
method of computing income for regulatory accounting and ratemaking
purposes. See 18 CFR 35.24(d)(2) (``Timing differences means
differences between the amounts of expenses or revenues recognized
for income tax purposes and amounts of expenses or revenues
recognized for ratemaking purposes, which differences arise in one
time period and reverse in one or more other time periods so that
the total amounts of expenses or revenues recognized for income tax
purposes and for ratemaking purposes are equal.'').
\5\ The converse is true for public utilities that have ADIT
assets.
\6\ See 18 CFR 35.24 and 18 CFR 154.305; see also Regulations
Implementing Tax Normalization for Certain Items Reflecting Timing
Differences in the Recognition of Expenses or Revenues for
Ratemaking and Income Tax Purposes, Order No. 144, 46 FR 26613 (May
14, 1981), FERC Stats. & Regs. ] 30,254 (1981) (cross-referenced at
18 FERC ] 61,163), order on reh'g, Order No. 144-A, 47 FR 8329 (Feb.
26, 1982), FERC Stats. & Regs. ] 30,340 (1982) (cross referenced at
15 FERC ] 61,142).
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[[Page 27682]]
B. Notice of Proposed Rulemaking
3. In response to the Tax Cuts and Jobs Act, on November 15, 2018
(83 FR 59331 (Nov. 23, 2018)), the Commission issued a notice of
proposed rulemaking (NOPR) to address excess and deficient ADIT for
public utility transmission providers with transmission rates under an
Open Access Transmission Tariff, a transmission owner tariff, or a rate
schedule. For public utilities with transmission formula rates, the
Commission found that many, if not most, transmission formula rates do
not contain provisions to fully reflect excess or deficient ADIT
following a change in tax rates, as required by the Commission's
regulations. The Commission explained that a public utility's
transmission formula rate should include certain mechanisms that
accurately reflect excess or deficient ADIT in a public utility's cost
of transmission service during the annual updates of the rest of the
revenue requirement, along with a worksheet that tracks excess and
deficient ADIT. The Commission proposed to require public utilities to
revise their tariffs accordingly.\7\
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\7\ Order No. 864, 169 FERC ] 61,139 at PP 15-16.
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4. For public utilities with transmission stated rates, the
Commission proposed to maintain Order No. 144's requirement that such
public utilities reflect any adjustments made to their ADIT balances as
a result of the Tax Cuts and Jobs Act in their next rate case.\8\
However, to increase the likelihood that the customers that contributed
to the related ADIT accounts receive the benefit of the reduced tax
rate, the Commission proposed to require public utilities with
transmission stated rates to calculate the excess or deficient ADIT as
a result of the Tax Cuts and Jobs Act using the ADIT approved in their
last rate cases and return or recover this amount to or from
customers.\9\
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\8\ See Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,519,
31,560 (requiring public utilities to file adjustments to recover
deferred tax amounts in their next rate case following the order,
and to begin the process of making up deficiencies or eliminating
excesses in their ADIT reserves so that they will be operating under
a full normalization policy within a reasonable period of time).
\9\ Id. P 17.
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C. Order No. 864
5. In Order No. 864, the Commission required public utilities with
transmission formula rates to propose tariff revisions to implement
certain excess and deficient ADIT-related mechanisms. Specifically, the
Commission required public utilities to include the following in their
transmission formula rates: (1) A mechanism to deduct any excess ADIT
from or add any deficient ADIT to their rate bases; \10\ (2) a
mechanism to decrease or increase their income tax allowances by any
amortized excess or deficient ADIT, respectively; \11\ and (3) a new
permanent worksheet that will annually track information related to
excess or deficient ADIT.\12\ The Commission also required that public
utilities with transmission formula rates return the full amount of
excess ADIT resulting from the Tax Cuts and Jobs Act to customers.\13\
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\10\ Id. P 28.
\11\ Id. P 42.
\12\ Id. P 62.
\13\ Id. P 45.
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6. The Commission did not adopt the proposals in the NOPR that were
applicable to public utilities with transmission stated rates.\14\
Instead, the Commission maintained the status quo that public utilities
with transmission stated rates should address any excess or deficient
ADIT resulting from the Tax Cuts and Jobs Act in their next rate
cases.\15\ Recognizing that the Commission will take a case-by-case
approach in addressing excess and deficient ADIT for a public utility
with a transmission stated rate, the Commission provided guidance that
for those public utilities with a prior Commission-approved methodology
for returning excess ADIT, they should have begun reducing excess ADIT
pursuant to that approved method.\16\ For those public utilities that
lack a prior-Commission approved methodology for returning excess ADIT,
they should use some ratemaking method for returning excess ADIT and
accordingly should begin reducing excess ADIT immediately upon a tax
rate change.\17\
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\14\ Id. P 86.
\15\ Id.
\16\ Id. P 91.
\17\ Id. PP 92-93.
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II. Discussion
A. Transmission Stated Rates
1. Order No. 864
7. As discussed above, the Commission did not adopt any of the
proposals in the NOPR for public utilities with transmission stated
rates. Rather, the Commission maintained the status quo under Order No.
144, Order No. 475 \18\ and 18 CFR 35.24, under which public utilities
with transmission stated rates should address any excess or deficient
ADIT caused by the Tax Cuts and Jobs Act in their next rate case.\19\
The Commission explained that, consistent with prior precedent and the
Commission's regulations, the question of how to properly handle excess
and deficient ADIT for public utilities with transmission stated rates
following a tax rate change continues to raise complex questions that
are more properly addressed in a rate case.\20\
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\18\ Rate Changes Relating to Federal Corporate Income Tax Rate
for Public Utilities, Order No. 475, 52 FR 24987 (July 2, 1987),
FERC Stats. & Regs. ] 30,752 (cross-referenced at 39 FERC ] 61,357),
order on reh'g, 52 FR 39907 (Oct. 26, 1987), 41 FERC ] 61,029 (1987)
(cross-referenced at 41 FERC ] 61,029).
\19\ Order No. 864, 169 FERC ] 61,139 at P 86.
\20\ Id. PP 87-90.
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8. Because excess and deficient ADIT for a public utility with a
transmission stated rate will be addressed in that public utility's
next rate case, the Commission provided guidance as to how excess and
deficient ADIT should be treated between rate cases. For public
utilities with transmission stated rates that have a Commission-
approved ratemaking method made specifically applicable to them for
returning excess ADIT, the Commission stated that those public
utilities should have begun reducing excess ADIT pursuant to that
previously Commission-approved method.\21\ For public utilities with
transmission stated rates that do not have a Commission-approved
ratemaking method, the Commission explained that, in accordance with
the Commission's regulations, those public utilities must ``use some
ratemaking method'' for making a provision for returning excess ADIT
and that ``the appropriateness of such method will be subject to a
case-by-case determination'' by the Commission.\22\
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\21\ Id. P 91.
\22\ Id. P 92 (quoting 18 CFR 35.24(c)(3)).
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9. As a general course of action, the Commission provided guidance
that public utilities with transmission stated rates that do not have a
Commission-approved ratemaking method will begin reducing excess ADIT
immediately upon a tax rate change. The Commission noted that its
expectation is ``merely intended to provide guidance'' to such public
utilities and that the Commission will address issues related to a
public utility's method for amortizing excess ADIT based on the
specific facts and circumstances in each proceeding.\23\ The Commission
also stated that nothing in Order No. 864 prevents a public utility
with a transmission stated rate that does not have a Commission-
approved ratemaking method from proposing to delay amortization of
excess ADIT until its next rate case.\24\
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\23\ Id. P 93.
\24\ Id.
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[[Page 27683]]
10. In providing guidance to public utilities with transmission
stated rates, the Commission explained why it is reasonable to treat
excess ADIT differently for public utilities with transmission stated
rates and those with transmission formula rates. The Commission stated
that the primary consideration in doing so was the two unique
circumstances of transmission formula rates at the time the Tax Cuts
and Jobs Act became law. First, the Commission identified that most
transmission formula rates lack a mechanism to make provision for
excess ADIT in computing the income tax component of a public utility's
cost of service as required under the Commission's regulations. The
Commission found that it is therefore inappropriate to treat excess
ADIT resulting from the Tax Cuts and Jobs Act as reducing immediately
as of January 1, 2018, when the transmission formula rate itself lacks
a mechanism to accomplish this task. Second, the Commission stated that
the rates of public utilities with transmission formula rates increased
upon the enactment of the Tax Cuts and Jobs Act (unlike transmission
stated rates, which are fixed between rate cases) because transmission
formula rates excluded excess ADIT from the calculation of the rates.
That is, the excess ADIT resulting from the Tax Cuts and Jobs Act no
longer served as a reduction to rate base as it did prior to the tax
rate change when it was part of ADIT because the transmission formula
rate did not have a mechanism that allowed excess ADIT to reduce rate
base. The Commission reasoned that, therefore, it is appropriate to
treat excess ADIT as wholly preserved in Account 254 (Other Regulatory
Liabilities) until it can be addressed and reinserted into the
transmission formula rate.\25\ The Commission also noted that the
Commission's policy prior to Order No. 864 required a public utility
with a transmission formula rate to seek Commission approval prior to
returning excess ADIT, which further distinguishes transmission formula
rates from transmission stated rates.\26\
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\25\ Id. PP 93-94.
\26\ Id. n.137.
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2. APPA's Request for Clarification or Rehearing
11. APPA requests that the Commission clarify that public utilities
with transmission stated rates must return the full amount of excess
ADIT resulting from the Tax Cuts and Jobs Act to customers.\27\ APPA
asserts that Order No. 864 creates ambiguity regarding whether
customers of public utilities with transmission stated rates will
receive the full amount of excess ADIT resulting from the Tax Cuts and
Jobs Act. Specifically, APPA points to the Commission's guidance in
Order No. 864 that the Commission ``will generally apply a policy that
public utilities begin reducing excess ADIT immediately upon a tax rate
change and not at a later date, such as at the time of a future rate
case.'' \28\ APPA claims that the Commission's guidance, among other
aspects of Order No. 864, potentially raises a concern that the portion
of excess ADIT amortized between January 1, 2018, and a public
utility's next rate case might not be returned to customers.\29\ For
example, APPA argues that a public utility might seek to adopt a brief
amortization period for unprotected excess ADIT amounts that would
amortize fully before that public utility's next rate case, therefore
depriving customers of that excess ADIT being returned.\30\
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\27\ APPA Rehearing at 2.
\28\ Id. at 4 (quoting Order No. 864, 169 FERC ] 61,139 at P
93).
\29\ Id. at 4-5.
\30\ Id.
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12. APPA contends that failing to require public utilities with
transmission stated rates to return excess ADIT would depart from
Commission precedent. APPA argues that the Commission acknowledged in
Order No. 864 that, under tax normalization, excess ADIT ``must be
returned to customers in a cost of service ratemaking context.'' \31\
Further, according to APPA, in Order No. 144, the Commission found that
``[a]ny excess or deficiency in [ADIT] does not . . . result in a
windfall to either shareholders or ratepayers since the balances will
systematically be subject to a reconciliation in future rates.'' \32\
APPA argues that excusing public utilities from returning excess ADIT
to customers could result in a windfall to public utilities, which
contravenes the Commission's findings in Order No. 144.\33\
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\31\ Id. at 5 (quoting Order No. 864, 169 FERC ] 61,139 at P 8).
\32\ Id. at 6 (quoting Order No. 144, FERC Stats. & Regs. ]
30,254 at 31,554).
\33\ Id.
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13. APPA also asserts that the Commission required public utilities
with transmission stated rates to ``establish a plan to return any
excess [ADIT] in rate applications'' in Order No. 475.\34\ APPA claims
that Order No. 475 did not contemplate that customers would be deprived
of the return of excess ADIT.\35\ Finally, APPA contends that the
Commission acknowledged in Order No. 864 that public utilities are
generally required to obtain specific ratemaking authority prior to
amortizing a regulatory asset or liability in rates.\36\ APPA argues
that public utilities with transmission stated rates should not be
allowed to deprive customers of the full excess ADIT regulatory
liability by amortizing the excess ADIT in that regulatory liability
between rate cases.\37\
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\34\ Id. (quoting Order No. 475, FERC Stats. & Regs. ] FERC
Stats. & Regs. ] 30,752 at 30,736).
\35\ Id.
\36\ Id. at 7.
\37\ Id.
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14. In the alternative, APPA requests rehearing of Order No. 864.
APPA argues that, to the extent the Commission's guidance provided in
Order No. 864 would result in any portion of excess ADIT not being
returned to customers, the Commission departed from prior Commission
policy without adequate explanation by permitting public utilities with
transmission stated rates to amortize excess ADIT immediately as of the
effective date of the Tax Cuts and Jobs Act. In support of its
rehearing request, APPA reiterates its arguments that excess ADIT must
be returned to customers in a cost of service ratemaking context and
that the Commission's tax normalization regulations are meant to ensure
that public utility shareholders do not receive a windfall from excess
ADIT. APPA also reiterates its argument that the Commission's
accounting guidance prohibits the amortization of regulatory assets or
liabilities relating to excess or deficient ADIT until they are
included in ratemaking.\38\
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\38\ Id. at 9.
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15. While APPA does not dispute the unique circumstances
surrounding transmission formula rates at the time of the enactment of
the Tax Cuts and Jobs Act, APPA claims that such circumstances provide
no basis for depriving customers of public utilities with transmission
stated rates of the full amount of excess ADIT resulting from the Tax
Cuts and Jobs Act. Further, APPA argues that the requirement for public
utilities to seek Commission approval prior to including a regulatory
asset or liability in rates applies to the Commission's cost-of-service
ratemaking generally and is not limited to only transmission formula
rates.
3. Commission Determination
16. We grant APPA's request for clarification in part and deny its
request for rehearing. APPA requests that the Commission clarify that a
public utility with a transmission stated rate must
[[Page 27684]]
return the full amount of excess ADIT resulting from the Tax Cuts and
Jobs Act to customers. APPA quotes the guidance provided in Order No.
864 that the Commission ``will generally apply a policy that public
utilities begin reducing excess ADIT immediately upon a tax rate change
and not at a later date, such as at the time of a future rate case.''
\39\ APPA argues that generally applying such a policy for transmission
stated rates while requiring public utilities with transmission formula
rates to return the full amount of excess ADIT resulting from the Tax
Cuts and Jobs Act potentially raises concerns that, for public
utilities with transmission stated rates, the portion of excess ADIT
amortized between January 1, 2018 and a public utility's next rate case
might not be returned to customers. We take this opportunity to further
clarify the Commission's guidance in Order No. 864, which addresses the
return of excess ADIT resulting from the Tax Cuts and Jobs Act for
public utilities with transmission stated rates.
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\39\ Order No. 864, 169 FERC ] 61,139 at P 93.
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17. We emphasize that there is a critical distinction in applying
the Commission's guidance and language quoted by APPA, which turns on
whether a public utility with a transmission stated rate has a
Commission-approved ratemaking method for addressing excess and
deficient ADIT. In Order No. 144, the Commission required public
utilities to file adjustments to recover deferred tax amounts in their
next rate case following the order, and to begin the process of making
up deficiencies or eliminating excesses in their ADIT reserves so that
they will be operating under a full normalization policy within a
reasonable period of time.\40\ To the extent that a public utility with
a transmission stated rate complied with Order No. 144 and has a
Commission-approved ratemaking method made specifically applicable to
it for addressing excess and deficient ADIT, then such a public utility
should return excess ADIT or recover deficient ADIT in accordance with
that prior Commission-approved method.\41\ That is, such a public
utility should begin amortizing excess or deficient ADIT immediately
upon a tax rate change in accordance with its prior Commission-approved
method for doing so.
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\40\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,519,
31,560.
\41\ Order No. 864, 169 FERC ] 61,139 at P 91. See also 18 CFR
35.24.
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18. A public utility's transmission stated rate is presumed to
recover all its costs during the time the rate is in effect, even if
some of those costs change between rate cases.\42\ Federal income
taxes, including ADIT, are a cost of providing service. If a public
utility with a transmission stated rate has a Commission-approved
ratemaking method for addressing excess and deficient ADIT, it is
presumed that the appropriate amount of excess ADIT is being returned
and deficient ADIT is being recovered as part of that transmission
stated rate. We therefore clarify, consistent with the presumption
discussed in this paragraph, that public utilities with transmission
stated rates that have a Commission-approved ratemaking method for
addressing excess and deficient ADIT return the appropriate amount of
excess ADIT resulting from the Tax Cuts and Jobs Act to customers
through their transmission stated rates.\43\
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\42\ For example, between rate cases, a public utility's
operating costs, billing determinants, and cost of capital may
increase or decrease. See SFPP, Opinion No. 511-B, 150 FERC ]
61,096, at P 19 (2015) (As with other items in a pipeline's cost of
service, the Commission does not ``track'' or ``true-up'' the
difference between the pipeline's actual taxes and the ``income tax
allowance'' used in a pipeline's most recent cost-of-service rate
case. Although a pipeline's costs may change in the years following
a rate case, the pipeline is assumed to recover its costs (including
its tax costs) via the rates in effect at the time the cost is
incurred. There is no subsequent adjustment for under- or over-
recoveries.); see also Interstate and Intrastate Natural Gas
Pipelines; Rate Changes Relating to Federal Income Tax Rate, Order
No. 849, 83 FR 36672 (July 30, 2018), 164 FERC ] 61,031, at PP 136-
150 (2018) (providing guidance that natural gas pipelines should
begin amortizing excess ADIT immediately as of the date the Tax Cuts
and Jobs Act was enacted for purposes of the FERC Form No. 501-G
informational filing, consistent with Sec. 154.305 of the
Commission's regulations).
\43\ We note that the Commission has the opportunity to review
in the next rate case whether a public utility with a transmission
stated rate that has a Commission-approved ratemaking method has
correctly applied that approved ratemaking method.
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19. For public utilities with transmission stated rates that lack a
Commission-approved ratemaking method, the Commission's regulations
require that such a public utility use some ratemaking method to make
provision for excess and deficient ADIT, and the appropriateness of
this method will be subject to case-by-case determination in a later
rate proceeding.\44\ The Commission provided guidance that a public
utility with a transmission stated rate that lacks a Commission-
approved ratemaking method for addressing excess and deficient ADIT
could begin employing a ratemaking method to amortize excess and
deficient ADIT balances immediately upon a tax rate change, subject to
the Commission's review of the appropriateness of that method in the
public utility's next rate case.\45\ This guidance is similarly based
on our discussion above that a public utility's transmission stated
rate is presumed to recover all its costs during the time the rate is
in effect, even if some of those costs change between rate cases.\46\
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\44\ See 18 CFR 35.24(c)(3).
\45\ Order No. 864, 169 FERC ] 61,139 at P 93; see also
Interstate and Intrastate Natural Gas Pipelines; Rate Changes
Relating to Federal Income Tax Rate, Order No. 849, 164 FERC ]
61,031, at PP 136-150 (2018) (providing guidance that natural gas
pipelines should begin amortizing excess ADIT immediately as of the
date the Tax Cuts and Jobs Act was enacted for purposes of the FERC
Form No. 501-G informational filing, consistent with Sec. 154.305
of the Commission's regulations).
\46\ See supra discussion at P 18 and n.42.
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20. We reiterate, however, that this is merely guidance and that
the Commission will address issues related to a public utility's method
for amortizing excess ADIT based on the specific facts and
circumstances in each proceeding. For this reason, we are unpersuaded
by APPA's argument that a public utility with a transmission stated
rate might seek to adopt a brief amortization period for unprotected
excess ADIT that would amortize fully before that public utility's next
rate case.\47\ A public utility with transmission stated rates that
does not have a Commission-approved ratemaking method is required to
support and justify all of its proposed amortization periods for excess
and deficient ADIT, including unprotected excess ADIT, in its next rate
proceeding. At that time, the Commission has an opportunity to
determine whether the amortization of excess and deficient ADIT is just
and reasonable.
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\47\ See APPA Rehearing at 4.
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21. We disagree with APPA that failing to require public utilities
with transmission stated rates to return excess ADIT departs from
Commission precedent and results in a windfall to public utilities.\48\
We are not failing to require public utilities to return excess ADIT
resulting from the Tax Cuts and Jobs Act. Rather, consistent with
Commission precedent, we are maintaining the status quo that excess and
deficient ADIT for a public utility will be addressed in that public
utility's next rate case.\49\ In doing so, the
[[Page 27685]]
Commission provided guidance that public utilities with transmission
stated rates that have a Commission-approved ratemaking method should
begin reducing excess ADIT in accordance with that approved method.
Public utilities with transmission stated rates that lack a Commission-
approved ratemaking method could begin reducing excess ADIT immediately
upon a tax rate change, subject to the Commission's review of the
appropriateness of that method in the public utility's next rate
case.\50\ We therefore find that the Commission's rationale in Order
No. 144--that ``any excess or deficiency in [ADIT] does not . . .
result in a windfall to either shareholders or ratepayers since the
balances will systematically be subject to a reconciliation in future
rates''--still applies.\51\
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\48\ To the extent that an entity believes that a public
utility's stated transmission rate is unjust and unreasonable as it
pertains to excess or deficient ADIT resulting from the Tax Cuts and
Jobs Act, it may file a complaint under section 206 of the FPA. 16
U.S.C. 824e.
\49\ See 18 CFR 35.24(c)(3) (``If no Commission-approved
ratemaking method has been made specifically applicable to the
public utility, then the public utility must use some ratemaking
method for making such provision, and the appropriateness of this
method will be subject to case-by-case determination.''); see also
18 CFR 35.24(c)(1)(ii) and (2).
\50\ Nothing here precludes a public utility with transmission
stated rates from proposing to delay amortization of excess ADIT to
its next rate case.
\51\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,554.
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22. Finally, we are unpersuaded by APPA's argument that the
Commission's accounting guidance prohibits the amortization of
regulatory assets or liabilities relating to excess or deficient ADIT
prior to approval by the Commission. Public utilities with transmission
stated rates that have a Commission-approved method for returning
excess ADIT by definition already have prior Commission approval to
begin reducing excess ADIT. For public utilities with transmission
stated rates that do not have a Commission-approved method for
returning excess ADIT, the Commission's regulations require that such
public utilities must use some ratemaking method for reducing excess
ADIT, and the appropriateness of this method will be subject to case-
by-case determination.\52\ The appropriateness of that method is
ultimately approved by the Commission, which happens in the public
utility's next rate case. Customers also have an opportunity to
intervene, comment, and protest the method for amortizing excess and
deficient ADIT at that time.
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\52\ See 18 CFR 35.24(c)(3).
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B. Transmission Formula Rates
1. Order No. 864
23. As discussed above, the Commission required public utilities
with transmission formula rates to propose tariff revisions to
implement certain excess and deficient ADIT-related mechanisms in their
transmission formula rates. The Commission stated that, on compliance,
the Commission expects public utilities with transmission formula rates
to make their proposed tariff revisions effective on the effective date
of the final rule, January 27, 2020.\53\
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\53\ Order No. 864, 169 FERC ] 61,139 at P 100.
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24. As relevant to Exelon Companies' request for rehearing, the
Commission stated that the full regulatory liability for excess ADIT
should be captured in transmission formula rates, beginning on the
effective date of any proposed tariff revision. In other words, the
full amount of excess ADIT resulting from the Tax Cuts and Jobs Act
must be returned to transmission formula rate customers.\54\
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\54\ Id. P 45.
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25. In addition, the Commission clarified that the requirements
adopted in Order No. 864 apply only to excess and deficient ADIT
resulting from the Tax Cuts and Jobs Act and any future tax rate
changes. The Commission stated that, therefore, the requirements in
Order No. 864 do not conflict with the Commission's determination in
Commonwealth Edison, which is discussed below.\55\
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\55\ Id. P 51 (citing Commonwealth Edison Co., 164 FERC ] 61,172
(2018) (Commonwealth Edison)). See also infra n.57.
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2. Exelon Orders
26. Beginning in December 2016, prior to the issuance of Order No.
864, Exelon Companies submitted multiple filings under section 205 of
the Federal Power Act (FPA) \56\ that proposed tariff revisions seeking
to, among other things, recover past deficient ADIT amounts. While the
specific facts of the filings differ, of relevance here, Exelon
Companies sought to recover the full amount of past deficient ADIT
resulting from prior state corporate income tax rate increases.
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\56\ 16 U.S.C. 824d (2018).
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27. The Commission rejected Exelon Companies' proposed tariff
revisions, finding that Exelon Companies had not shown the proposed
tariff revisions allowing for the recovery of the full amount of past
deficient ADIT to be just and reasonable because, among other things,
Exelon Companies failed to meet the requirement in Order No. 144 to
propose recovery in the public utility's next rate case.\57\ In
rejecting Exelon Companies' proposed tariff revisions, the Commission
provided guidance that, due to recent state corporate income tax rate
increases, a portion of the deficient ADIT that Exelon Companies sought
to recover may still be eligible for recovery. The Commission stated
that should Exelon Companies seek recovery of such deficient ADIT
amounts, Exelon Companies should support these amounts by providing
detailed workpapers, as well as provide for the reduction of the
associated ADIT liabilities from rate base.\58\
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\57\ PJM Interconnection, L.L.C., 161 FERC ] 61,163 (2017),
reh'g denied, 164 FERC ] 61,173 (2018), aff'd sub nom. Balt. Gas &
Elec. Co. v. FERC, No. 18-1298, 2020 WL 1482394 (D.C. Cir. Mar. 27,
2020) (BG&E); Commonwealth Edison, 164 FERC ] 61,172 (collectively,
Exelon Orders).
\58\ Commonwealth Edison, 164 FERC ] 61,172 at P 130.
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28. The Commission also announced a limited, one-year compliance
period in which a public utility could file to recover past deficient
ADIT if the public utility did not file a rate case subsequent to the
Commission' issuance of Order No. 144 or if the public utility properly
preserved its right to recover past ADIT through settlement terms.\59\
Following this limited compliance period, the Commission clarified that
public utilities should submit FPA section 205 filings seeking recovery
of deficient ADIT amounts within two years of incurring such
amounts.\60\
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\59\ Id. P 132.
\60\ Id. P 133.
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3. Exelon Companies' Request for Rehearing
29. Exelon Companies request rehearing of the Commission's
requirement that public utilities with transmission formula rates must
return the full amount of excess ADIT resulting from the Tax Cuts and
Jobs Act to customers. Exelon Companies contend that the requirement in
Order No. 864 that excess ADIT resulting from the Tax Cuts and Jobs Act
should be ``wholly preserved'' until a public utility's transmission
formula rate contains a mechanism to flow through that ``full amount''
of excess ADIT in rates is inconsistent with the Commission's decisions
in the Exelon Orders.\61\
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\61\ Exelon Companies Rehearing at 8-9.
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30. Exelon Companies assert that their proposed tariff revisions in
the Exelon Orders sought to address various deferred tax adjustments,
which according to Exelon Companies are recorded pursuant to the
Commission's policies concerning Statement of Financial Accounting
Standards No. 109 (FAS 109).\62\ Exelon Companies argue that they
proposed, among other things, to recover the full amount of past
[[Page 27686]]
deficient ADIT and return the full amount of excess ADIT resulting from
the Tax Cuts and Jobs Act. Exelon Companies allege that the Commission
rejected the proposed tariff revisions, finding that only a portion of
the past deficient ADIT would be available for recovery once the
proposed tariff revisions become effective. Exelon Companies therefore
argue that no justification has been provided to support treating
excess ADIT related to the Tax Cuts and Jobs Act differently from the
other FAS 109 amounts addressed in the Exelon Orders, which erode away
if the transmission formula rate does not contain a mechanism to
reflect those amounts.\63\
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\62\ Exelon Companies' use of the term FAS 109 amounts refers
generally to its proposals to flow three items through its formula
rate: (1) Excess and deficient ADIT caused by the Tax Cuts and Jobs
Act; (2) accumulated tax balances for past allowance for funds used
during construction (AFUDC) equity originations that have not flowed
through rates and future AFUDC equity originations; and (3) tax
account balance differences caused by a switch from the flow-through
method to normalization.
\63\ Exelon Companies Rehearing at 3-6, 8-9.
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31. Exelon Companies allege that the Commission's tax normalization
policies should be conducted in an even-handed fashion, meaning that
the full amount of excess ADIT resulting from the Tax Cuts and Jobs Act
should be treated similarly to other FAS 109 amounts. According to
Exelon Companies, the Commission attempts to provide a technical
justification for treating excess ADIT for transmission formula rates
different than transmission stated rates, explaining that the rates of
public utilities with transmission formula rates increased as a result
of the Tax Cuts and Jobs Act where those formula rates did not have a
mechanism to offset the excess ADIT from rate base. Exelon Companies
argue that their formula rates have a mechanism to offset rate base by
FAS 109 amounts, so the distinction does not apply to Exelon Companies.
Exelon Companies further contend that the Commission acknowledges that
Order No. 864 reaches a different result than the Exelon Orders, but
provides no explanation for why the different result is justified.\64\
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\64\ Id. at 9-13.
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4. Commission Determination
32. We deny Exelon Companies' request for rehearing.\65\ We
disagree with Exelon Companies' central argument that the Commission is
treating the return of excess ADIT (a regulatory liability) resulting
from the Tax Cuts and Jobs Act differently than how the Commission
treated deficient ADIT (a regulatory asset) resulting from past tax
rate increases in the Exelon Orders. Exelon Companies both
mischaracterize the Commission's reasons for rejecting full recovery of
their past deficient ADIT amounts in the Exelon Orders and the
Commission's actions in Order No. 864. Simply, the Commission rejected
Exelon Companies' attempt to recover the full amount of past deficient
ADIT because Exelon Companies failed to meet the next rate case
requirement of Order No. 144.\66\ Order No. 864 does not address past
deficient ADIT,\67\ nor does it change the requirements of Order No.
144.\68\
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\65\ To the extent Exelon Companies' request for rehearing
extends to all FAS 109 amounts, we find that AFUDC equity and flow-
through items are beyond the scope of this proceeding. Order No. 864
addresses only the treatment of excess and deficient ADIT resulting
from the Tax Cuts and Jobs Act (and future tax rate changes) for
public utilities with transmission formula rates, not AFUDC equity
and flow-through items.
\66\ See also BG&E, 2020 WL 1482394, at 2 (finding that ``the
`next rate case following applicability of the rule' is the `next
rate case' after the utility has incurred an item (either a cost or
a benefit) requiring `normalization' under Order No. 144 and [the
Commission's 1993 accounting guidance in Docket No. AI93-5-000], not
counting periods in which a rate case or settlement had itself
normalized the treatment of the item (or adequately addressed its
normalization)'').
\67\ Order No. 864, 169 FERC ] 61,139 at P 51.
\68\ Id. PP 42, 86, 90.
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33. In the Exelon Orders, contrary to Exelon Companies' contention,
the Commission did not require Exelon Companies to amortize prior
recorded FAS 109 regulatory asset amounts even though Exelon Companies'
transmission formula rates contained no mechanism to pass them
through.\69\ Instead, the Commission did not permit Exelon Companies to
recover the full amount of those regulatory assets because Exelon
Companies failed the next rate case requirement of Order No. 144.
Specifically, the Commission determined that the transmission formula
rates that resulted from the settlement of those proceedings accounted
for ADIT; the Commission interpreted the Exelon Companies' transmission
formula rates to explicitly exclude recovery of this past deficient
ADIT. In supporting this conclusion, the Commission found that Exelon
Companies' ``initial [f]ormula [r]ate filings included line items that
expressly excluded recovery of these [deficient ADIT] items in their
[f]ormula [r]ates.'' \70\ The Commission therefore determined that
Exelon Companies have not sought to recover this past deficient ADIT in
their next rate proceedings after Order No. 144 \71\ and failed to
expressly reserve this issue in the settlements of those
proceedings.\72\
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\69\ Exelon Companies Rehearing at 12.
\70\ Commonwealth Edison, 164 FERC ] 61,172 at P 111.
\71\ Id. (``Exelon Companies thus failed to comply with the
requirement in Order No. 144 that recovery should be addressed in
the `next rate case' at the time they initially filed their Formula
Rates.'').
\72\ Id. P 112 (``Moreover, because Exelon Companies did not
request recovery of FAS 109 amounts in their initial filings of
their Formula Rate cases, Exelon Companies could not have deferred
recovery of FAS 109 amounts for the next rate case unless they
expressly addressed this issue in the settlements of their Formula
Rates.'').
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34. The Commission also explained that the next rate case
requirement in Order No. 144 works in conjunction with the reasonable
period of time requirement.\73\ Accordingly, the Commission determined
that because Exelon Companies failed the next rate case requirement,
they also necessarily failed the reasonable period of time
requirement.\74\ The Commission also rejected Exelon Companies' attempt
to recover the full amount of past ADIT because Exelon Companies waited
longer than seven years to seek recovery of this past deficient ADIT
and failed to offer an adequate reason for the delay.\75\
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\73\ Id. P 113.
\74\ Id. (``Exelon Companies failed to comply with the directive
in Order No. 144 to begin the process of adjusting its deferred tax
deficiencies and excesses `so that, within a reasonable period of
time to be determined on a case-by-case basis, [it would] be
operating under a full normalization policy.' '').
\75\ Id. (``Exelon Companies still do not explain why they
waited an additional nine and a half years to make their February
23, 2018 filings [after the end of the rate moratorium in the
settlement agreement]. And Exelon Companies' apparent conclusion
that they could hold these amounts in reserve indefinitely conflicts
with the language of Order No. 144.''); see also BG&E, 2020 WL
1482394, at 6 (finding that the Commission acted reasonably in
determining that Baltimore Gas & Electric Company's 12 year delay
was ``far longer'' than the four and seven year delays previously
accepted by the Commission and that Baltimore Gas & Electric Company
``failed to offer an adequate reason for the delay'').
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35. The requirements of Order No. 864 have no bearing on Exelon
Companies' efforts to recover past deficient ADIT that pre-dated the
existence of their transmission formula rates. The Commission's
requirements in Order No. 864 resolve the issue that most public
utility transmission formula rates were not designed to properly
address excess or deficient ADIT resulting from the Tax Cuts and Jobs
Act and future tax rate changes. The original framework adopted in
Order No. 144, which was issued when all public utilities used
transmission stated rates, required public utilities to address excess
and deficient ADIT within a reasonable period of time in their next
rate cases.\76\ However, public utilities with transmission formula
rates no longer file traditional rate cases as contemplated by Order
No. 144. Thus, prior to Order No. 864, most public utilities with
transmission formula rates were required to make an FPA section 205
filing to seek approval to flow through excess or deficient ADIT in
[[Page 27687]]
their transmission formula rates.\77\ While this requirement relates to
regulatory assets and regulatory liabilities more broadly, in the
context of tax rate changes and Order No. 144, it functioned as the way
in which public utilities with transmission formula rates complied with
Order No. 144 and the Commission's regulations. Specifically, it
represented the way that a public utility with transmission formula
rates began ``the process of making up deficiencies in or eliminating
excesses in their deferred tax so that, within a reasonable period of
time . . . they will be operating under a full normalization policy''
following a tax rate change.\78\ If the Commission accepted such a
filing by a public utility with transmission formula rates, then that
public utility would have a Commission-approved ratemaking method for
that specific tax rate change consistent with the Commission's
regulations. However, this approach generally required such filings to
seek approval of a new ratemaking method after each tax rate change by
public utilities with transmission formula rates.
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\76\ See Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
\77\ PJM Interconnection, L.L.C., 165 FERC ] 61,275, at P 28
(2018).
\78\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
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36. As a result of Order No. 864, public utilities with
transmission formula rates are no longer required to make a filing
pursuant to FPA section 205 to obtain Commission approval prior to
including excess and deficient ADIT in their transmission formula rates
following future changes to tax rates.\79\ Instead, the Commission
required public utilities with transmission formula rates to implement
certain mechanisms that accurately reflect excess or deficient ADIT in
their formula rates, which will serve as the ratemaking method for the
Tax Cuts and Jobs Act and all future tax rate changes and ensure that
excess and deficient ADIT are automatically included in a public
utility's transmission formula rate following a tax rate change.
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\79\ Order No. 864, 169 FERC ] 61,139 at P 48.
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37. The Commission's requirements in Order No. 864 apply equally to
Exelon Companies and all other public utilities with transmission
formula rates. Similar to most public utilities with transmission
formula rates at the time of the Tax Cuts and Jobs Act, Exelon
Companies lacked a mechanism in its formula rates and did not have a
Commission-approved ratemaking method to address excess and deficient
ADIT resulting from the Tax Cuts and Jobs Act.\80\ Thus, public
utilities with transmission formula rates, including Exelon Companies,
are required under Order No. 864 to return the full amount of excess
ADIT and recover the full amount deficient ADIT resulting from the Tax
Cuts and Jobs Act. It is appropriate to return the full amount of
excess and deficient ADIT resulting from the Tax Cuts and Jobs Act
because Order No. 144 provides that public utilities will have a
reasonable amount of time to begin accounting for excess or deficient
ADIT if such public utilities lack a Commission-approved ratemaking
method for addressing excess and deficient ADIT. By complying with
Order No. 864, all public utilities with transmission formula rates
will ``begin the process of making up deficiencies in or eliminating
excesses in their deferred tax so that, within a reasonable period of
time . . . they will be operating under a full normalization policy''
following the Tax Cuts and Jobs Act in accordance with Order No.
144.\81\ These public utilities will also have a Commission-approved
ratemaking method, and therefore, will comply with the Commission's
regulations.\82\ Additionally, because excess and deficient ADIT will
be automatically included in transmission formula rates following
future tax rate changes pursuant to this Commission-approved ratemaking
method, public utilities with transmission formula rates will be able
to maintain compliance with Order No. 144 and the Commission's
regulations going forward without seeking additional Commission
approval through an FPA section 205 filing.
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\80\ In its rehearing request, Exelon Companies argue that the
Commission's rate base justification for treating public utilities
with transmission formula rates differently than those with
transmission stated rates is inapplicable to them because Exelon
Companies' formula rates have always contained ``an adjustment to
rate base to subtract FAS 109 amounts from the deferred tax
calculation.'' Exelon Companies Rehearing at 10-11. To the extent
Exelon Companies' assertion is true, we agree that this rate base
explanation is inapplicable to Exelon Companies. However, as
discussed elsewhere, Exelon Companies failed to seek recovery of
past deficient ADIT within a reasonable period of time in its next
rate case. It is for this reason that Exelon Companies are unable to
recover past deficient ADIT. This is also distinguishable from the
circumstances surrounding the Commission's issuance of Order No.
864, as discussed elsewhere. See supra at PP 32-37.
\81\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
\82\ 18 CFR 35.24(c)(2) and (3).
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III. Document Availability
38. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
internet through the Commission's Home Page www.ferc.gov. At this time,
the Commission has suspended access to the Commission's Public
Reference Room due to the President's March 13, 2020 proclamation
declaring a National Emergency concerning the Novel Coronavirus Disease
(COVID-19).
39. From the Commission's Home Page on the internet, this
information is available on eLibrary. The full text of this document is
available on eLibrary in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits in the docket number
field.
40. User assistance is available for eLibrary and the Commission's
website during normal business hours from FERC Online Support at (202)
502-6652 (toll free at 1-866-208-3676) or email at
ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at
public.referenceroom@ferc.gov.
IV. Dates
41. The effective date of the document published on November 27,
2019 (84 FR 65281), is confirmed: January 27, 2020.
By the Commission.
Issued: April 16, 2020.
Kimberly D. Bose,
Secretary.
[FR Doc. 2020-08634 Filed 5-8-20; 8:45 am]
BILLING CODE 6717-01-P