A REFUND may be hard to tell apart from a future discount. There are important tax consequences for utilities.

A REFUND may be hard to tell apart from a future discount. There are important tax consequences for utilities.

December 01, 2003
A REFUND may be hard to tell apart from a future discount.  There are important tax consequences for utilities.

Most utilities are allowed to pass through taxes to their customers as a cost of providing service.  However, in cases where the utility reports taxes for ratemaking purposes before it actually pays them to the government, a “deferred tax account” is established to keep track.

Congress cut the corporate tax rate in the late 1980’s from 46 to 34%.  As a consequence, many utilities had collected money in rates to cover future taxes that they would not have to pay.  State public utility commissions made them return the money to their customers.

Florida Progress Corporation was ordered to return the amounts in the form of bill credits over 12 months.  Each customer’s bill, under the heading “monthly rate reduction,” listed a credit reflecting the amounts being returned.  The utility had already paid federal income taxes on the amounts it collected from customers and was now having to return.  It proposed to amend its earlier tax returns to reduce its taxable income in those years.  The IRS and the US Tax Court said no.  The utility lost in late October in a US appeals court.

The court said the utility had not made a “refund” of money to its customers.  Rather, it reduced how much it charged customers for electricity during the 12-month period.

Therefore, it was not entitled to any deduction on account of the bill credits to its customers.  Rather, it simply had less income to report from electricity sales in the current year.

The decision has a present-value cost to the utility.  It is no doubt frustrating for Florida Progress because Dominion Resources won a similar case in a different US appeals court.  The case is Florida Progress v. Commissioner.  The court issued its decision on October 21.

Keith Martin