Tucson Electric Power

Workers string high-voltage power lines as part of Tucson Electric Power Co’s $76 million, 41-mile Pinal Central-Tortolita transmission line, in 2017.

Tucson Electric Power Co. has filed a plan to refund to ratepayers millions of dollars in corporate income-tax savings from the latest federal tax-reform law, starting with credits amounting to about $3 a month for the typical home customer for a year.

But after a year of tax-savings credits starting in May, TEP wants to hold some of the savings back as a hedge against future rate increases, and an unrelated increase in a surcharge for purchased power and fuel could eat up the proposed rebate in at least the first year.

TEP filed its plan in response to a directive from the Arizona Corporation Commission that state-regulated utilities disclose any savings from a steep cut in the federal corporate tax rate enacted in December, and that they propose how they would return any tax windfall to ratepayers.

For a year starting May 1, TEP has proposed returning $34 million to ratepayers with a usage-based bill credit of about four-tenths of a cent per kilowatt-hour — $3.07 per month for the typical home customer using 800 kWh per month.

For the following two years, TEP has proposed holding back part of the tax savings as a “regulatory liability” that could be adjusted later based on other tax impacts or costs.

For the year beginning May 1, 2019, TEP proposes withholding 25 percent of the tax savings and reducing the credit to an average $2.29 per month. For the following year, it would hold back 50 percent of the tax savings for a monthly bill credit averaging $1.48.

TEP says that it is earning less than its allowed rate of return, even with the reduced federal income taxes.

Together with an expected increase in capital spending, TEP says returning all of the tax savings each year would pressure the utility’s cash flow and potentially adversely affect its credit ratings and increase its borrowing costs.

TEP spokesman Joe Barrios said it’s important to note that the company’s plan would still pass 100 percent of the company’s tax savings along to customers.

“It’s just a matter of timing,” Barrios said. “We’re proposing holding back some of those benefits to offset any future filing for rates. If there is any increase in rates, then the portion we’ve set aside would be used to reduce those bill impacts.”

TEP’s tax-credit proposal will be scrutizined by the Corporation Commission staff and other stakeholders, who will file responses ahead of a vote by the commission at an open meeting. The panel’s next regular open meeting is set for April 10-11.

The commission also is considering a request by TEP to increase a special pass-through surcharge that offsets costs for fuel and wholesale power purchases, which would more than offset the proposed tax-savings credits.

TEP has recommended raising the “purchased power and fuel adjustment clause,” which is usually reset each April to reflect recent costs, to recover an additional $3.15 per month based on typical home usage.

Since last April, TEP customers have been getting a credit averaging about $2.70 monthly under that mechanism, to offset a previous overcollection.

The tax-savings credits would likely remain in effect until TEP’s next general rate case, which the utility says it expects to file sometime in 2019.

TEP was last awarded new base rates in February 2017 in a ruling that increased the typical home customer’s bill by about $8.50 a month, though a second phase of that case regarding treatment of customers who install rooftop solar systems is still pending.

TEP’s sister rural utility, UniSource Energy Services, will file tax-savings plans for its electric and natural-gas divisions separately, Barrios said.

UES provides natural-gas service in Santa Cruz, Mohave, Yavapai, Coconino and Navajo counties and electric service in Santa Cruz and Mohave counties.

Arizona Public Service Co., the largest state-regulated utility, filed to return about $119 million in annual tax savings related to the tax-reform law through a special mechanism adopted during its last rate case in anticipation of tax changes.

The APS plan was approved by the Corporation Commission in February and went into effect March 2, resulting in an average $5.40 monthly bill credit for APS home customers.

Meanwhile, Southwest Gas in filings to the commission said though its income-tax rate was cut, changes to certain depreciation and tax-deferral rules will hurt the company’s cash flow and increase borrowing costs.

The gas company proposed passing any tax savings on to customers through an existing billing-adjustment mechanism that limits the company’s profit margin per customer and said it would propose changes to that mechanism no later than April 30.

Contact senior reporter David Wichner at dwichner@tucson.com or 573-4181. On Twitter: @dwichner. On Facebook: Facebook.com/DailyStarBiz

Senior reporter covering business and technology for the Arizona Daily Star/Tucson.com