Utility's deferred-tax rate-base methods satisfy normalization rules

Plain-English summary

A regulated electric utility asked whether several methods of reflecting accumulated deferred income taxes in federal and state rate proceedings complied with the tax normalization rules. The methods used historical year-end balances, projected capital costs, pro rata deferred-tax changes, true-up adjustments, and forecast test-year amounts. The IRS approved all five requested rulings. It concluded that the described pro rata adjustments did not exclude more deferred-tax reserve from rate base than permitted and that eliminating an additional 13-month averaging convention from the pro rata calculations would not violate the consistency rule.

Ruling snapshot

• Question: Did the utility's historical, forecast, true-up, and pro rata deferred-tax rate-base methods comply with the normalization rules?
• Outcome: Approved on all five requested methods, including removal of the extra 13-month averaging convention.
• Key authorities: IRC §§ 167 and 168(i)(9); Treas. Reg. § 1.167(l)-1(h)(6).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201949006 Third Party Communication: None
Release Date: 12/6/2019 Date of Communication: Not Applicable
Index Number: 167.22-01
Person To Contact:
------------------- ------------------------, ID No. -------------
--------------------------- Telephone Number:
--------------------------------------------------- ----------------------
-------------------------------------- Refer Reply To:
------------------------------------ CC:PSI:B06
PLR-103656-19
Date:
August 27, 2019

LEGEND

Taxpayer = -------------------------------------------------------------------------------
Corporation = -----------------------------------------------------
State = --------------
Commission A = -------------------------------------------------------
Commission B = ---------------------------------------------------
Director = -------------------------------------------------------------------
------------------
Month = -----------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Date 1 = ------------------------
Date 2 = ----------------------
Date 3 = ---------------------------
Date 4 = --------------------
Date 5 = -----------------------
Date 6 = ---------------------------
Date 7 = ------------------------
Date 8 = ---------------------------

Dear --------------:

  This letter responds to a request for a private letter ruling dated

January 22, 2019, submitted by Taxpayer. Taxpayer requests rulings regarding the
computation of the pro rata portion of accumulated deferred federal income tax reserve
PLR-103656-19 2

(“AFDIT”) subject to § 168(i)(9) of the Internal Revenue Code and § 1.167(l)-1 of the
Income Tax Regulations (the Normalization Rules) as an adjustment to rate base
pursuant to § 1.167(l)-1(h)(6) of the Regulations. The relevant facts as represented in
your submission are set forth below.

                                      FACTS

   Taxpayer is incorporated in State. Taxpayer employs a calendar year reporting

period and uses the accrual method of accounting.

     Taxpayer is a wholly-owned subsidiary of Corporation. Corporation and its

affiliated group of corporations (that includes Taxpayer) electronically file a consolidated
federal income tax return with the IRS. Taxpayer is under the audit jurisdiction of the
Large Business and International Division of the IRS.

    Taxpayer is principally engaged in the business of supplying and distributing

electricity to an area of State, and is subject to regulation as to rates and conditions of
service by Commission A and Commission B.

Commission A Rate Proceeding

    Taxpayer files annual revenue requirement updates with Commission A to

establish rates for its regulated transmission-related activities subject to Commission
A’s jurisdiction. On Date 1, Taxpayer filed revisions to Taxpayer’s Transmission Owner
Tariff (TO Tariff) that utilizes a formula ratemaking approach (Formula Rate) to compute
a transmission revenue requirement (Base Transmission Revenue Requirement or
Base TRR) which will determine rates effective Date 2 ( the TO Year 1 filing establishes
rates for the Rate Year Year 1.) Commission A accepted Taxpayer’s proposed Formula
Rate in an order issued on Date 3, subject to refund, and established settlement and
hearing procedures.

   Taxpayer’s Base TRR equals the sum of the following three components: 1) the

Prior Year Transmission Revenue Requirement (“Prior Year TRR”); 2) the Incremental
Forecast Period Transmission Revenue Requirement (“IFPTRR”); and 3) the True-Up
Adjustment. The combination of the Prior Year TRR and IFPTRR represent the
revenue requirement for forecasted costs to be incurred in the Rate Year (“Rate Year
TRR”). The True-Up Adjustment represents the difference between the revenue
requirement based on actual costs incurred by Taxpayer in a prior year and the actual
revenue received by Taxpayer during that prior year.

   The Prior Year TRR is the first component of the Rate Year TRR that is

calculated based on actual Commission A-related costs, as reflected in Taxpayer’s
Commission A Form 1 filed for the most recent year-end prior to the filing of the Formula
PLR-103656-19 3

Rate (“Prior Year”). Since TO Year 1 was filed with Commission A in Month of Year 2,
the Prior Year for TO Year 1 is Year 3.

   IFPTRR is the second component of the Rate Year TRR that represents the

additional revenue requirement for forecasted incremental costs to be incurred in the
Rate Year. The calculation applies: (1) a revenue requirement per dollar of plant (the
“Annual Fixed Charge Rate” or “AFCR”) to the capital expenditures Taxpayer projects it
will make in the Rate Year (“Incremental Capital Costs” or “ICC”), plus (2) a revenue
requirement per dollar (the “Specified Fixed Charge Rate” or “SFCR”) applied to certain
construction work-in-progress (“Incremental CWIP” or “ICWIP”).

   The True-Up Adjustment is the difference between the revenue requirement

based on actual costs incurred by Taxpayer in the Prior Year and the actual revenue
received by Taxpayer during the Prior Year. For TO Year 1, the True-Up Adjustment
represents the difference between the revenue requirement based on actual costs
recorded in Year 3 (per the Year 3 Commission A Form 1) and the transmission
revenue actually received in Year 3.

   Income tax expense, which is a cost of service component of Taxpayer’s Base

TRR, is calculated in the Company’s Prior Year TRR and True-Up Adjustment based on
an income tax formula (“Income Tax Formula”) that utilizes applicable corporate income
tax rates. Income tax expense under the Income Tax Formula represents the
combination of three components. Income tax expense for purposes of IFPTRR is
embedded in both the AFCR and SFCR. Neither the income tax expense produced by
the Income Tax Formula nor the income tax expense embedded in the AFCR and
SFCR distinguish between current tax expense and deferred tax expense.

   Accumulated deferred federal and state income tax (together, “ADIT”) balances

related to Commission A are used to adjust Commission A rate base in the computation
of Prior Year TRR and the True-Up Adjustment. To effectuate this ADIT adjustment to
rate base, ADIT-related Commission A balance sheet accounts as recorded and
reflected in the Prior Year Commission A Form 1 are separately examined to determine
the amounts attributable to Commission A transmission and distribution that should be
included in the ADIT adjustment to Commission A rate base. The Prior Year year-end
balances of these Commission A-related ADIT amounts are used to adjust rate base for
purposes of calculating the Prior Year TRR. The Prior Year pro rata calculated
balances of these Commission A-related ADIT amounts are used to adjust rate base for
purposes of calculating the True-Up Adjustment. Thus, no proration is applied in
computing the Rate Year TRR and proration is applied in calculating the True-Up
Adjustment. The pro rata balance used to adjust rate base for purposes of the True-Up
Adjustment includes a calculation of the 13-month average of: 1) the Prior Year
beginning ADIT balance, and 2) the pro rata ADIT balance at the end of the Prior Year.
The Incremental Capital Cost balance used to calculate IFPTRR does not include ADIT
amounts.
PLR-103656-19 4

   On Date 4, Commission A issued an order, pursuant to section 206 of the

Federal Power Act, to institute proceedings to examine the methodology utilized by
Taxpayer to apply a regulatory averaging convention to the pro rata methodology
described in § 1.167(l)-1(h)(6)(ii) in calculating the ADIT component of rate base. The
206 Order cited a previous Commission A order that denied a request by a taxpayer to
use the average of the pro rata calculation of ADIT to adjust rate base in their formula
rates. On Date 5, Taxpayer submitted to Commission A its answer to the 206 Order. In
summary, this answer noted that the question of eliminating the computation of “the
average of” the pro rata portion of ADFIT for ratemaking purposes is a tax normalization
question and, therefore, it is particularly important for both Taxpayer and its customers
that Taxpayer seek guidance from the IRS on how to address this normalization issue
before making a change to its Formula Rate template. On Date 6, Commission A
issued an order that, inter alia, directed Taxpayer to make a compliance filing within 30
days of the date of that order to revise its transmission Formula Rate to eliminate the
use of the two-step averaging methodology for calculating ADIT. Taxpayer intends to
comply with Commission A’s Date 6 order by submitting a compliance filing on or before
Date 7, prior to receiving the guidance from the IRS requested herein.

Commission B General Rate Case Proceedings

   Taxpayer typically files a general rate case (“GRC”) application with Commission

B every three years to establish rates for a future three-year period associated with its
state-regulated distribution, transmission and generation-related business activities
subject to Commission B’s jurisdiction. On Date 8, Taxpayer filed its application to
establish rates for the test year Year 1 and post-test years Year 4 and Year 5 (“Year 1
GRC”). Commission B has not issued a final decision as of the filing of this ruling
request.

    In establishing its rates, Taxpayer utilizes its most recent calendar-year recorded

costs as its starting point and forecasts annual costs and related revenue requirements
for the subsequent five calendar years. In its Year 1 GRC, Taxpayer is seeking
approval for rates to be charged in the years Year 1, Year 4, and Year 5. Taxpayer’s
GRCs do not include ratemaking mechanisms that true up actual costs to forecasted
costs, although there are various Commission B-related balancing accounts and
memorandum accounts for discrete items (including some GRC-related costs) that are
typically for a limited or interim period of time. The final approval in rates of the trued-up
costs for most of these balancing and memorandum accounts are not included in the
GRC proceedings (nor subject to this ruling request), but are generally approved in
separate balancing account proceedings.

  ADIT balances related to Commission B-jurisdictional assets are used to adjust

Commission B rate base in the computation of GRC revenue requirement. To derive
the ADIT adjustment to forecast test year rate base, the forecasted ADIT balance at the
PLR-103656-19 5

beginning of the test year is added to the product of the change in ADIT occurring in the
test year multiplied by the pro rata percentage. The pro rata percentage is equivalent to
the 13-month average of the resulting pro rata computation of the change in ADIT
occurring in the test year as described in § 1.167(l)-1(h)(6)(ii) of the Regulations.

                              RULINGS REQUESTED

Relating to Commission A Proceedings

    1. That reflecting the Prior Year year-end balances of Commission A-related

ADIT amounts as adjustments to rate base in the Prior Year TRR computation and
reflecting the Incremental Capital Costs in the IFPTRR computation without adjustments
for ADIT in the calculation of Taxpayer’s Rate Year TRR is not inconsistent with
§ 1.167(l)-1(h)(6)(ii) and is not subject to § 168(i)(9)(B)(ii) and, as such, is not a violation
of the Normalization Rules.

  2. That adjusting rate base by the pro rata computation of ADIT subject to the

Normalization Rules in Taxpayer’s True-Up Adjustment is not inconsistent with
§ 1.167(l)-1(h)(6)(ii) and, as such, is not a violation of the Normalization Rules.

  3. That eliminating the application of the regulatory 13-month averaging

convention to the pro rata portion of ADIT subject to the Normalization Rules in
computing the adjustment to rate base in Taxpayer’s True-Up Adjustment would not be
inconsistent with § 1.167(l)-1(h)(6)(ii) nor subject to § 168(i)(9)(B)(ii) and, as such,
would not be a violation of the Normalization Rules.

Relating to Commission B Procedings

   4. That utilizing a pro rata percentage portion of ADIT subject to the

Normalization Rules as an adjustment to rate base in Taxpayer’s GRC test year is
consistent with § 1.167(l)-1(h)(6)(ii) and, as such, is not a violation of the Normalization
Rules.

  5. That eliminating the application of the regulatory 13-month averaging

convention to the pro rata percentage portion of ADIT subject to the Normalization
Rules as an adjustment to rate base in Taxpayer’s GRC test year would not be
inconsistent with § 1.167(l)-1(h)(6)(ii) nor subject to § 168(i)(9)(B)(ii) and, as such,
would not be a violation of the Normalization Rules.

                                LAW AND ANALYSIS

    Former section 167(l) of the Code generally provided that public utilities were

entitled to use accelerated methods for depreciation if they used a “normalization
method of accounting.” A normalization method of accounting was defined in former
PLR-103656-19 6

§ 167(l)(3)(G) in a manner consistent with that found in § 168(i)(9)(A). Section 1.167(l)-
1(a)(1) provides that the normalization requirements for public utility property pertain
only to the deferral of federal income tax liability resulting from the use of an accelerated
method of depreciation for computing the allowance for depreciation under § 167 and
the use of straight-line depreciation for computing tax expense and depreciation
expense for purposes of establishing cost of services and for reflecting operating results
in regulated books of account. These regulations do not pertain to other book-tax timing
differences with respect to state income taxes, F.I.C.A. taxes, construction costs, or any
other taxes and items.

   Section 168(f)(2) provides that the depreciation deduction determined under

§ 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if
the taxpayer does not use a normalization method of accounting.

    In order to use a normalization method of accounting, § 168(i)(9)(A) requires that

a taxpayer, in computing its tax expense for establishing its cost of service for
ratemaking purposes and reflecting operating results in its regulated books of account,
use a method of depreciation with respect to public utility property that is the same as,
and a depreciation period for such property that is not shorter than, the method and
period used to compute its depreciation expense for such purposes. Under
§ 168(i)(9)(A)(ii), if the amount allowable as a deduction under § 168 differs from the
amount that would be allowable as a deduction under § 167 using the method, period,
first and last year convention, and salvage value used to compute regulated tax
expense under § 168(i)(9)(A)(i), the taxpayer must make adjustments to a reserve to
reflect the deferral of taxes resulting from such difference.

   Under § 1.167(l)-1(h)(6)(i), a taxpayer does not use a normalization method of

accounting if, for ratemaking purposes, the amount of the reserve for deferred taxes
excluded from the rate base, or treated as cost-free capital, exceeds the amount of the
reserve for the period used in determining the taxpayer’s ratemaking tax expense.
Section 1.167(l)-1(h)(6)(ii) also provides the procedure for determining the amount of
the reserve for deferred taxes to be excluded from rate base or to be included as no-
cost capital.

   Section 1.167(l)-1(h)(6)(ii) provides that for the purpose of determining the

maximum amount of the reserve to be excluded from the rate base (or to be included as
no-cost capital) under § 1.167(l)-1(h)(6)(i), if solely an historical period is used to
determine depreciation for federal income tax expense for ratemaking purposes, then
the amount of the reserve account for the period is the amount of the reserve
(determined under § 1.167(l)-1(h)(2)) at the end of the historical period. Section
1.167(l)-1(h)(6)(ii) provides that if solely a future period is used for such determination,
the amount of the reserve account for the period is the amount of the reserve at the
beginning of the period and a pro rata portion of the amount of any projected increase to
be credited or decrease to be charged to the account during such period.
PLR-103656-19 7

   Section 1.167(l)-1(h)(6)(ii) provides if, in determining depreciation for ratemaking

tax expense, a period (the “test period”) is used which is part historical and part future,
then the amount of the reserve account for this period is the amount of the reserve at
the end of the historical portion of the period and a pro rata amount of any projected
increase to be credited to the account during the future portion of the period. The pro
rata amount of any increase during the future portion of the period is determined by
multiplying the increase by a fraction, the numerator of which is the number of days
remaining in the period at the time the increase is to accrue, and the denominator of
which is the total number of days in the future portion of the period.

   Section 1.167(l)-1(h)(6)(i) makes it clear that the reserve excluded from rate base

must be determined by reference to the same period as is used in determining
ratemaking tax expense. A taxpayer may use either historical data or projected data in
calculating these two amounts, but it must be consistent. As explained in § 1.167(l)-
1(a)(1), the rules provided in § 1.167(l)-1(h)(6)(i) are to insure that the same time period
is used to determine the deferred tax reserve amount resulting from the use of an
accelerated method of depreciation for cost of service purposes and the reserve amount
that may be excluded from the rate base or included in no-cost capital in determining
such cost of services.

   If a taxpayer chooses to compute its ratemaking tax expense and rate base

exclusion amount using projected data then it must use the formula provided in
§ 1.167(l)-1(h)(6)(ii) of the Regulations to calculate the amount of deferred taxes subject
to exclusion from the rate base. This formula prorates the projected accruals to the
reserve so as to account for the actual time these amounts are expected to be in the
reserve. As explained in § 1.167(l)-1(a)(1), the formula in § 1.167(l)-1(h)(6)(ii) provides
a method to determine the period of time during which the taxpayer will be treated as
having received amounts credited or charged to the reserve account so that the
disallowance of earnings with respect to such amounts through rate base exclusion or
treatment as no-cost capital will take into account the factor of time for which such
amounts are held by the taxpayer.

   The purpose of the proration formula is the same as that of the requirement for

consistent periods discussed above: to prevent the immediate flow-through of the
benefits of accelerated depreciation to ratepayers. The proration formula stops flow-
through by limiting the deferred tax reserve accruals that may be excluded from rate
base, and thus the earnings on rate base that may be disallowed, according to the
length of time these accruals are actually in the reserve account.

   The effectiveness of § 1.167(l)-1(h)(6)(ii) in resolving the timing issue has been

limited by its failure to define some key terms. Nowhere does this provision state what
is meant by the terms “historical” and “future” in relation to the test period for
determining depreciation for ratemaking tax expense. How are these time periods to be
PLR-103656-19 8

measured? One interpretation focuses on the type or quality of the data used in the
ratemaking process. According to this interpretation, the historical period is that portion
of the test period for which actual data is used, while the portion of the period for which
data is estimated is the future period. The second interpretation focuses on when the
utility rates become effective. Under this interpretation, the historical period is that
portion of the test period before rates go into effect, while the portion of the test period
after the effective date of the rate order is the future period.

    The first interpretation, which focuses on the quality of the ratemaking data, is an

attractive one. It proposes a simple rule, easy to follow and to enforce: any portion of
the reserve for deferred taxes based on estimated data must be prorated in determining
the amount to be deducted from rate base. The actual passage of time between the
date ratemaking data is submitted and the date rates become effective is of no
importance. But this interpretation of the regulations achieves simplicity at the expense
of precision; in other words, it is overbroad. The proration of all estimated deferred tax
data does serve to magnify the benefits of accelerated depreciation to the utility, but this
is not the purpose of normalization. Congress was explicit: normalization “in no way
diminishes whatever power the [utility regulatory] agency may have to require that the
deferred taxes reserve be excluded from the base upon which the utility’s permitted rate
of return is calculated.” H.R. Rep. No. 413, 91st Cong., 1st Sess. 133 (1969).

   In contrast, the second interpretation of § 1.167(l)-1(h)(6)(ii) is consistent with the

purpose of normalization, which is to preserve for regulated utilities the benefits of
accelerated depreciation as a source of cost-free capital. The availability of this capital
is ensured by prohibiting flow-through. But whether or not flow-through can even be
accomplished by means of rate base exclusions depends primarily on whether, at the
time rates become effective, the amounts originally projected to accrue to the deferred
tax reserve have actually accrued.

   If rates go into effect before the end of the test period, and the rate base

reduction is not prorated, the utility commission is denying a current return for
accelerated depreciation benefits the utility is only projected to have. This procedure is
a form of flow-through, for current rates are reduced to reflect the capital cost savings of
accelerated depreciation deductions not yet claimed or accrued by the utility. Yet
projected data is often necessary in determining rates, since historical data by itself is
rarely an accurate indication of future utility operating results. Thus, the regulations
provide that as long as the portion of the deferred tax reserve based on truly projected
(future estimated) data is prorated according to the formula in § 1.167(l)-1(h)(6)(ii), a
regulator may deduct this reserve from rate base in determining a utility’s allowable
return. In other words, a utility regulator using projected data in computing ratemaking
tax expense and rate base exclusion must account for the passage of time if it is to
avoid flow-through.
PLR-103656-19 9

  But if rates go into effect after the end of the test period, the opportunity to flow

through the benefits of future accelerated depreciation to current ratepayers is gone,
and so too is the need to apply the proration formula.

   In sum, the Normalization Rules were enacted in response to Congressional

concerns over the growing number of public utilities commissions that were mandating
investor-owned regulated utilities to not retain these tax benefits from accelerated
depreciation, but, instead, to immediately flow-through all of these tax incentives to
ratepayers in the form of lower income tax expense in regulated cost of service rates.
Congress’ response was to enact legislation that would preclude regulated investor-
owned utilities from utilizing accelerated depreciation methods of tax purposes if the
related tax benefits were immediately flowed-through to ratepayers in rates or were
flowed-through to ratepayers faster than permitted under the Normalization Rules.

   The underlying concept and purpose of the Normalization Rules is to prevent the

flow-through of these accelerated depreciation-related tax benefits to ratepayers in
regulated rates any faster than permitted by the Normalization Rules. Thus, the flow-
through of these tax benefits to ratepayers faster than permitted by the Normalization
Rules would result in a normalization violation that would preclude the taxpayer from
using any of the accelerated tax depreciation methods on public utility property and,
instead, require the taxpayer to use the same depreciation method and period as those
used to compute depreciation expense in its cost of service for ratemaking purposes.
Conversely, a taxpayer that flows through these tax benefits to ratepayers slower than
permitted by the Normalization Rules, or that never flows through any of the tax benefits
from accelerated depreciation to ratepayers, would not be in violation of those rules.

    Although the Normalization Rules require adjustments to be made to a reserve to

reflect the deferral of taxes, the Normalization Rules do not require a minimum amount
of the reserve that must be excluded from rate base for ratemaking purposes, but do
stipulate a maximum amount of the reserve that can be excluded from rate base.

    The calculation of income tax expense for purposes of Taxpayer’s Commission A

Formula Rate Year TRR (that is, Prior Year TRR plus IFPTRR) is made by reference
both to costs from a period (Prior Year TRR) before rates are to become effective
(historical period) and to costs from a period (IFPTRR) after rates are to become
effective (future period). Thus, the maximum amount of the reserve to be excluded from
rate base is the amount of the reserve at the end of the historical portion of the period
and a pro rata portion of the amount of any projected increase or decrease to be
charged to the reserve account during the future portion of the period. The reflection in
Taxpayer’s Commission A Formula Rate Year TRR of the Prior Year year-end balance
of Commission A related amounts in the Prior Year TRR and the exclusion of ADIT
amounts in the IFPTRR as adjustments to Incremental Capital Costs is not inconsistent
with § 1.167(l)-1(h)(6)(ii) because the total of such reserve amount is less than the
PLR-103656-19 10

maximum amount that can be excluded from rate base under the Normalization Rules
and, as such, is not a violation of these rules.

    Similarly, the calculation of federal income tax expense for purposes of

Taxpayer’s Commission B GRC utilizes federal tax depreciation that is determined
solely from a period (test year) that is after the rate order is to become effective (future
period). Thus, the maximum amount of the reserve to be excluded from rate base is the
amount of the reserve at the beginning of the future test period (test year) and the pro
rata portion of the amount of any projected increase or decrease to be charged to the
reserve account during the portion of the future test period. The reflection of the
reserve amount at the beginning of the test year and the use of the pro rata percentage
portion on the projected increase or decrease to be charged to ADIT as an adjustment
to rate base in Taxpayer’s Commission B stated rate GRC test year is consistent with
the requirement to use the pro rata calculation pursuant to § 1.167(l)-1(h)(6)(ii) and, as
such, is not a violation of the Normalization Rules.

    Taxpayer’s reflection of reserve for deferred taxes in rate base for purposes of

the True–Up Adjustment is not inconsistent with the maximum amount allowable under
the Normalization Rules because it excludes from rate base the reserve balance at the
beginning of the actual period (that is, Prior Year); and a pro rata portion of the amount
of the increase or decrease to the reserve account during the portion of the actual
period (that is, Prior Year), which together is a reserve amount that is equal to the
maximum amount that can be excluded from rate base pursuant to the intent and
purposes of the Normalization Rules.

   In addition to the Normalization Rules’ requirements on the maximum amount of

the reserve to be excluded from the rate base (or to be included as no-cost capital),
discussed above, the Normalization Rules also impose a ‘consistency requirement.’
Section 168(i)(9)(B)(i) provides that one way the requirements of § 168(i)(9)(A) will not
be satisfied is if the taxpayer, for ratemaking purposes, uses a procedure or adjustment
which is inconsistent with such requirements. Under § 168(i)(9)(B)(ii), such inconsistent
procedures and adjustments include the use of an estimate or projection of the
taxpayer’s tax expense, depreciation expense, or reserve for deferred taxes under
§ 168(i)(9)(A)(ii), unless such estimate or projection is also used, for ratemaking
purposes, with respect to all three of these items and with respect to the rate base
(hereinafter referred to as the “Consistency Rule”.)

   Requests 3 and 5 relate primarily to Taxpayer’s compliance with the Consistency

Rule. Taxpayer requests that we conclude that eliminating the application of the
regulatory 13-month averaging convention to the pro rata percentage portion of ADIT
subject to the Normalization Rules as an adjustment to rate base in Taxpayer’s True-Up
Adjustment (Request 3) and GRC test year (Request 5) would not result in a violation of
the Consistency Rule.
PLR-103656-19 11

   We agree that the use of “the average of” the pro rata calculation in Taxpayer’s

Commission A Formula Rate True-Up Adjustment and in the Commission B GRC is
unnecessary under the Normalization Rules (including § 1.167(l)-1(h)(6)(ii)) and, in
particular, not required in order to avoid violation of the Consistency Rule of
§ 168(i)(9)(B)(ii). As described in § 168(i)(9)(B)(ii), the use of a procedure or adjustment
that uses an estimate or projection of any of (1) the taxpayer's tax expense, (2)
depreciation expense, or (3) reserve for deferred taxes under § 168(i)(9)(A)(ii), unless
such estimate or projection is also used, for ratemaking purposes, with respect to all
three of these items and with respect to the rate base. These three items are not
implicated here, and thus, it is not necessary to adjust or further average calculations
described in § 1.167(l)-1(h)(6)(ii) in order to mimic the regulatory mandated methods
used for the other non-tax related rate base components and avoid violation of the
Consistency Rule.

                                  CONCLUSION

   Accordingly, we rule as follows:

    1. Reflecting the Prior Year year-end balances of Commission A-related ADIT

amounts as adjustments to rate base in the Prior Year TRR computation and reflecting
the Incremental Capital Costs in the IFPTRR computation without adjustments for ADIT
in the calculation of Taxpayer’s Rate Year TRR is not inconsistent with § 1.167(l)-
1(h)(6)(ii) and is not subject to § 168(i)(9)(B)(ii) and, as such, is not a violation of the
Normalization Rules.

  2. Adjusting rate base by the pro rata computation of ADIT subject to the

Normalization Rules in Taxpayer’s True-Up Adjustment is not inconsistent with
§ 1.167(l)-1(h)(6)(ii) and, as such, is not a violation of the Normalization Rules.

    3. Eliminating the application of the regulatory 13-month averaging convention to

the pro rata portion of ADIT subject to the Normalization Rules in computing the
adjustment to rate base in Taxpayer’s True-Up Adjustment would not be inconsistent
with § 1.167(l)-1(h)(6)(ii) nor subject to § 168(i)(9)(B)(ii) and, as such, would not be a
violation of the Normalization Rules.

  4. Utilizing a pro rata percentage portion of ADIT subject to the Normalization

Rules as an adjustment to rate base in Taxpayer’s GRC test year is consistent with
§ 1.167(l)-1(h)(6)(ii) and, as such, is not a violation of the Normalization Rules.

    5. Eliminating the application of the regulatory 13-month averaging convention to

the pro rata percentage portion of ADIT subject to the Normalization Rules as an
adjustment to rate base in Taxpayer’s GRC test year would not be inconsistent with
§ 1.167(l)-1(h)(6)(ii) nor subject to § 168(i)(9)(B)(ii) and, as such, would not be a
violation of the Normalization Rules
PLR-103656-19 12

  Except as specifically set forth above, no opinion is expressed or implied

concerning the federal income tax consequences of the above described facts under
any other provision of the Code or regulations.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of

the Code provides it may not be used or cited as precedent.

    This ruling is based upon information and representations submitted by Taxpayer

and accompanied by penalty of perjury statements executed by an appropriate party.
While this office has not verified any of the material submitted in support of the request
for rulings, it is subject to verification on examination.

     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to your authorized representative. We are also sending a copy of
this letter ruling to Director.

                                           Sincerely,


                                           Patrick S. Kirwan
                                           Chief, Branch 6
                                           Office of Associate Chief Counsel
                                               (Passthroughs & Special Industries)

cc: