Nevada Administrative Code › Chapter 704 - Regulation of Public Utilities Generally › ACCOUNTING PRACTICES AND RATE MAKING FOR CERTAIN UTILITIES › Adjustment of Rates in Conformity With Federal Tax Reform › Section 704.6532 - Contributions to corporate capital

Current through June 11,
				2024
1. The Commission
				hereby adopts by reference section 118 of the Internal Revenue Code,
				26 U.S.C. §
										118, as amended.
2. All contributions made pursuant to section
				118 of the Internal Revenue Code will be increased by an income tax gross up
				amount pursuant to this section and the utility's tariff. Except as otherwise
				provided in subsection 8, the income tax gross up will be calculated under the
				method as described in subsection 3 for depreciable assets and the method as
				described in subsection 5 for nondepreciable assets. For rate-making purposes,
				contributions will be treated as described in subsection 7.
3. For depreciable assets, the income tax
				gross up percentage is the present value of the sum of annual revenue
				requirements associated with the inclusion of the contribution-related federal
				income tax amount in the rate base divided by the contribution. The
				contribution-related federal income tax amount is calculated by multiplying the
				contribution by the marginal statutory federal income tax rate for the utility.
				The discount rate to be used in calculating the present value of the sum of
				annual revenue requirements associated with the inclusion of the
				contribution-related federal income tax amount in the rate base is the interest
				rate set for customer deposits that is effective on January 1 of that year in
				accordance with
				NRS
				704.655. Until the utility has recovered the
				contribution-related federal income tax amount through the tax benefits of
				accelerated depreciation on the amount of the contribution, the annual revenue
				requirement associated with the inclusion of the contribution-related federal
				income tax amount in the rate base must be calculated using the pretax
				authorized rate of return for the utility. Except as otherwise provided in
				subsection 4, the pretax authorized rate of return for the utility must be
				calculated using a return on equity for the utility that is increased by the
				statutory income tax rate applicable to the utility using the methodology set
				forth in subsection 5. For the purpose of calculating the income tax gross up
				amount for the first year, the annual revenue requirement shall be deemed to be
				earned at the midpoint of the year.
4. For the purpose of subsection 3, unless
				otherwise determined by the Commission in a water or sewer utility's general
				rate case, the authorized rate of return used to calculate the annual revenue
				requirement for the water or sewer utility shall be deemed to be 10.2 percent.
				This authorized rate of return is calculated by adjusting the weighted average
				return on equity, which is deemed to be 6 percent, for federal income taxes.
				This weighted average return on equity is calculated using an equity ratio
				which is deemed to be 40 percent and a return on equity which is deemed to be
				15 percent.
5. For nondepreciable
				assets, in addition to the contribution, the contributor pays the full income
				tax burden utilizing the statutory income tax rate applicable to that utility.
				The income tax gross up percentage is 1 divided by the difference between 1.00
				and the statutory income tax rate applicable to that utility. For example,
				using a 35 percent income tax rate, the income tax gross up percentage is 1
				divided by 0.65 (1.00 - 0.35 ), which equals 1.538462.
6. The utility must file a revision to the
				income tax gross up percentage in its tariff annually to reflect the interest
				rate set for customer deposits that is effective on January 1 of that year in
				accordance with
				NRS
				704.655. In addition, the utility must file a
				revision to the income tax gross up in its tariff when a change in one or more
				of the components of the income tax gross up calculation, as provided in
				subsection 3 or 5, would result in a change in the income tax gross up
				percentage of 1 percent or more.
7.
				The account activity and balances resulting from accounting for the gross up on
				contributions would be afforded rate-making treatment. For example, deferred
				federal income tax assets that result from the inclusion of the contribution
				and income tax gross up in taxable income would be included in the rate base
				and increase revenue requirement. Conversely, revenue requirement would be
				reduced as the benefit of future tax depreciation deductions reduces related
				deferred taxes (i.e., rate base), and as deferred income (i.e., income tax
				gross up) is amortized and recognized.
8. Utilities that receive annual amounts of
				contributions which are less than 1 percent of total operating revenues or
				which qualify for simplified procedures or methodologies for a change of rates
				pursuant to
				NRS
				704.095 may, in lieu of an income tax
				gross-up method elect to use one of the following methods:
(a) Rate-base method. The amount of the
				contribution would not be subject to a gross up. Increased federal income tax
				that results from the inclusion of the contribution in taxable income would be
				afforded deferred income tax treatment, thereby increasing rate base. The
				benefit of future tax depreciation deductions are used to reduce rate base
				(rate-base effects are reduced to zero at the end of the related assets' tax
				life).
(b) Flow-through method. The
				amount of the contribution would not be subject to a gross up. Increased
				federal income tax that results from the inclusion of the contribution in
				taxable income would increase current federal income tax expense for
				rate-making purposes. Future tax depreciation benefits would reduce federal
				income tax expense for rate-making purposes.