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TCJA and Connecticut Capital Structure

The Connecticut Public Utilities Regulatory Authority has approved a settlement agreement authorizing Connecticut Natural Gas Corporation to increase revenues by $19.747 million over a three-year rate period. The company’s original application requested a three-year rate plan for a total increase of $27.785 million. The capital structure issue was an integral component of the settlement. The signatories agreed to a capital structure consisting of 54% common equity for Rate Year 1, 54.50% for Rate Year 2 and 55% for Rate Year 3. The agreement provided for a return on common equity (ROE) of 9.30% for each of the three rate years. According to the commission, the 9.30% ROE was not developed based on formulaic calculations such as Discounted Cash Flow, Capital Asset Pricing Model, or Risk Premium Method typically employed by the authority in past precedent, but rather, the allowed ROE and hypothetical capital structure represent overall trade-offs encompassed in the agreement and are critical, interrelated cost-of-service elements. In approving the overall revenue figure, the department found that the proposed rate year capital structures are supported by market conditions and are consistent with the company’s peer group. It also noted that the company had indicated that increased equity ratios will become more common in the energy and water utility sectors, and that was one of the crucial factors that the company considered during the negotiation process. The authority found that the 54% to 55% common equity portion for ratemaking purposes falls within the parameters established by credit rating agencies to maintain the company’s current credit rating and also falls within the range of common equity ratios examined in the company peer group. Proponents of the settlement acknowledged that since 2013, allowed common equity ratios for ratemaking purposes have ranged from 50% to 53% for Connecticut gas and electric utilities, but these equity ratios were granted prior to the 2018 Tax Cuts and Jobs Act (TCJA), and the TCJA has had a negative effect on utility cash flow metrics. The parties to the agreement also told the department that the TCJA was one of the factors driving the need for an increased equity component, as it is expected to reduce utility revenues due to the lower federal income tax rates, loss of bonus deprecation, and the requirement to return excess accumulated deferred income taxes. Re Connecticut Natural Gas Corp., Docket No. 18-05-16, Dec. 19, 2018 (Conn.P.U.Reg.Auth.).

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