IRS Required Treatment of ADIT Balances in the Electric Transmission True-up calculation

Recently FERC has issued orders directing TOs to eliminate the two-step approach for addressing ADIT in formula rates with projections.  Previously, many TOs believed that the IRS required, for projecting ADIT balances, use of its proration methodology and then, in addition, use of the conventional 13-month averaging to that proration result.  TOs thought the averaging was necessary in order to meet the IRS’ consistency requirements.  In April 2017, the IRS issued a Private Letter Ruling (PLR) in which it clarified that the averaging, in addition to the proration methodology, was unnecessary.  Thus TOs have been making filings to eliminate the averaging from the ADIT projection.
 
For the True-up calculation, all TOs have held that the IRS proration requirement does not apply to the calculation of the revenue to which the utility would have been entitled had it based its projected rate computation on what turned out to be the actual results for that period. The result is to ignore proration in the True-up calculation and reverse the impact of the application of the proration requirement embedded in the projected rate calculation (i.e., the true-up would be to a revenue number that did not reflect any proration). However, in the PLR, the IRS said that to make proration matter, the freedom from proration can only apply to the variations in the changes in the ADIT balance used in the True-Up component, not to the entire change in the ADIT balances used in that computation. The IRS stated that the True-Up component is determined by reference to a purely historical period and, accordingly, there is no need to use the proration formula to calculate the differences between projected ADIT balance and the actual ADIT balance during the period. In calculating the True-Up, proration applies to the original projection amount, but the actual amount added to the ADIT over the test year is not modified by application of the proration formula.
 
ATC proposed to FERC in EL18-157 not to apply the proration formula to the variances in the monthly ADIT balances but, instead, to apply its “normal” regulatory convention (a 13-month average) to those variances. ATC proposed to add the result of this calculation to the ADIT balance originally used in the calculation of the projected rate – that is, the prorated balance. In this way, ATC would preserve the effect of the proration requirement embedded in the projected rate, avoid applying proration to the differences between projected and actual ADIT balances and comply with the consistency rule with respect to those variances.   

GridLiance and Certain MISO TOs take a different and more complicated approach in the True-up calculation.  The differences attributable to over-projection of ADIT in the annual projection will result in a proportionate reversal of the projected prorated ADIT activity to the extent of the over-projection.  The differences attributable to under-projection of ADIT in the annual projection will result in an adjustment to the projected prorated ADIT activity by the difference between the projected monthly activity and the actual monthly activity.  However, when projected monthly ADIT activity is an increase and actual monthly ADIT activity is a decrease, actual monthly ADIT activity will be used.  Likewise, when projected monthly ADIT activity is a decrease and actual monthly ADIT activity is an increase, actual monthly ADIT activity will be used.  

Please contact Dumais Consulting if you want to see examples of both approaches.