Discussion
of Issues
Issue 1:
Should the Commission approve DEF’s calculations of
the base rate revenue requirement impact of federal income tax law changes
enacted through the One Big Beautiful Bill Act?
Recommendation:
Yes. The Commission should approve DEF’s
calculations of the base rate revenue impacts from the OBBBA. The base rate
revenue impacts are a net decrease of $2,788 for the 2025 tax year, and an
increase of $338,970 for the 2026 tax year. (Souchik)
Staff Analysis:
The 2024 Settlement acknowledged that income tax amendments
can take many forms which may include changes to tax rates, changes to
deductibility of certain costs, and changes to the timing of deductibility of
certain costs.
Paragraph 19(b) of the 2024 Settlement describes that if tax reform is enacted
during the settlement term, DEF will quantify the impact of tax reform in the
year which the tax reform is effective. Paragraph 19(b) in relevant part
states:
If Tax Reform is enacted during the Term, DEF will
quantify the impact of Tax Reform on its Florida Jurisdictional base revenue
requirement as projected in DEF’s forecasted earnings surveillance report for
the calendar year that includes the period in which Tax Reform is effective. If
Tax Reform is enacted effective for the tax years 2025 or 2026, the impacts of
the Tax Reform on base revenue requirements, primarily driven by an income tax
rate increase/decrease, will be adjusted for retail customers within the later
of 180 days of when the Tax Reform becomes law or the effective date of the
law, through a prospective adjustment to base rates upon a thorough review of
the effects of the tax reform on base revenue requirements.
The OBBBA was signed into law on July 4, 2025, and made
changes to the tax treatment relating to (1) the expensing of domestic research
and experimental (R&E) costs, (2) the research and development (R&D)
tax credit, and (3) the expensing of employer-provided meals.
Domestic R&E
Expenditures
Domestic R&E expenses are costs incurred in connection
with the development or improvement of products, processes or technologies.
Prior to the OBBBA, domestic R&E expenses were amortized over a 5-year
period. The OBBBA amended Internal Revenue Code (IRC) Section 174(a) to allow
for full expensing of domestic R&E expenditures paid in taxable years
beginning after December 31, 2024.
In response to staff’s first data request, DEF explained
its total income tax expense is not impacted, because prior to enactment of the
OBBBA, the tax benefit associated with these book expenses was recorded as a
reduction to deferred income tax expense. Under the OBBBA, the tax benefit is
recorded to current income tax expense. Accordingly, while the characterization
of the tax benefit changed from deferred to current income tax expense, there
is no change to DEF’s total 2025 income tax expense. An impact of expensing of
domestic R&E expenditures for tax purposes on DEF’s books and records is a
change to the Accumulated Deferred Income Tax (ADIT) balance included in the capital
structure. The tax law change increased DEF’s 2025 13-month average ADIT
balance by $1,079,112, which reduced the 2025 revenue requirement by $78,085.
DEF’s calculation is summarized in Table 1-1.
Table 1-1
Full Expensing of Domestic
R&E Expenditures (2025 Tax Year)
|
Capitalized Section 174(e) R&E Expenditures
|
$9,000,000
|
|
First Year Amortization
|
(900,000)
|
|
Increase in Timing Differences
|
$8,100,000
|
|
13-month Average Increase in Timing Differences
|
4,257,692
|
|
Statutory Federal and State Rate (combined)
|
25.345%
|
|
Increase in Net Deferred Tax Liability
|
$1,079,112
|
|
Jurisdictional Separation Factors
|
88.94%
|
|
Increase in Net Deferred Tax Liability
|
$959,806
|
|
Mid-point WACC (Grossed up for Tax)
|
8.14%
|
|
Decrease in 2025 Revenue Requirement*
|
($78,085)
|
Source:
Document No. 07149-2026, Attachment 1
*May not sum due to rounding.
R&D Tax Credit
The OBBBA modified IRC Sections 41(d)(1)(A) and 280(c)(1)
to reduce the R&D tax credit available to DEF for taxable years beginning
after December 31, 2024. The IRC Section 41 R&D Tax Credit is a federal
incentive that provides a dollar-for-dollar reduction in tax liability for
businesses that perform qualified research activities in the United States. IRC
Section 280(c) is a coordination provision that prevents a “double benefit” by
requiring taxpayers to choose between claiming the full credit and a full deduction
for the same expenses. The reduced tax credit increased DEF’s 2025 income tax
expense by $63,035, which increased the 2025 revenue requirement by $75,297.
DEF’s calculation is summarized in Table 1-2.
Table 1-2
Reduced R&D Tax Credits
(2025 Tax Year)
|
R&D Tax Credit
|
$300,168
|
|
Percent Reduction in R&D Tax Credit
|
21%
|
|
Reduced R&D Tax Credit
|
$63,035
|
|
Jurisdictional Separation Factor
|
88.94%
|
|
Retail Reduced Tax Credit
|
$56,066
|
|
Net Operating Income Multiplier
|
1.343
|
|
Increase in 2025 Revenue Requirements*
|
$75,297
|
Source: Document
No. 07149-2026, Attachment 1.
*May not
sum due to rounding.
The net base rate revenue requirement for the 2025 tax
year is a decrease of $2,788 ($78,085 - $75,297). In its response to staff’s
first data request, DEF stated that it does not agree that the net decrease of
$2,788 should be netted against the requested increase of $338,970 for the 2026
tax year as each adjustment is associated with a different effective year and
is evaluated independently. In support of its position DEF provided the
following explanation:
The language in Paragraph 19(b) of the 2024 Settlement
Agreement specifies that each adjustment is considered according to its
effective year. Specifically, Paragraph 19(b) provides, in relevant part, that
“If Tax Reform is enacted during the Term, DEF will quantify the impact of the
Tax Reform on its Florida Jurisdictional base revenue requirement as projected
in DEF’s forecasted earnings surveillance report for the calendar year that
includes the period in which Tax Reform is effective.”
The $2,788 decrease shown on line 23 reflects the net
impact of tax provisions that take effect in 2025. This decrease is too
insignificant to have an impact on customer rates and, as a result, did not
warrant a rate adjustment for that year.
In contrast, the $338,970 increase on line 35 pertains
to a separate provision that becomes effective in 2026. This increase is
substantial enough to require a 2026 rate adjustment.
DEF explained that for the 2025 tax year, the $2,788 net
decrease does not have a measurable impact on customer rates and does not
warrant a base rate adjustment for 2025.
Elimination of Meal
Expenses
Prior to the OBBBA, IRC Section 162, defined eligible meal
expenses as meals that are “ordinary and necessary” for carrying on a trade or
business and were subject to a 50 percent deduction (i.e., only half of the
total meal expense amount was deductible).
The OBBBA modified IRC Section 274(o) to eliminate the income tax deduction for
employer-provided meals as defined in IRC Section 162 for tax years beginning
after December 31, 2025.
DEF estimated the amount of the eligible meal expense in
2026 affected by the change of IRC 274(o) is $1.17 million. The $1.17 million amount
represents 50 percent of the actual amount DEF forecasted to spend on meals
included in total O&M expense in its 2026 Forecasted Earnings Surveillance
Report. DEF explained the types of meal expenses included in the $1.17 million
are associated with employee travel, external conferences and meetings, company
sponsored events, and storm and power outage restoration activities due to
thunderstorms or other outage events not associated with named storms.
The reduced income tax deduction increased DEF’s 2026 income
tax expense by $296,537, which equates to a revenue requirement increase of
$338,970 for 2026. DEF’s calculation is summarized in Table 1-3.
Table 1-3
Elimination of Meals
Deduction (2026 Tax Year)
|
Meals deduction (50 percent of actual)
|
$1,170,000
|
|
Statutory Federal & State Tax Rate
|
25.345%
|
|
Retail Meals Deduction
|
$296,537
|
|
Jurisdictional Separation Factor
|
85.12%
|
|
Income Tax Impact
|
$252,398
|
|
Net Operating Income Multiplier
|
1.343
|
|
Increase in 2026 Revenue Requirements*
|
$338,970
|
Source: Document
No. 01749-2026, Attachment 1.
*May not sum due to rounding.
Based on
the analysis above, staff believes DEF’s calculations of the base rate revenue
impact resulting from the OBBBA are consistent with the IRC and the 2024
Settlement, and therefore, should be approved.
Issue 2:
Should the Commission approve DEF’s request to
combine the tax reform base rate adjustment with the Bailey Mill Solar Base
Rate Adjustment effective September 1, 2026?
Recommendation:
Yes. In this proceeding the Commission should
approve DEF’s request to combine the tax reform base rate adjustment with the
Bailey Mill Solar Base Rate Adjustment effective September 1, 2026. (Souchik,
P. Kelly)
Staff Analysis:
DEF proposed to combine the tax reform adjustment of
$338,970 for the 2026 tax year with the upcoming Bailey Mill Solar Base Rate
Adjustment (SoBRA). The Bailey Mill SoBRA has been approved by Order No.
PSC-2025-0212-PAA-EI.
The Bailey Mill solar project is expected to be operational in August 2026 and
the SoBRA would be effective in September 2026. DEF stated that it will file
the applicable rate adjustments and tariff sheets, itemizing both the Bailey
Mill SoBRA and tax reform adjustment components, approximately two months in
advance of the effective date. As DEF stated in its petition, the base rate
increase associated with tax reform is immaterial and proposed to combine the
tax reform base rate increase with the Bailey Mill SoBRA for administrative
efficiency.
In its response to staff’s second
data request, DEF stated that it will notify customers of the rate changes
effective September 2026 through bill inserts. DEF calculated the estimated
monthly bill impact of the tax reform base rate increase on a 1,000
kilowatt-hour residential bill to be $0.01.
As proposed by DEF, staff will
review the tariff filing for the tax reform base rate adjustment at the time of
the tariff filing for the Bailey Mill SoBRA. Given the relatively small tax
change amount in the context of DEF’s overall revenue requirement, processing
this adjustment as a stand-alone base rate adjustment could create unnecessary
administrative burden for both DEF and the Commission. In Order No.
PSC-2025-0212-PAA-EI, the Commission granted staff administrative authority to
approve tariffs and associated charges for four of DEF’s solar projects.
Therefore, staff believes the Commission should approve
DEF’s request to combine the tax reform base rate adjustment with the Bailey
Mill SoBRA effective September 1, 2026.
Issue 3:
Should the Commission approve DEF’s request to
include the tax reform base rate adjustment of $225,980 for the period January
1, 2026, through August 31, 2026, in the Capacity Cost Recovery Clause?
Recommendation:
Yes. The Commission should approve the inclusion of
the tax reform base rate adjustment of $225,980 for the period January 1, 2026
through August 31, 2026 in the Capacity Cost Recovery Clause (CCRC). (Souchik)
Staff Analysis:
As discussed in Issue 2, DEF requested to include
the annual tax reform base rate adjustment of $338,970 in the Bailey Mill SoBRA
beginning September 1, 2026. In addition, DEF requested to include recovery of the
tax reform base rate revenue requirement impact for the period January 1, 2026,
through August 31, 2026, in the CCRC as prescribed by the 2024 Settlement. The
treatment of the base rate revenue requirement impact as a result of tax reform
is defined in paragraph 19(b) of the 2024 Settlement, which states:
Any
effects of tax reform on retail revenue requirements from the effective date
through the date of the base rate adjustment shall be flowed back or collected
from customers through the CCRC on the same basis as used in any base rate
adjustment.
The effective date of the change in IRC code 174(c) was
January 1, 2026, and the proposed implementation date of the annual base rate
adjustment of $338,970 to be collected in the Baily Mill SoBRA is September 1,
2026. Therefore, for the first eight months of 2026, DEF will recover the base
rate revenue requirement through the CCRC and not the Baily Mill SoBRA. In its
response to staff’s first data request, DEF explained it would collect $225,980
through the 2026 CCRC, which represents the tax reform base rate revenue
requirement impact of the elimination of the meals expense deduction for the
period January 1, 2026, through August 31, 2026.
The amount of $225,980 was calculated by multiplying $338,970 by the ratio of 8
of 12 months, or two-thirds ($338,970 x 2/3 = $225,980).
Staff believes DEF’s request to include $225,980 in the
CCRC is reasonable, consistent with the 2024 Settlement, and should be
approved.
Issue 4:
Should this docket be closed?
Recommendation:
If no person who substantial interests are affected
by the proposed agency actions files a protest within 21 days of the issuance
of the order, this docket should be closed upon the issuance of a consummating
order. (M. Thompson)
Staff Analysis:
If no person who substantial interests are affected
by the proposed agency actions files a protest within 21 days of the issuance
of the order, this docket should be closed upon the issuance of a consummating
order.
