Order Rejecting Proposed Tariff Revisions, Providing Guidance and Providing Limited Compliance Period, 46715-46731 [2018-19994]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 83, Number 179 (Friday, September 14, 2018)]
[Notices]
[Pages 46715-46731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19994]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission


Order Rejecting Proposed Tariff Revisions, Providing Guidance and 
Providing Limited Compliance Period

Before Commissioners: Kevin J. McIntyre, Chairman; Cheryl A. LaFleur, 
Neil Chatterjee, and Richard Glick.

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                                                   Docket Nos.
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Commonwealth Edison Company............  ER18-899-000.
                                         ER18-899-001.
Delmarva Power & Light Company.........  ER18-903-000.
                                         ER18-903-001.
Atlantic City Electric Company.........  ER18-904-000.
                                         ER18-904-001.
Potomac Electric Power Company.........  ER18-905-000.
                                         ER18-905-001.
PJM Interconnection, L.L.C.............  (Not Consolidated).
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    1. On February 23, 2018, as amended on July 9, 2018, Commonwealth 
Edison Company (ComEd), Delmarva Power & Light Company (Delmarva), 
Atlantic City Electric Company (ACE) and Potomac Electric Power Company 
(PEPCO) (together, Exelon Companies), submitted separate but nearly 
identical filings pursuant to section 205 of the Federal Power Act 
(FPA).\1\ Exelon Companies propose revisions to their formula 
transmission rates (Formula Rates), contained in Attachments H-13A, H-
3D, H-1A and H-9A of the PJM Interconnection, L.L.C. (PJM) Open Access 
Transmission Tariff (OATT),\2\ to

[[Page 46716]]

provide a mechanism to refund or recover, as appropriate, certain 
deferred income tax excesses and deficiencies that they previously 
recorded on their books and that they will record on an ongoing basis. 
In particular, Exelon Companies propose to recover or refund in their 
Formula Rates: (1) Excess or deficient Accumulated Deferred Income 
Taxes (ADIT) related to tax rate changes (Excess/Deficient Deferred 
Taxes); (2) the tax effect of the Allowance for Funds Used During 
Construction (AFUDC) equity portion of depreciation expense (AFUDC 
Equity); and (3) amounts related to Exelon Companies' switch years ago 
from the flow-through method for income tax treatment in ratemaking to 
the tax normalization method (Flow-Through Items).
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    \1\ 16 U.S.C. 824d (2012).
    \2\ PJM Interconnection, L.L.C., Intra-PJM Tariffs, OATT ATT H-
13A, OATT Attachment H-13A--Commonwealth Edison Company, 13.0.0, 
OATT ATT H-3D, OATT Attachment H-3D--Delmarva Power & Light Company, 
5.0.0, OATT ATT H-1A, OATT Attachment H-1A--Atlantic City Electric 
Company, 4.0.0, and OATT ATT H-9A, OATT Attachment H-9A--Potomac 
Electric Power Company, 6.0.0.
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    2. In this order, we find that Exelon Companies have not shown that 
their proposed Formula Rate provisions allowing for the recovery of 
previously incurred income tax amounts are just and reasonable. 
Therefore, as discussed below, we reject Exelon Companies' filings, but 
we provide guidance that Exelon Companies may submit new filings with a 
mechanism to refund or recover, as appropriate, deferred income tax 
excesses and deficiencies related to the recent Tax Cuts and Jobs Act 
\3\ and any future income tax changes, any new originations of past 
income tax changes, and taxes on AFUDC Equity associated with current 
and future years' depreciation expense. As described below, we also 
announce a limited compliance period under Order No. 144 during which 
other utilities may make FPA section 205 filings to recover past ADIT 
under certain conditions.
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    \3\ Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054 
(2017).
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I. Background

    3. Under a tax normalization policy, tax savings and increases that 
result from different treatment for ratemaking and income tax purposes 
are not immediately flowed through to customers, but are instead 
recognized in rates over time. In 1981, the Commission amended its 
regulations to require companies to determine the income tax allowance 
included in jurisdictional rates on a fully normalized basis.\4\ The 
Commission in Order No. 144 recognized that the adoption of full 
normalization, as well as tax rate changes, might result in excesses or 
deficiencies in the deferred tax accounts and required rate applicants 
to make provision in the income tax component of their cost of service 
for any such excess or deficiency. Order No. 144 stated that rate 
applicants must ``begin the process of making up deficiencies in or 
eliminating excesses in their deferred tax account reserves so that, 
within a reasonable period of time to be determined on a case-by-case 
basis, they will be operating under a full normalization policy.'' \5\ 
Order No. 144 further specified that a rate applicant must make 
adjustments pertaining to reversals from prior flow-through or tax rate 
changes in ``the applicant's next rate case following the applicability 
of [Order No. 144].'' \6\
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    \4\ See 18 CFR 35.24 (2017); see also Tax Normalization for 
Certain Items Reflecting Timing Differences in the Recognition of 
Expenses or Revenues for Ratemaking and Income Tax Purposes, Order 
No. 144, FERC Stats. & Regs. ] 30,254 (1981), order on reh'g, Order 
No. 144-A, FERC Stats. & Regs. ] 30,340 (1982).
    \5\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
    \6\ Id. at 31,519.
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    4. In 1992, the Financial Accounting Standards Board issued 
Financial Accounting Standards Board Statement No. 109 (FAS 109), which 
required public utilities to make certain changes to their balance 
sheets. Among other things, FAS 109 required: (1) Recognition in the 
deferred tax accounts for changes in tax laws or tax rates in the 
period that the change is enacted; (2) recognition of a deferred tax 
liability for the equity component of AFUDC depreciation expense; and 
(3) recognition of a deferred tax liability for timing differences 
under normalization even if the deferred tax liability was previously 
flowed through to ratepayers prior to adopting normalization. 
Addressing the implementation of FAS 109, the Commission's Chief 
Accountant explained that if as a result of action by a regulator, it 
was probable that a tax deficiency would be recovered from customers or 
any tax excess would be returned to customers in rates, an asset or 
liability must be recognized in the appropriate account. The Chief 
Accountant also explained that the asset or liability is a temporary 
difference for which a deferred tax asset or liability must be 
recognized in the appropriate deferred tax account.\7\ The Chief 
Accountant further stated that if an entity's billing determinations 
would be affected by adoption of FAS 109, the entity shall make a 
filing with the proper rate regulatory authorities prior to 
implementing the change for tariff billing purposes.\8\
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    \7\ See Accounting for Income Taxes, Docket No. AI93-5-000 
(April 23, 1993).
    \8\ Id. at 11.
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II. Related Proceedings

A. BGE Proceeding

    5. On November 16, 2017, the Commission rejected Baltimore Gas and 
Electric Company's (BGE) proposed revisions to its formula transmission 
rate to provide a mechanism to refund or recover, as appropriate, 
certain deferred income tax excesses and deficiencies previously 
recorded and on an ongoing basis.\9\ In the instant proceedings, Exelon 
Companies state that their proposed revisions to their Formula Rates 
are ``essentially identical'' to those proposed by BGE, which is also a 
subsidiary of Exelon.\10\
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    \9\ PJM Interconnection, L.L.C., 161 FERC ] 61,163 (2017) 
(November 16 Order).
    \10\ See, e.g., ComEd Transmittal at 33.
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    6. In the November 16 Order, the Commission found that BGE failed 
to demonstrate that its proposed mechanisms for the recovery of 
previously incurred tax amounts were just and reasonable.\11\ In 
particular, the Commission found that BGE should have captured the 
accumulated amounts associated with AFUDC Equity that has already been 
depreciated and prior period tax balances associated with Flow-Through 
Items in its formula rate since its implementation in 2005, consistent 
with the directive in Order No. 144 that utilities make such 
adjustments in their next rate case, or at least ``within a reasonable 
period of time.'' \12\ The Commission further found BGE's proposal to 
be inconsistent with the principle of matching (i.e., the recognition 
in rates of the tax effects of expenses and revenues with the expenses 
and revenues themselves) because the Flow-Through Items related to 
certain pre-1976 plant that could be either fully depreciated or 
retired by 2016, and because the additional taxes associated with AFUDC 
Equity are applicable only to the relevant year's depreciation 
expense.\13\ Finding that BGE failed to explain why it did not make 
provision for recovery of the deferred amounts for nearly 12 years 
after implementing its formula rate and that the proceedings cited by 
BGE in support of its proposal do not establish binding precedent, the 
Commission rejected BGE's proposed formula rate revisions.\14\
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    \11\ November 16 Order, 161 FERC ] 61,163 at P 18.
    \12\ Id. PP 18-19 (citing Order No. 144, FERC Stats. & Regs. ] 
30,254 at 31,519, 31,560).
    \13\ Id. P 20.
    \14\ Id. PP 21-22.
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    7. On December 18, 2017, BGE requested rehearing of the November 16 
Order regarding recovery of past deferred tax liabilities and assets. 
It also requested clarification that it could

[[Page 46717]]

recover: (1) Amounts for new tax liabilities and assets that were 
originated on or after the February 11, 2017 effective date that BGE 
originally proposed; and (2) amounts for past deferred tax liabilities 
and assets that would not have been collected until after February 11, 
2017, even if its formula rate had been amended in 2005 to include such 
recovery. In support of its rehearing request, BGE raised similar 
arguments to those now advanced in Exelon Companies' filings regarding 
the timing of recovering deferred amounts, matching, and prior 
Commission precedent. The Commission denies all rehearing requests,\15\ 
but grants clarification in part, of the November 16 Order in an order 
being issued concurrently with this one in Docket No. ER17-528-002.\16\
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    \15\ The Maryland Public Service Commission and the Edison 
Electric Institute also filed requests for rehearing.
    \16\ PJM Interconnection L.L.C., 164 FERC ] 61,173.
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B. Notice of Inquiry

    8. On March 15, 2018, the Commission sought industry-wide comment 
on the effect of the Tax Cuts and Jobs Act on Commission-jurisdictional 
rates.\17\ In particular, the Commission sought comment whether, and if 
so how, the Commission should address changes related to ADIT and bonus 
depreciation in Commission-jurisdictional rates. That proceeding 
remains pending.
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    \17\ Inquiry Regarding the Effect of the Tax Cuts and Jobs Act 
on Commission-Jurisdictional Rates, FERC Stats. & Regs. ] 35,582 
(2018) (Notice of Inquiry).
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III. Exelon Companies' Filings

A. Original Filings

    9. Exelon Companies propose to implement three tax-related changes 
(Excess/Deficient Deferred Taxes, AFUDC Equity and Flow-Through Items) 
to their Formula Rates to more accurately track expenses arising from 
tax liabilities and to clarify the timing for recovery of various 
accrued tax liabilities. Exelon Companies assert that the proposed 
changes do not alter the amount of taxes to be recovered, but instead 
provide clarity to ratepayers as to when various tax liabilities and 
assets will be recovered or refunded, and ensure that the proper 
amounts will be recovered or refunded over a timeframe that is 
consistent with Commission policies. Exelon Companies request that the 
Commission accept the revised tariff sheets with an effective date of 
April 24, 2018, although these proposed tax changes would be reflected 
for the first time in the rate levels charged to customers in Exelon 
Companies' June 1, 2019 Annual Update of their Formula Rates (2019 
Annual Update) (with the resulting rate levels charged for service on 
and after June 1, 2019).
    10. First, Exelon Companies propose an adjustment to their Formula 
Rates for Excess/Deficient Deferred Taxes that are the result of 
enacted changes in tax laws or rates. Exelon Companies explain that, 
due to changes in state and federal tax rates that occur from time to 
time, such as the Tax Cuts and Jobs Act, Exelon Companies' deferred 
income tax balances do not match their actual tax liabilities. Rather 
than allowing such mismatches to accumulate over time, Exelon Companies 
propose to correct the mismatches by including a mechanism in their 
Formula Rates that will automatically return any future excess deferred 
income taxes to customers, as well as recover any future deficiencies 
in deferred income taxes from customers. Exelon Companies state that 
the automatic adjustments would reflect the tax rate changes from the 
Tax Cuts and Jobs Act and past federal and state income tax rate 
changes that are not yet fully accounted for, and would also provide an 
automatic mechanism to capture the impact of any future tax rate 
changes that may be enacted at the state or federal level. Exelon 
Companies state that, consistent with the ``South Georgia method'' \18\ 
and Commission precedent, Exelon Companies propose to amortize the 
relevant balances over the remaining useful life of the assets impacted 
by the tax rate change.\19\
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    \18\ See South Georgia Natural Gas Co., Docket No. RP77-32 (May 
5, 1978) (delegated order). Under the South Georgia method, a 
calculation is taken of the difference between the amount actually 
in the deferred account and the amount that would have been in the 
account had normalization continuously been followed. This 
difference is collected from ratepayers over the remaining 
depreciable life of the plant that caused the difference. When the 
deferred account is fully funded at the end of this transition 
period, the annual increment ceases. Memphis Light, Gas & Water Div. 
v. FERC, 707 F.2d 565, 569 (D.C. Cir. 1983).
    \19\ See, e.g., ComEd Transmittal Letter at 24-28 (citing 
Virginia Elec. Power Co., Docket No. ER16-2116-000 (August 2, 2016) 
(delegated order) (VEPCO); Midcontinent Indep. Sys. Operator, Inc., 
153 FERC ] 61,374 (2015) (ITC); DATC Midwest Holdings, LLC, 144 FERC 
] 61,015 (2013) (DATC); American Transmission Co., LLC, 93 FERC ] 
61,335 (2000) (ATC); Michigan Gas Storage Co., 83 FERC ] 63,001 
(1998), order on initial decision, 87 FERC ] 61,038 (1999)).
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    11. Second, Exelon Companies propose an adjustment to their Formula 
Rates for the tax effect of AFUDC Equity, which would automatically 
amortize in rates the accumulated tax balances for past AFUDC Equity 
originations that have not flowed through rates and future AFUDC Equity 
originations. Exelon Companies explain that federal income tax rules do 
not permit the deduction of AFUDC Equity on the income tax return, but 
that AFUDC Equity is included in depreciation expense for financial 
reporting purposes. Under FAS 109, this difference between the cost 
basis calculated for income tax and financial statement reporting 
purposes is recorded as a deferred regulatory asset and associated tax 
liability. Thus, Exelon Companies propose to modify their Formula Rates 
to recover this tax difference on an ongoing basis, as well as to use a 
South Georgia catch-up provision to recover all previously unrecovered 
FAS 109 amounts associated with AFUDC Equity over the remaining life of 
the transmission assets. Exelon Companies assert that the Commission 
has recognized that AFUDC Equity requires adjustment in the income tax 
calculation \20\ and that this modification is consistent with the tax 
recovery mechanisms that the Commission has allowed in other 
transmission rate filings.\21\
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    \20\ Id. at 29 (citing Order No. 144-A, FERC Stats. & Regs. ] 
30,340 at 30,136).
    \21\ Id. at 28-30 (citing Indianapolis Power & Light, 162 FERC ] 
61,134 (2018) (IPL), Wisconsin Power & Light Co., Docket No. ER18-
216-000 (Feb. 13, 2018) (delegated order) (WPL), VEPCO, Docket No. 
ER16-2116-000 (Aug. 2, 2016) (delegated order); ITC, 153 FERC ] 
61,374; ATC, 93 FERC ] 61,335; DATC, 144 FERC ] 61,015).
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    12. Third, Exelon Companies propose an adjustment to their Formula 
Rates for tax benefits flowed through to customers at the time that 
they originated (Flow-Through Items). Exelon Companies explain that, in 
the past, they recovered substantially all of their transmission 
revenue requirements through bundled retail rates. Exelon Companies 
state that they sold their generating facilities and now recover their 
transmission revenue requirements through the Formula Rates regulated 
by this Commission. Exelon Companies explain that, while their Formula 
Rates now employ the tax normalization methodology (i.e., Exelon 
Companies use comprehensive tax normalization for ratemaking purposes), 
Exelon Companies previously employed flow-through ratemaking for 
property placed in service (i.e., Exelon Companies immediately 
reflected the tax benefits of accelerated depreciation and cost of 
removal in their bundled retail rates).\22\

[[Page 46718]]

Exelon Companies state that both the flow-through and normalization 
methodologies will recover the proper amount of taxes from ratepayers 
over time. However, the switch from one methodology to another creates 
timing differences that lead to a difference between a utility's 
deferred tax account balance and its future tax liability. Thus, Exelon 
Companies propose to modify their Formula Rates using the South Georgia 
methodology to amortize the tax balances associated with flow-through 
ratemaking over the remaining life of the transmission assets in place 
at the time they implemented their Formula Rates.\23\
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    \22\ ComEd states that small excesses remain to be passed 
through in ComEd's accounting resulting from the pre-2007 use of the 
flow-through method. ComEd Transmittal at 8. Delmarva, ACE, and 
PEPCO state that shortfalls remain to be passed through in their 
accounting resulting from the pre-2005 use of the flow-through 
method. Delmarva Transmittal at 8; ACE Transmittal at 7; and PEPCO 
Transmittal at 8.
    \23\ See, e.g., ComEd Transmittal Letter at 32 (citing Duquesne 
Light Co., Docket No. ER13-1220-000 (April 26, 2013) (delegated 
order) (Duquesne); PPL Elec. Util. Corp., Docket No. ER12-1397-000 
(May 23, 2012) (delegated order) (PPL); San Diego Gas & Elec. Co., 
105 FERC ] 61,301 (2003)).
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    13. Exelon Companies state that the timing of their filings was 
influenced by a number of factors, in particular the desire to unlock 
as soon as possible customer benefits from the Tax Cuts and Jobs Act. 
Exelon Companies explain that they assume that recovery occurred for of 
an amortized portion of the FAS 109 amounts each year until their 
Formula Rate settlements in either 2005 or 2007, depending on the 
individual company. They further assert that per the Formula Rate 
settlements, recovery of the FAS 109 amounts were expressly excluded. 
Therefore, they now seek authorization for recovery of the unamortized 
portion of amounts from the dates the Formula Rates became effective 
and any new originations since the Formula Rates were effective.
    14. Exelon Companies state that the rate impact from the Formula 
Rate revisions on the annual transmission revenue requirements for the 
Formula Rates will vary from year to year. Exelon Companies estimated 
the one-year impact of the Formula Rate revisions using 2017 data,\24\ 
as shown in the following table:
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    \24\ See ComEd Transmittal at 47; Delmarva Transmittal at 42; 
ACE Transmittal at 40; and PEPCO Transmittal at 42.
    \25\ This column represents Exelon Companies' estimates of the 
benefits that customers will receive, beginning June 1, 2019, from 
excess ADIT from the Tax Cuts and Jobs Act. The methods for recovery 
of these excess ADIT amounts are being explored through the 
Commission's Notice of Inquiry.
    \26\ This column represents a one year example of the net rate 
increases resulting from the Exelon Companies' proposals. The net 
rate increases would occur each year over the remaining lives of the 
assets at issue.

----------------------------------------------------------------------------------------------------------------
                                                   ADIT-related      Net rate
                                                   rate decrease   increase from
                                                   from Tax Cuts   prior period     Overall net   Annual revenue
                     Company                       and Jobs Act    ADIT amounts   rate reduction  requirement ($
                                                      \25\ ($         \26\ ($       ($ million)      million)
                                                     million)        million)
----------------------------------------------------------------------------------------------------------------
ComEd...........................................              18               1              17             709
Delmarva........................................             4.1             0.7             3.4           127.9
ACE.............................................             4.2             0.6             3.6           132.7
PEPCO...........................................             5.3             0.9             4.4           161.7
----------------------------------------------------------------------------------------------------------------

    15. Exelon Companies assert that their filings are timely and 
should be accepted. Exelon Companies assert that the primary basis for 
the Commission's rejection of BGE's filing in the November 16 Order was 
that the BGE filing was untimely.\27\ They point out that one issue 
raised in the November 16 Order was the suggestion that BGE was seeking 
recovery of ``decades'' old amounts that should have been recovered 
prior to the adoption of BGE's formula rates in 2005.\28\ They state 
that BGE's rehearing request explained that BGE was not seeking 
recovery of these out-dated amounts and they likewise are not seeking 
recovery of out-dated amounts. In particular, Exelon Companies explain 
that they assumed that an amortized portion of the FAS 109 amounts were 
recovered each year until 2005 (for Delmarva, ACE and PEPCO) or 2007 
(for ComEd) when the Formula Rates took effect, and they do not seek 
recovery of those amounts prior to 2005 or 2007, respectively. Exelon 
Companies state that they assumed that their black-box stated rates in 
place prior to the Formula Rates included recovery of FAS 109 amounts. 
Exelon Companies assert that this treatment is consistent with 
Stingray,\29\ cited in the November 16 Order, in which the Commission 
held that it would assume that FAS 109 amounts were being amortized 
during the pendency of a settled stated rate that did not address the 
FAS 109 issue.
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    \27\ Exelon Companies state that because their amendments to 
their Formula Rates are essentially identical to BGE's, which the 
Commission rejected in the November 16 Order, Exelon Companies 
arguments in support of their amendments are similar to those which 
BGE submitted in its rehearing request of the November 16 Order. 
See, e.g., ComEd Transmittal at 33.
    \28\ Id. at 34 (citing November 16 Order, 161 FERC ] 61,163 at P 
19).
    \29\ Id. at 34 (citing November 16 Order, 161 FERC ] 61,163 at P 
19 & n.25 (citing Stingray Pipeline, Co., 50 FERC ] 61,159, at 
61,469 (1990) (Stingray)).
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    16. Exelon Companies argue that their Formula Rates were settled 
rates, and thus did not violate the ``next rate case'' rule in Order 
No. 144. Exelon Companies explain that the November 16 Order found that 
BGE should have addressed FAS 109 recovery in its 2005 formula rate 
because it was the ``next rate case'' concerning FAS 109 amounts.\30\ 
Just as with BGE, Exelon Companies argue that the ``next rate case'' 
rule cannot be applied to Exelon Companies because their Formula Rates 
filings resulted in settlements that expressly excluded FAS 109 amounts 
from current rates, thus leaving the issue to be decided in some later 
proceeding. Exelon Companies argue that no provision in the settlement 
requires them to eliminate or reduce FAS 109 recovery, and it would be 
unlawful to read such a provision into the settlement.\31\
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    \30\ Id. at 35 (citing November 16 Order, 161 FERC ] 61,163 at 
PP 18-19). Order No. 144 specified that a rate applicant must make 
adjustments pertaining to reversals from prior flow-through or tax 
rate changes in ``the applicant's next rate case following the 
applicability of [Order No. 144].'' Order No. 144, FERC Stats. & 
Regs. ] 30,254 at 31,519.
    \31\ ComEd Transmittal at 35-36.
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    17. Exelon Companies also argue that Order No. 144 permits 
resolution of the FAS 109 issue by settlement, and recognizes that 
parties may reach a settlement that would defer litigation of the 
timing of tax recoveries. In support of this position, they point out 
that after Order No. 144 states that the applicants should address 
ratemaking treatment in the ``next rate case,'' it states that: ``The 
rule, of course, leaves undisturbed the ability of the parties to reach 
a settlement on any of the issues covered by the rule.'' \32\ They also 
assert that the Commission explained in Order No. 144 that it wanted to 
ensure that ``agreement by the parties not to litigate the issue in 
future cases is preserved and

[[Page 46719]]

encouraged.'' \33\ They assert that because this is the first rate case 
after settlement of the Formula Rates, Exelon Companies have not 
violated the ``next rate case'' rule.
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    \32\ Id. at 36 (citing Order No. 144, FERC Stats. & Regs. ] 
30,254 at 31,519).
    \33\ Id. (citing Order No. 144, FERC Stats. & Regs. ] 30,254 at 
31,561).
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    18. Exelon Companies assert that the ``reasonable period of time'' 
standard in Order No. 144 applies to the period of time for 
normalization, and not the period of time in which the utility must 
make its rate filing to implement normalization. They assert that, in 
the November 16 Order, the Commission partially quoted and misconstrued 
a sentence in Order No. 144 when it stated that: ``In Order No. 144, 
the Commission specifically directed utilities `to begin the process of 
making up deficiencies or eliminating excesses in their deferred tax 
reserves . . . within a reasonable period of time to be determined on a 
case-by-case basis.' '' \34\ They state that the full sentence in Order 
No. 144 reads:
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    \34\ Id. at 37 (citing November 16 Order, 161 FERC ] 61,163 at P 
19 (quoting Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560)).

    As revised, the final rule requires rate applicants to begin the 
process of making up deficiencies in or eliminating excesses in their 
deferred tax reserves so that, within a reasonable period of time to be 
determined on a case-by-case basis, they will be operating under a full 
normalization policy.\35\
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    \35\ Id. at 37 (citing Order No. 144, FERC Stats. & Regs. ] 
30,254 at 31,560).

    19. Exelon Companies argue that this Order No. 144 language does 
not direct when utilities must make a rate case filing, as the 
Commission asserts in the November 16 Order, but instead it explains 
the standards for evaluation of ``rate applicants'' when their next 
rate case filing is made.\36\ Exelon Companies assert that their 
proposal to normalize the recovery of deficient or excess amounts over 
the remaining life of the assets meets Order No. 144's requirement for 
seeking full normalization over a reasonable period of time. Exelon 
Companies also point out that the definition of ``rate applicant'' and 
other portions of Order No. 144 do not specify when the next rate case 
must be filed.\37\ Exelon Companies also explain that subsequent cases 
clarify that recovery ``in a reasonable period of time'' meant recovery 
over the remaining life of the assets.\38\ Exelon Companies therefore 
assert that, consistent with Order No. 144, this is the first rate case 
after their settlement of the Formula Rates in which the issue could be 
addressed, and their filings provide for recovery over the remaining 
life of the assets, which is a reasonable period of time for recovery.
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    \36\ Id. at 38.
    \37\ Id.
    \38\ Id. at 39 (citing Northern States Power Co. (Wisconsin), 
Opinion No. 345, 50 FERC ] 61,377, at 62,148 (1990) (``Opinion No. 
345''), and Nat. Gas Pipeline of America, Opinion No. 108, 13 FERC ] 
61,266 (1980)).
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    20. Exelon Companies argue that, in the November 16 Order, the 
Commission ``suggested'' that BGE's filing violated the Commission's 
matching policy because it sought recovery of amounts long after the 
underlying assets have been retired or have stopped being 
depreciated.\39\ They contend that, like BGE, they meet the matching 
test because the filings are tied to recovery over the remaining life 
of appropriately chosen assets.\40\ They conclude there is no basis for 
concern that ``matching'' of costs and asset lives has somehow been 
violated.\41\ Moreover, Exelon Companies argue that their use of the 
industry standard PowerTax software verifies that the Flow-Through 
Items regulatory asset is linked to assets that are still in 
service.\42\
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    \39\ See ComEd Transmittal at 40 & n.85 (citing November 16 
Order, 161 FERC ] 61,163 at P 20); Delmarva Transmittal at 35 & 
n.83; Atlantic City Transmittal at 33 & n.83; and PEPCO Transmittal 
at 35 & n.83.
    \40\ See, e.g., ComEd Transmittal at 40.
    \41\ Id. at 41.
    \42\ Id.
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    21. Exelon Companies next argue that recovery of the amounts from 
2005 (for Delmarva, ACE and PEPCO) or 2007 (for ComEd) and going 
forward is consistent with Order No. 144, with FAS 109 and the 1993 FAS 
109 Guidance Letter, with the 2014 Staff Guidance on Formula Rate 
Updates, and with the orders in PPL, Duquesne, VEPCO, and ITC. In this 
regard, they briefly discuss each of these cases. They state that, in 
PPL, four years had elapsed since PPL had implemented its formula rate, 
and the entire regulatory asset amount, as of the date the formula rate 
was implemented, was authorized for recovery. In Duquesne, seven years 
had elapsed since its formula rate was filed, and the utility was 
similarly authorized to recover the amount as of the date of its 
formula rate. Regarding ITC and VEPCO, Exelon Companies state that 
these cases similarly involved a formulaic mechanism for recovery of an 
amortized amount, each year, of transmission-related FAS 109 amounts up 
through the date in which each year's rates are calculated. Unlike PPL 
and Duquesne, the adjustments in ITC and VEPCO also included new 
originating FAS 109 amounts that had been recorded after their formula 
rates were put in place. Taken together, Exelon Companies argue that 
these proceedings make it clear that formulaic recovery of FAS 109 
amounts from prior to, and after, implementation of the formula rate is 
appropriate, which Exelon Companies argue is exactly what they propose 
here.
    22. While conceding that the PPL, Duquesne, and VEPCO orders were 
delegated letter orders, Exelon Companies point out that the ITC order 
was not a delegated letter order and argue that the delegated orders 
should be given weight as they are consistent with ITC.\43\
---------------------------------------------------------------------------

    \43\ Id. at 42-43.
---------------------------------------------------------------------------

    23. Finally, Exelon Companies argue that recovery of the past 
expenses would not present a problem of retroactive ratemaking because 
on appeal of Order No. 144, the court held that a provision for 
recovery of deficient deferred taxes relating to prior years is not 
retroactive.\44\ Exelon Companies assert that because customers' rates 
in past years did not reflect these expenses, if the FAS 109 amounts 
flow through rates, Exelon Companies' proposals will place customers in 
exactly the same position as if they had included a formulaic rate 
recovery of FAS 109 amounts in past rates.\45\
---------------------------------------------------------------------------

    \44\ Id. at 44 & n.98 (citing Public Systems v. FERC, 709 F.2d 
73, 85 (D.C. Cir. 1983) (Public Systems)).
    \45\ Id. at 44.
---------------------------------------------------------------------------

B. Deficiency Letter

    24. On April 24, 2018, Commission staff issued a deficiency letter 
advising Exelon Companies that their February 23, 2018 filings were 
deficient and requiring additional information to evaluate their 
Formula Rate revisions.\46\ Commission staff sought additional 
information from the Exelon Companies about when they changed to full 
tax normalization, whether the AFUDC Equity relates to current year's 
depreciation expense, the method used to allocate FAS 109 amounts to 
transmission-related components, past FAS 109 amortization collection 
in rate base, the Tax Reform Act of 1986, and an explanation for why 
the Exelon Companies decided to exclude FAS 109 recovery in their 
Formula Rates and why they delayed in seeking recovery.
---------------------------------------------------------------------------

    \46\ PJM Interconnection, L.L.C., Deficiency Letter, Docket Nos. 
ER18-899-000, et al. (Apr. 24, 2018) (Deficiency Letter).
---------------------------------------------------------------------------

    25. On May 3, 2018, Exelon Companies filed motions for additional 
time to respond to the Deficiency Letter, so that their responses would 
be due on July 9, 2018.\47\ On May 14, 2018, the

[[Page 46720]]

Commission granted Exelon Companies' motions.\48\
---------------------------------------------------------------------------

    \47\ ComEd Motion for Additional Time, Docket No. ER18-899-00 
(filed May 3, 2018); Delmarva Motion for Additional Time, Docket No. 
ER18-903-00 (filed May 3, 2018); ACE Motion for Additional Time, 
Docket No. ER18-904-00 (filed May 3, 2018); and PEPCO Motion for 
Additional Time, Docket No. ER18-905-00 (filed May 3, 2018).
    \48\ Notice of Extension of Time, Docket No. ER18-899-000 (May 
14, 2018); Notice of Extension of Time, Docket No. ER18-903-000 (May 
14, 2018); Notice of Extension of Time, Docket No. ER18-904-000 (May 
14, 2018); and Notice of Extension of Time, Docket No. ER18-905-000 
(May 14, 2018).
---------------------------------------------------------------------------

C. Deficiency Letter Responses

    26. On July 9, 2018, Exelon Companies filed responses to the 
Commission staff's Deficiency Letter, which amended their filings.
    27. In their response to the Deficiency Letter, the Exelon 
Companies largely reiterated arguments and pointed to data in their 
filed cases. In response to staff's question as to when full tax 
normalization had occurred at the retail level, the Exelon Companies 
explain that, prior to their Formula Rate filings, the Exelon 
Companies' rate filings historically resulted from black box 
settlements. According to the Exelon Companies, these black box 
settlements, prior to the implementation of Formula Rates, made it 
impossible to determine whether the [stated] \49\ rates incorporated 
full tax normalization. Exelon Companies contend that only after the 
adoption of the subject Formula Rates were they effectively approved to 
implement full tax normalization.
---------------------------------------------------------------------------

    \49\ Under stated rates, utilities are assumed to be recovering 
all of their fixed costs, including any excess or deficiency in the 
deferred income tax accounts.
---------------------------------------------------------------------------

    28. With respect to staff's question as to whether the AFUDC Equity 
includes prior years' depreciation expense, Exelon Companies explain 
that they propose to include South Georgia catchup provisions to 
recover all unrecovered FAS 109 amounts associated with AFUDC Equity. 
The Exelon Companies explain that they intend to track the relevant 
assets and their relevant lives and retirements using their PowerTax 
and PowerPlant software, which track each plant item and associated tax 
expense, and thus will allow a FAS 109 amortization that properly 
adjusts each year based on the remaining lives of the relevant assets.
    29. In response to staff's request on the net plant allocation 
method used to determine the transmission-related component of FAS 109 
regulatory asset, Exelon Companies explain that they generally use 
composite transmission depreciation rates or group rates by account. 
Exelon Companies explain that the ADIT reversal is calculated by 
multiplying the AFUDC Debt and Equity components in depreciation 
expense by the applicable composite income tax rate.
    30. In response to staff's request as to whether there was any 
accumulated FAS 109 collections associated with prior flow-through 
items, the Exelon Companies cite to their Formula Rate settlements 
which specifically exclude FAS 109 amounts from rate base, and state 
that their proposed Formula Rates continue to exclude FAS 109 amounts, 
and thus FAS 109 does not impact rate base.
    31. In response to staff's request about the Tax Reform Act of 
1986, Exelon Companies explain that they assume that they have been 
refunding or recovering such amounts from their customers through 
stated rates (either retail or Commission rates). However, due to the 
fact that the stated rates prior to the effectiveness of their Formula 
Rates were black box settlements, there is no rate order that expressly 
spells out that such recovery is occurring.
    32. With respect to why the Exelon Companies decided to exclude FAS 
109 recovery from their Formula Rates, they explain that exclusion of 
FAS 109 amounts was the product of settlement. Nevertheless, they 
suggest that it was reasonable given that the Commission's accounting 
policies provide that recovery of FAS 109 amounts could only happen 
pursuant to a FERC rate filing addressing those amounts. Further, they 
explain that while it is clear today that recovery of such amounts can 
occur formulaicly, it was not clear at the time that such automatic 
flow through would be acceptable.

IV. Notices of Filings and Responsive Pleadings

A. Original Filings

    33. Notice of ComEd's filing in Docket No. ER18-899-000 was 
published in the Federal Register, 83 FR 8986 (2018), with 
interventions and protests due on or before March 16, 2018. Timely 
motions to intervene were filed by FirstEnergy Service Company, Old 
Dominion Electric Cooperative, PPL Electric Utilities Corporation and 
Public Service Electric and Gas Company. The Illinois Commerce 
Commission (Illinois Commission) filed a notice of intervention and 
comments. On March 29, 2018, ComEd filed an answer.
    34. Notice of Delmarva's filing in Docket No. ER18-903-000 was 
published in the Federal Register, 83 FR 8986 (2018), with 
interventions and protests due on or before March 16, 2018. Timely 
motions to intervene were filed by Delaware Municipal Electric 
Corporation, Inc. (DEMEC), Delaware Division of the Public Advocate, 
Maryland Office of People's Counsel (Md People's Counsel), FirstEnergy 
Service Company, Old Dominion Electric Cooperative, PPL Electric 
Utilities Corporation and Public Service Electric and Gas Company. 
DEMEC filed a timely protest. MD People's Counsel filed timely 
comments. On March 29, 2018, Delmarva filed an answer. On April 13, 
2018, DEMEC filed an answer to the answer.
    35. Notice of ACE's filing in Docket No. ER18-904-000 was published 
in the Federal Register, 83 FR 8986 (2018), with interventions and 
protests due on or before March 16, 2018. Timely motions to intervene 
were filed by FirstEnergy Service Company, the New Jersey Division of 
Rate Counsel (Rate Counsel), PPL Electric Utilities Corporation, Public 
Service Electric and Gas Company, and Vineland Municipal Electric 
Utility (Vineland). Rate Counsel and Vineland filed timely protests. On 
March 29, 2018, ACE filed an answer. On April 10, 2018, Rate Counsel 
filed an answer to the answer.
    36. Notice of PEPCO's filing in Docket No. ER18-905-000 was 
published in the Federal Register, 83 FR 8986 (2018), with 
interventions and protests due on or before March 16, 2018. Timely 
motions to intervene were filed by FirstEnergy Service Company, MD 
People's Counsel, Office of the People's Counsel for the District of 
Columbia (DC People's Counsel), Old Dominion Electric Cooperative, PPL 
Electric Utilities Corporation Public Service Electric and Gas Company, 
and Southern Maryland Electric Cooperative, Inc. (SMECO). DC People's 
Counsel and MD People's Counsel filed timely comments. SMECO filed a 
timely protest. On March 29, 2018, PEPCO filed an answer. On April 13, 
2018, SMECO filed an answer to the answer.

B. Deficiency Letter Responses

    37. Notice of ComEd's Deficiency Letter response in Docket No. 
ER18-899-001 was published in the Federal Register, 83 FR 32,662 
(2018), with interventions and protests due on or before July 30, 2018. 
None were filed.
    38. Notice of Delmarva's Deficiency Letter response in Docket No. 
ER18-903-001 was published in the Federal Register, 83 FR 32,662 
(2018), with interventions and protests due on or before July 30, 2018. 
DEMEC filed a timely protest. On August 13, 2018, Delmarva filed an 
answer.
    39. Notice of ACE's Deficiency Letter response in Docket No. ER18-
904-001 was published in the Federal Register, 83 FR 32,662 (2018), 
with interventions

[[Page 46721]]

and protests due on or before July 30, 2018. None were filed.
    40. Notice of PEPCO's Deficiency Letter response in Docket No. 
ER18-905-001 was published in the Federal Register, 83 FR 32,662 
(2018), with interventions and protests due on or before July 30, 2018. 
DC People's Counsel filed timely comments. On August 13, 2018, PEPCO 
filed an answer.

V. Responsive Pleadings

A. ComEd Proceeding, Docket Nos. ER18-899-000 and ER18-899-001

    41. The Illinois Commission filed comments in support of ComEd's 
filing and noted ComEd's assertion that the filing represents an 
overall rate reduction that will directly benefit customers. It urges 
the Commission to allow ComEd's Formula Rate to include any necessary 
adjustments so that ComEd's customers fully realize these savings in a 
timely manner.\50\ In response, ComEd argues that the Commission should 
approve its filing without delay.
---------------------------------------------------------------------------

    \50\ Illinois Commission March 16, 2018 Comments at 1.
---------------------------------------------------------------------------

B. Delmarva Proceeding, Docket Nos. ER18-903-000 and ER18-903-001

1. Protest of DEMEC
    42. DEMEC argues that Delmarva's proposal to recover FAS 109 
amounts for prior periods (2005-2017) is contrary to the 2006 
settlement of Delmarva's Formula Rate (2006 Settlement) and Commission 
precedent. DEMEC argues that contrary to Delmarva's claim that the 2006 
Settlement left the issue of FAS 109 amount recovery to some later 
proceeding, there is no provision in the 2006 Settlement that expressly 
provides for addressing these amounts at some future date, and thus, 
Delmarva unlawfully seeks to read into the 2006 Settlement a provision 
that was not expressly contained in that 2006 Settlement.\51\ DEMEC 
points out that the 2006 Settlement expressly proposed to remove FAS 
109 amounts, and does not include any notice or agreement to 
retroactively refund to Delmarva deferred tax liabilities recorded as 
of December 31, 2004 or any other date. Further, DEMEC asserts that 
Delmarva's 2005 formula rate filing was the next rate case after Order 
No. 144 and FAS 109 was issued, since Delmarva did make a section 205 
filing with its formula rate on January 31, 2005.\52\ DEMEC argues that 
Order No. 144 did not permit utilities to forego explaining in their 
settlement agreements their intentions regarding implementation of 
Order No. 144.
---------------------------------------------------------------------------

    \51\ DEMEC March 16, 2018 Protest at 8.
    \52\ Id. at 9-10.
---------------------------------------------------------------------------

    43. DEMEC argues that Delmarva's filing inappropriately attempts to 
tie the reductions due to transmission customers as a result of the Tax 
Cuts and Jobs Act to an unjust and unreasonable request for retroactive 
recovery of deferred tax amounts that it did not preserve to recover in 
subsequent periods. DEMEC asserts that the Commission should summarily 
reject any aspect of Delmarva's filing that would permit recovery of 
deferred tax adjustments for prior periods, including any proposal for 
inclusion of the amortization of regulatory assets and amortization of 
prior flow-through amounts which were incurred in the past. DEMEC 
argues that Delmarva's proposal pertaining to Flow-Through Items 
violates the matching principle, as the Commission found in the 
November 16 Order.\53\
---------------------------------------------------------------------------

    \53\ Id. at 12-13 (citing November 16 Order, 161 FERC ] 61,163 
at P 20 & n.30 (citing Order No. 144, FERC Stats. & Regs. ] 30,254 
at 31,522)).
---------------------------------------------------------------------------

    44. DEMEC asserts that even if Delmarva's filing is considered on a 
forward-looking basis, it is not consistent with Commission precedent, 
is lacking in adequate cost support, and contains various other errors 
that render it unjust and unreasonable. For these reasons, DEMEC 
asserts that Delmarva's filing should be set for hearing and settlement 
procedures and an FPA section 206 investigation should be opened to 
determine if further rate decreases would be appropriate.\54\
---------------------------------------------------------------------------

    \54\ Id. at 10-11.
---------------------------------------------------------------------------

    45. Specifically, DEMEC argues that the Commission's policy and 
guidance reflects the need to differentiate between unfunded versus 
funded ADIT balances and to exclude FAS 109 amounts absent a 
demonstrated impact on billing determinations and express Commission 
approval, noting the 2014 Staff Guidance on Formula Rate Updates.\55\ 
DEMEC also asserts that Delmarva's proposal lacks cost support for its 
amortization periods and fails to pass back tax benefits to ratepayers 
in a reasonable amount of time.\56\ For example, DEMEC suggests a five-
year amortization period for Non-Protected Excess ADIT amounts, as the 
Commission proposed in its Notice of Inquiry.\57\ Additionally, DEMEC 
asserts that Delmarva's filing fails to adjust the Account 190 ADIT 
amount to reflect the tax rate change from 35 percent to 21 percent, 
fails to exclude ADIT amounts related to the Net Operating Loss 
Carryforward, and fails to justify the removal of certain components 
from Attachment 5 of its Formula Rate.
---------------------------------------------------------------------------

    \55\ Id. at 11-12 (citing 2014 Staff Guidance on Formula Rate 
Updates (July 17, 2014) at 1-2).
    \56\ Id. at 15-16.
    \57\ Id. at 17 (citing Notice of Inquiry, FERC Stats. & Regs. ] 
35,582 at P 17).
---------------------------------------------------------------------------

    46. DEMEC argues that Delmarva's request for including the AFUDC 
Equity amount in its income tax calculation will result in double 
recovery of costs. DEMEC explains that Delmarva's proposal would result 
in not only permitting Delmarva to recover the depreciation expense in 
rates which exceed depreciation expenses allowed by the Internal 
Revenue Service (IRS), but to also recover the income taxes associated 
with this over-recovery of depreciation expenses. Further, DEMEC argues 
the Commission should ensure that even on a prospective basis, Delmarva 
is not permitted to double recover costs associated with depreciation 
expense related income taxes.\58\ DEMEC also argues that AFUDC Equity 
is a permanent tax difference, rather than a temporary tax difference, 
and that the Commission has required support to demonstrate that 
recovery of permanent tax differences is just and reasonable.\59\
---------------------------------------------------------------------------

    \58\ Id. at 18.
    \59\ Id. at 19.
---------------------------------------------------------------------------

    47. DEMEC argues Delmarva's filing does not include a number of Tax 
Cuts and Jobs Act provisions that would further reduce Delmarva's 
transmission rates, including the following: (1) The Federal corporate 
rate reduction from 35 percent to 21 percent; (2) employee-related 
deductions; and (3) various other reductions. Additionally, DEMEC 
asserts that the Commission should require Delmarva to reflect the 
refunds caused by all the rate reductions resulting from the Tax Cuts 
and Jobs Act as of the effective date of the Tax Cuts and Jobs Act, 
which is January 1, 2018.\60\
---------------------------------------------------------------------------

    \60\ Id. at 15.
---------------------------------------------------------------------------

2. Comments of MD People's Counsel
    48. MD People's Counsel argues that the Commission should consider 
requiring Delmarva to include an interest provision for refunds from 
the Tax Cuts and Jobs Act. MD People's Counsel also argues that 
Delmarva's filing lacks sufficient details and supporting workpapers 
for MD People's Counsel to understand the impact and accuracy of 
Delmarva's ADIT calculations providing for flow-back of excess ADIT to 
customers or recovery of deficient ADIT from customers. MD People's 
Counsel notes that these were both issues raised in the Commission's 
Notice of Inquiry.

[[Page 46722]]

    49. MD People's Counsel disagrees with Delmarva that the FAS 109 
mechanism for deferred tax assets qualifies for single-issue rate 
treatment.\61\ MD People's Counsel explains that the Commission has 
limited the use of single-issue rate treatment to ``ADIT treatment in 
formula rates when such revisions are only considered mere differences 
in timing.'' \62\ MD People's Counsel asserts that Delmarva's revisions 
to the treatment of FAS 109 deferred tax assets are more than 
differences in timing and represent a significant departure from 
previous Commission-approved accounting methods. MD People's Counsel 
also explains that Delmarva's Formula Rate protocols only allow single-
issue rate treatment for certain issues, which does not include the 
proposed FAS 109 mechanism, and therefore Delmarva's next section 205 
general rate cases are the appropriate venue to consider this change.
---------------------------------------------------------------------------

    \61\ MD People's Counsel March 16, 2018 Comments to Delmarva at 
5-7.
    \62\ Id. at 5 (citing Indicated RTO Owners, 161 FERC ] 61,018, 
at P 14 (2017)).
---------------------------------------------------------------------------

3. Answer of Delmarva
    50. Delmarva responds that its request is permitted under the 
Commission's single-issue ratemaking policy, which allows ``limited 
revisions addressing [ADIT] treatment in formula rates when such 
revisions are only considered mere differences in timing.'' \63\ 
Further, Delmarva asserts that severing the formula rate adjustments 
pertaining to the Tax Cuts and Jobs Act from other portions of 
Delmarva's proposal, as requested by the MD People's Counsel, would 
transform its filing into a new rate scheme and violate the FPA.\64\ 
Delmarva asserts that DEMEC and MD People's Counsel have failed to 
demonstrate any problem with the Formula Rates, aside from issues 
raised in Delmarva's filing, and therefore the Commission should follow 
its single-issue ratemaking policy and grant Delmarva's request.\65\
---------------------------------------------------------------------------

    \63\ Delmarva March 29, 2018 Answer at 4 (citing Indicated RTO 
Owners, 161 FERC ] 61,018 at P 14).
    \64\ Id. at 12 & n.39 (citing NRG Power Mktg., LLC v. FERC, 862 
F.3d 108 (D.C. Cir. 2017) (NRG) (rejecting Commission orders 
transforming a rate scheme in a section 205 filing into an entirely 
new rate scheme of the Commission's making)).
    \65\ Id. at 4-6.
---------------------------------------------------------------------------

    51. Delmarva also disagrees with DEMEC's allegation that recovery 
of FAS 109 amounts would violate the 2006 Settlement Agreement and 
would result in retroactive ratemaking. Delmarva states that if the 
2006 Settlement Agreement precluded future recovery of FAS 109 amounts 
as DEMEC asserts, then DEMEC's request--to recognize in rates excess/
deficient deferred taxes arising from the Tax Cuts and Jobs Act 
effective January 1, 2018--would also be precluded.\66\ Delmarva 
reiterates its previously stated positions on Order No. 144, FAS 109 
and the 1993 FAS 109 Guidance Letter, the 2014 Staff Guidance on 
Formula Rate Updates, and the November 16 Order. In particular, 
Delmarva explains that since the issuance of Order No. 144, the 
Commission has recognized that deferred taxes are not like other rate 
elements that can only be recovered during the applicable test period 
rate year, but that the Commission allows accrual of deferred tax 
excesses and shortfalls until later rate years, with the recovery to be 
determined in later rate cases on a ``case by case basis.'' \67\ 
Delmarva also points out that an appellate court has explicitly 
rejected the argument that later recovery of deferred taxes is 
retroactive ratemaking.\68\
---------------------------------------------------------------------------

    \66\ Id. at 6-7.
    \67\ Id. at 8.
    \68\ Id. at 8 & n.28 (citing Public Systems, 709 F.2d at 85).
---------------------------------------------------------------------------

    52. Delmarva argues that its filing does not remove any components 
of Attachment 5 of Delmarva's Formula Rate and that DEMEC's assertions 
that it has deleted these components is erroneous.
    53. Delmarva also argues that DEMEC's claim that rate recovery of 
FAS 109 amounts associated with the equity component of the AFUDC 
somehow amount to double recovery are incorrect. Delmarva states that 
DEMEC's claim seems to be premised on the fact that AFUDC Equity is a 
``permanent tax difference'' rather than a ``temporary timing 
difference.'' Delmarva argues the Commission has repeatedly recognized 
that formula recovery of FAS 109 amounts associated with AFUDC Equity 
is appropriate and DEMEC has not addressed this precedent or provided a 
reason for the Commission to rule differently.\69\
---------------------------------------------------------------------------

    \69\ Id. at 14.
---------------------------------------------------------------------------

    54. Delmarva argues that DEMEC's challenges to the specifics of 
Delmarva's FAS 109 calculations \70\ and to non-FAS issues \71\ should 
be addressed as part of the Annual Update process.
---------------------------------------------------------------------------

    \70\ Delmarva notes that, for example, DEMEC raises questions 
about whether Delmarva's FAS 109 accounting factors in the 
distinctions between ``funded'' and ``unfunded'' assets and 
liabilities. Id. at 14 & n.46 (citing DEMEC March 16, 2018 Protest 
at 11-12).
    \71\ Delmarva notes that DEMEC raises various questions about 
whether Delmarva will properly calculate its Formula Rate, such as 
whether Delmarva's rate base calculations will properly reflect 
Account 190 and whether its rates will include various tax 
deductions from the Tax Cuts and Jobs Act. Id. at 15-16 & n.48 
(citing DEMEC March 16, 2018 Protest at 14, 19-20).
---------------------------------------------------------------------------

4. DEMEC's Answer to the Answer
    55. DEMEC reiterates that Delmarva has failed to provide cost 
support, workpapers or justification for its proposed amount and timing 
of its Excess/Deficient Deferred Taxes adjustment and associated 
amortization periods, AFUDC Equity permanent tax difference adjustment, 
and Flow-Through Items adjustment. DEMEC states that it cannot rely on 
the Annual Update process for this information, as the Annual Update 
process does not allow DEMEC to challenge the Formula Rate itself.
    56. DEMEC asserts that Delmarva misstates the terms of the 2006 
Settlement. DEMEC points out that Attachment H-3D of the Formula Rate 
only includes the instruction to exclude FAS 109 amounts from the 
Formula Rate.\72\ DEMEC also argues that section 6.11 of the 2006 
Settlement provides that the settling parties are not to rely on any 
term not expressly set forth in the 2006 Settlement. DEMEC argues that 
there is nothing in the 2006 Settlement that permits Delmarva to 
recover excluded FAS 109 amounts in future years. DEMEC therefore 
argues that Delmarva unravels the 2006 Settlement by now seeking 
recovery of FAS 109 amounts back to 2005. Further, DEMEC states that 
the Formula Rate protocols provide that the Annual Updates are final 
and no longer subject to change or challenge on the later of the 
passage of the challenge period or a final Commission order on the 
Annual Update, subject to judicial review.\73\
---------------------------------------------------------------------------

    \72\ DEMEC April 13, 2018 Answer to the Answer at 4. In 
particular, Attachment 1 of Attachment H-3D of Delmarva's Formula 
Rate states: ``Less FASB 109 Above if not separately removed.''
    \73\ Id. at 6.
---------------------------------------------------------------------------

    57. DEMEC reiterates that Delmarva's 2005 Formula Rate filing was 
the ``next rate case'' after Order No. 144 to obtain FAS 109 recovery, 
and Delmarva's current proposal, filed 13 years after its Formula Rate 
was implemented, was not filed within ``a reasonable period of time'' 
required by Order No. 144 to obtain FAS 109 recovery.\74\ DEMEC argues 
that Public Systems does not support Delmarva's case, because 
Delmarva's filing is seeking to recover shortfalls in prior rates going 
back over 13 years and therefore Delmarva is engaged in retroactive 
ratemaking.\75\ DEMEC therefore requests that the Commission reject 
Delmarva's proposal to recover deferred tax amounts back to 2005.
---------------------------------------------------------------------------

    \74\ Id. at 5-6.
    \75\ Id. at 7-8.

---------------------------------------------------------------------------

[[Page 46723]]

    58. DEMEC states that, contrary to Delmarva's assumption, DEMEC's 
argument about double recovery of AFUDC Equity is not based on a claim 
that the request represents a permanent tax difference.\76\ Rather, 
DEMEC explains that the AFUDC Equity adjustments results from the fact 
that the IRS does not allow depreciation expense associated with AFUDC 
Equity to be deducted on the tax return, while the Commission does 
permit recovery of this depreciation expense in transmission rates.\77\ 
DEMEC states that Delmarva includes AFUDC Equity as a part of its rate 
base, and it recovers depreciation associated with the AFUDC Equity as 
well as a return on it with associated income taxes at the full 
statutory tax rate. DEMEC asserts that Delmarva's proposal would permit 
Delmarva to recover the depreciation expense in rates, which exceed 
depreciation expenses allowed by the IRS, and also recover the income 
taxes associated with this over-recovery of depreciation expenses.\78\
---------------------------------------------------------------------------

    \76\ Id. at 11 (citing Delmarva March 29, 2018 Answer at 14).
    \77\ Id.; DEMEC March 16, 2018 Protest at 18.
    \78\ DEMEC April 13, 2018 Answer to the Answer at 11.
---------------------------------------------------------------------------

    59. DEMEC also asserts that Delmarva is incorrect that single-issue 
rate making is applicable to its filing, because its filing is not 
limited to addressing ADIT timing differences in the current or future 
test years. DEMEC argues that any proposed change to this component of 
the Formula Rate retroactive to 2005 would require investigation of the 
justness and reasonableness of the provisions of the existing Formula 
Rate that Delmarva has not proposed to change.\79\
---------------------------------------------------------------------------

    \79\ Id.
---------------------------------------------------------------------------

5. DEMEC Protest of Deficiency Letter Response
    60. DEMEC reiterates its position that the 2006 Settlement contains 
no provision that supports Delmarva's proposed treatment of FAS 109 
amounts, AFUDC equity, and excess/deficient deferrals amounts. DEMEC 
maintains that recovery of these amounts for prior periods would be 
contrary to the filed rate doctrine, and that Delmarva's claims 
pertaining to recovery in the ``next rate case'' are contrary to 
relevant Commission precedent and guidance.\80\
---------------------------------------------------------------------------

    \80\ DEMEC July 30, 2018 Protest of Deficiency Letter Response 
at 6.
---------------------------------------------------------------------------

    61. DEMEC also argues that Delmarva's Deficiency Response amplifies 
the unreasonableness of its AFUDC equity proposal, because the proposal 
implicates potential double-recovery or previously bargained-for 
compromises. DEMEC restates that Delmarva's proposal runs afoul of the 
rationales articulated by the court in Public Systems, and that PPL, 
Duquesne, and VEPCO are inapt. DEMEC notes that Delmarva failed to 
respond to Commission staff's question regarding the retail rate orders 
approving Delmarva's full tax normalization and any catchup provisions 
similar to the South Georgia catchup provision. DEMEC asserts that 
Delmarva's reliance on discovery protocols in the annual update process 
for post-2005 originations is insufficient as it is Delmarva's burden 
to prove the reasonableness of its section 205 application.\81\
---------------------------------------------------------------------------

    \81\ Id. at 10-11.
---------------------------------------------------------------------------

    62. Finally, DEMEC emphasizes that Delmarva did not clarify whether 
the ``weighted average expected service lives'' it references in its 
Deficiency Response are equal to the lives used by Delmarva for 
depreciating the assets and amortizing the Investment Tax Credits. 
DEMEC requests that the Commission require Delmarva to do so.\82\
---------------------------------------------------------------------------

    \82\ Id. at 11.
---------------------------------------------------------------------------

6. Delmarva Answer to DEMEC Protest of Deficiency Response
    63. Delmarva reiterates its arguments that the 2006 Settlement 
expressly recognizes the existence of the FAS 109 regulatory asset or 
liability.\83\
---------------------------------------------------------------------------

    \83\ Delmarva August 13, 2018 Answer to DEMEC Protest of 
Deficiency Response at 5.
---------------------------------------------------------------------------

    64. With respect to DEMEC's concern that the AFUDC equity component 
of Delmarva's filing amounts to double recovery or over recovery, 
Delmarva argues that as the Commission explained in Ameren, the 
Commission's guiding principle is that it limits the allowance charged 
to ratepayers to an amount equal to the costs the company incurs in 
serving them.\84\ Delmarva argues there is no serious dispute that the 
AFUDC Equity amounts at issue here, even those that originated pre-
2005, are real costs incurred by Delmarva in serving ratepayers and 
thus, Delmarva is entitled to recover those costs.\85\
---------------------------------------------------------------------------

    \84\ Id. at 13 (citing Midcontinent Indep. Syst. Operator, 163 
FERC ] 61,163, at P 63 (2018) (Ameren)).
    \85\ Id.
---------------------------------------------------------------------------

    65. In response to DEMEC's argument that there is something unclear 
about the amortization proposed in the filing, Delmarva argues its 
filing was clear.\86\ Delmarva asserts that as explained in the 
response to Question 2(iii), Delmarva will amortize post-2005 amounts 
based on the remaining lives of the relevant assets. For pre-2005 
assets, Delmarva argues it proposes an amortization based on the 
average remaining life of all of its transmission assets as of 2005-25 
years, which it argues is consistent with the methodologies the 
Commission accepted in PPL and Duquesne.\87\ Delmarva asserts that if 
questions arise about whether Delmarva has properly implemented the 
rates in any rate year, those questions can be raised as part of the 
annual rate update process.\88\
---------------------------------------------------------------------------

    \86\ Id. at 13-14.
    \87\ Id. at 14.
    \88\ Id.
---------------------------------------------------------------------------

C. ACE Proceeding, Docket Nos. ER18-904-000 and ER18-904-001

1. Protests of Vineland and Rate Counsel
    66. Vineland concurs with the ACE Formula Rate amendments to the 
extent that they provide a mechanism to refund to customers the excess 
ADIT created when the Tax Cuts and Jobs Act reduced the ACE corporate 
tax rate.\89\
---------------------------------------------------------------------------

    \89\ Vineland March 16, 2018 Protest at 1-2.
---------------------------------------------------------------------------

    67. However, Vineland objects to ACE's proposal to amend its 
Formula Rate to recover deficient ADIT predating the Tax Cuts and Jobs 
Act. Vineland argues that the proposals by ACE on: (1) Excess/Deficient 
Deferred Taxes; (2) AFUDC Equity; and (3) Flow-Through Items were 
specifically considered and rejected in the BGE case. Vineland argues 
the same logic that led the Commission to reject those proposals in BGE 
should prevail here.\90\
---------------------------------------------------------------------------

    \90\ Id. at 2.
---------------------------------------------------------------------------

    68. Vineland argues that ACE's proposed amortization period for 
refund of the excess ADIT related to the Tax Cuts and Jobs Act, set 
forth in Exhibit D-2 of ACE's Filing, is not well documented and 
Vineland seeks Commission review and approval of the amortization 
period proposed. Vineland notes that ACE proposes a 35-year 
amortization period which it states equates to the average remaining 
book life of the assets that were initially taxed. Vineland seeks 
Commission review and confirmation that the amortization period is 
properly related to the transmission plant giving rise to the refund of 
excess ADIT brought about by the Tax Cuts and Jobs Act.\91\
---------------------------------------------------------------------------

    \91\ Id. at 5-6.
---------------------------------------------------------------------------

    69. Rate Counsel argues that as the changes sought by ACE are 
substantively identical changes to those sought previously--and 
unsuccessfully--by BGE, the Comission should summarily reject them.\92\ 
Rate Counsel disagrees that the precedent cited by ACE--Duquesne, PPL, 
VEPCO and ITC--is applicable. Rate Counsel

[[Page 46724]]

argues that the ITC proceeding related to a 2011 tax change that 
occurred four years prior to the filing in that case and the VEPCO 
proceeding related to a 2013 tax change that occurred three years prior 
to the filing in that case. Rate Counsel states that in contrast, while 
the identity of the events that have given rise to the changes ACE 
wishes to implement are not obvious from ACE's filing, it appears that 
ACE--much like its affiliate BGE, which the Commission condemned for 
seeking recoveries related to pre-1976 plant--is here seeking 
recoveries associated with items dating back to the 1970s. Similarly, 
Rate Counsel argues ACE's reliance on other Commission letter orders, 
such as the one issued in Wisconsin Power & Light Co., do not justify 
approval here.\93\
---------------------------------------------------------------------------

    \92\ Rate Counsel March 16, 2018 Protest at 4.
    \93\ Id. at 4.
---------------------------------------------------------------------------

    70. Rate Counsel notes that FAS 109, established in 1992, required 
public utilities to make changes to their balance sheet to account for 
the proper recording of (i) changes in tax laws or tax rates in the 
period that the change is enacted and reflected in the utilities' 
deferred tax accounts, (ii) a deferred tax liability for the equity 
component of AFUDC depreciation expense, and (iii) a deferred tax 
liability for any unfunded tax benefits previously flowed through to 
ratepayers. Rate Counsel notes that in implementing FAS 109, the Chief 
Accountant advised that if a utility's billing determinations would be 
affected by adoption of FAS 109, then the utility must file with the 
proper rate regulatory authorities before implementing the change in 
tariff billings. Thus, Rate Counsel argues that contrary to ACE's 
request here, filings implementing FAS 109 changes for billing purposes 
were to be prospective--not retrospective.\94\
---------------------------------------------------------------------------

    \94\ Id. at 5.
---------------------------------------------------------------------------

    71. Rate Counsel next argues that ACE, like BGE, failed to comply 
with the requirement to make a filing within a reasonable period of 
time. Rate Counsel argues ACE has previously recorded all amortizations 
of the FAS 109 regulatory assets and liabilities on its books and 
records for the period 2005-2017. Rate Counsel argues ACE's claim that 
it is making this adjustment to reverse the prior accounting treatment 
of amortizing the FAS 109 assets and liabilities for 2005-2017 period 
to ``properly match the ratemaking'' is illogical.\95\ Rate Counsel 
argues ACE's existing transmission formula rate template already 
appropriately reflects the removal (i.e., exclusion) of FAS 109's 
current year balance from ADIT.\96\ Rate Counsel argues ACE has already 
properly excluded FAS 109 balances for ratemaking purposes in prior 
year periods, and has also properly amortized the FAS 109 assets and 
liabilities each year for the 2005-2017 period.\97\
---------------------------------------------------------------------------

    \95\ Id. at 6.
    \96\ Id. at 6-7.
    \97\ Id. at 7.
---------------------------------------------------------------------------

    72. Rate Counsel argues the 2006 Settlement Agreement did not 
contemplate that ACE would defer these FAS 109 amounts and seek 
recovery in a subsequent rate case. Rather, in the 2006 Settlement 
Agreement, the settling parties agreed on a revenue formula that was 
accepted as just and reasonable, and which specifically excluded the 
recovery of FAS 109 ADIT and annual amortization amounts.\98\ Rate 
Counsel asserts that ACE has offered no basis that would justify a 
unilateral amendment of the settled formula rate.\99\
---------------------------------------------------------------------------

    \98\ Id.
    \99\ Id. at 9.
---------------------------------------------------------------------------

    73. Rate Counsel asserts ACE cannot leverage the tax law change 
into a basis for belated recovery of unrelated dollars. While Rate 
Counsel agrees that a mechanism should be added to the formula to 
account for the flow back of prospective Excess/Deficient Deferred 
Income Taxes associated with federal income tax and state income tax 
rate changes, especially in light of the recent significant reduction 
of the federal income tax rate, Rate Counsel argues that it is not 
appropriate to include amortization of Excess/Deficient Income Taxes 
from prior periods. Rate Counsel argues that in addition to dating back 
as much as 44 years, many of these items appear to be temporary in 
nature and thereby create only temporary timing differences. Rate 
Counsel argues ACE has not provided a detailed description of each of 
the ``Other Flow Through Items,'' nor a detailed explanation supporting 
a special formula adjustment to accommodate them. Rate Counsel argues 
ACE has also not demonstrated that transmission customers benefited 
from the prior flow-through. Therefore, Rate Counsel argues ACE has not 
demonstrated that the transmission customers should now fund the 
``deficiency'' in deferred income tax liabilities.\100\
---------------------------------------------------------------------------

    \100\ Id. at 11-13.
---------------------------------------------------------------------------

    74. Rate Counsel argues that ACE's claim that all FAS 109 items 
must flow through the formula is unfounded and asserts FAS 109 includes 
numerous items, each of which needs Commission approval. Rate Counsel 
argues that a new line item can be added in Account 283 to record the 
excess deferred taxes related to the federal income tax rate 
change.\101\
---------------------------------------------------------------------------

    \101\ Id. at 13.
---------------------------------------------------------------------------

    75. Rate Counsel argues ACE has not demonstrated that the ten-year 
amortization period is appropriate for transmission customers. Rate 
Counsel argues the use of such a lengthy amortization period may cause 
cross-generational cost allocation issues.\102\
---------------------------------------------------------------------------

    \102\ Id. at 14.
---------------------------------------------------------------------------

2. Answer of ACE
    76. ACE filed in its answer nearly identical responses to 
Delmarva's answer in response to protesters' arguments on the following 
three issues: (1) Single-issue rate treatment; (2) the allegation that 
recovery of FAS 109 amounts would violate the 2006 Settlement Agreement 
and would result in retroactive ratemaking; and (3) severing formula 
rate adjustments pertaining to the Tax Cuts and Jobs Act from other 
portions of ACE's proposal.
    77. ACE argues that Vineland's suggestion--that ACE seek Commission 
approval for each and every FAS 109 amount as it arises--would be 
burdensome and extreme because FAS 109 amounts arise frequently, thus 
requiring multiple section 205 filings for every such expense. ACE 
states that the Commission has repeatedly recognized that formula 
recovery of FAS 109 amounts is just and reasonable.\103\
---------------------------------------------------------------------------

    \103\ ACE March 29, 2018 Answer at 12-13.
---------------------------------------------------------------------------

    78. ACE asserts that Rate Counsel failed to cite precedent that 
precludes ACE from correcting accounting errors, such as ACE's reversal 
of amortizations of FAS 109 amounts. ACE instead argues that Duquesne 
and PPL support its proposal to correct these amortizations to align 
rate treatment of FAS 109 amounts, and therefore Rate Counsel's 
argument should be summarily rejected.\104\
---------------------------------------------------------------------------

    \104\ Id. at 13-14.
---------------------------------------------------------------------------

    79. Finally, ACE argues that various challenges raised by Rate 
Counsel regarding numerical values in the proposal are more 
appropriately raised within the annual formula rate update and 
challenge process. ACE states that the formula rate protocols provide a 
robust process for obtaining discovery on and challenging particular 
items included in the annual rate update, and therefore the Commission 
should reject Rate Counsel's arguments without prejudice to their right 
to raise those issues in that forum.\105\
---------------------------------------------------------------------------

    \105\ Id. at 15.
---------------------------------------------------------------------------

3. Rate Counsel's Answer to the Answer
    80. Rate Counsel argues that contrary to ACE's claims, the ACE 
accounting

[[Page 46725]]

department did not make an error, but instead correctly amortized the 
FAS 109 amounts in ACE's books and records from 2006 through 2016, 
consistent with Generally Accepted Accounting Principles (GAAP).\106\ 
Further, Rate Counsel argues that if ACE's intention was to defer FAS 
109 amortizations from 2006-2016, then ACE should have requested 
authorization from the Commission to implement such accounting 
treatment.\107\
---------------------------------------------------------------------------

    \106\ Rate Counsel April 10, 2018 Answer to the Answer at 3.
    \107\ Id. at 3-4.
---------------------------------------------------------------------------

    81. Rate Counsel also argues that contrary to ACE's claims, it is 
not asking the Commission to make an impermissible retroactive change 
to ACE's rates. To this point, Rate Counsel argues that the FAS 109 
current balances, after reflecting all prior period amortizations and 
those amortizations that should have been expensed annually, are the 
appropriate basis for any current or future amortizations and only 
after the Commission approves each FAS 109 component.\108\
---------------------------------------------------------------------------

    \108\ Id. at 4.
---------------------------------------------------------------------------

D. PEPCO Proceeding, Docket Nos. ER18-905-000 and ER18-905-001

1. Protest of SMECO
    82. SMECO asserts that PEPCO's proposal to recover FAS 109 amounts 
from prior periods is not just and reasonable for four reasons. First, 
SMECO argues that PEPCO's proposal violates the filed rate doctrine and 
the rule against retroactive ratemaking. SMECO reasons that the 2006 
Settlement Agreement adopted a formula rate template that specifically 
excluded these amounts and that PEPCO did not expressly reserve a right 
to defer these amounts for future recovery.\109\ SMECO also contends 
that, contrary to PEPCO's assertion, the 2006 Settlement Agreement 
constituted the ``next rate case'' following Order No. 144.\110\ 
Alternatively SMECO argues that to the extent PEPCO wanted to attempt 
to recover these FAS 109 amounts, it should have done so immediately 
after the rate moratorium (which resulted from settlement) that ended 
on June 1, 2009. SMECO notes that accepting PEPCO's proposal now would 
also contradict precedent set in the November 16 Order involving 
BGE.\111\
---------------------------------------------------------------------------

    \109\ SMECO March 16, 2018 Protest at 3-4.
    \110\ Id. at 5.
    \111\ Id. at 6-7.
---------------------------------------------------------------------------

    83. Secondly, SMECO notes that, for accounting purposes, PEPCO has 
already been amortizing FAS 109 regulatory assets and liabilities for 
the 2005-2017 period. SMECO states that PEPCO's proposal to reverse all 
these amortizations ``to properly match the ratemaking'' is illogical 
because PEPCO's formula rate already appropriately reflects the 
exclusion of FAS 109 current year balances from ADIT.\112\
---------------------------------------------------------------------------

    \112\ Id. at 8.
---------------------------------------------------------------------------

    84. Thirdly, SMECO argues that for PEPCO to properly seek rate 
recovery of prior FAS 109 amounts for AFUDC Equity Origination/
Depreciation, it would have needed to create a deferred regulatory 
asset on its books to record the annual AFUDC Equity depreciation 
amount, which it did not. SMECO contends that PEPCO is effectively 
attempting to revise its books to create these deferred regulatory 
assets retrospectively.\113\
---------------------------------------------------------------------------

    \113\ Id. at 9.
---------------------------------------------------------------------------

    85. Finally, SMECO agrees that a mechanism in the formula rate is 
necessary to flow back Excess/Deficient Deferred Taxes associated with 
federal and state income tax changes. However, SMECO claims that PEPCO 
has not adequately supported its proposed amortization and that it is 
inappropriate to include amortization of Excess/Deficient Income Taxes 
from prior periods.\114\
---------------------------------------------------------------------------

    \114\ Id. at 10-11.
---------------------------------------------------------------------------

    86. SMECO alleges that many of the ``Other Flow Through Items'' 
appear to be temporary in nature, and that PEPCO has failed to 
sufficiently support its basis for making a special adjustment to 
income taxes in the formula rate for these items. SMECO maintains that, 
as with the other prior-period FAS 109 amounts, it is inappropriate for 
PEPCO to recover these amounts from prior periods in its current and 
future formula rates, and that PEPCO could have dealt with these items 
in the 2006 Settlement Agreement.\115\
---------------------------------------------------------------------------

    \115\ Id. at 11-12.
---------------------------------------------------------------------------

    87. SMECO states that the entire FAS 109 amounts (including 
deferred tax amounts from prior periods) do not need to be included in 
rates in order to effectuate the Tax Cuts and Jobs Act. SMECO argues 
that PEPCO can instead create a new line item in Account 283 to 
implement the excess deferred taxes related to the adjustment of the 
federal income tax rate, or that the regulatory liability balance for 
the excess deferred tax reserve recorded in Account 254 can be included 
as an adjustment to rate base.\116\
---------------------------------------------------------------------------

    \116\ Id. at 12-13.
---------------------------------------------------------------------------

    88. SMECO also argues that PEPCO has not supported its claim that 
the Flow-Through Items regulatory asset is linked to assets that are 
still in service. SMECO further argues that the Commission should 
reject PEPCO's attempt to shift the burden of proof regarding the 
reasonableness of its proposal to transmission customers via the 
formula rate protocols.\117\ SMECO also notes that PEPCO does not 
address the overall tax rate change from 35 percent to 21 percent in 
its filing.\118\
---------------------------------------------------------------------------

    \117\ Id. at 13.
    \118\ Id. at 14.
---------------------------------------------------------------------------

    89. SMECO argues that PEPCO has not sufficiently supported the 
amortization periods it proposes to apply for Excess Deferred Taxes 
Decrease/(Increase) to deferred tax assets for Protected Property Rate 
Base, Non-Protected Property Rate Base, Non-Protected Non-Property Rate 
Base, and Non-Protected Non-Rate Base balances. SMECO also specifically 
disputes PEPCO's proposed 10-year amortization period for Non-Protected 
Non-Property and Non-Protected Non-Rate Base items, alleging that this 
may cause intergenerational cost allocation issues, wherein the 
customers that contributed to the excess deferred income taxes may not 
necessarily be the same customers that receive the flow back of excess 
deferred income taxes.\119\
---------------------------------------------------------------------------

    \119\ Id. at 14-15.
---------------------------------------------------------------------------

2. Comments of MD People's Counsel and DC People's Counsel

    90. MD People's Counsel filed comments in response to PEPCO's 
filing that were identical to the comments it filed in response to 
Delmarva's filing.\120\
---------------------------------------------------------------------------

    \120\ MD People's Counsel March 16, 2018 Comments to PEPCO at 1, 
3-7.
---------------------------------------------------------------------------

    91. DC People's Counsel agrees with PEPCO's proposal to apply the 
average rate assumption method in calculating excess ADIT on Protected 
Property Rate Base balances, but requests that the Commission utilize 
its discretion to institute a shorter amortization period for excess 
ADIT on Non-Protected Rate Base and Non-Rate Base balances. DC People's 
Counsel specifically requests a 10-year amortization period for excess 
ADIT on Non-Protected Property Rate Base balances, and a 5-year 
amortization period for excess ADIT on Non-Protected Non-Property Rate 
Base and Non-Protected Non-Rate Base balances.\121\
---------------------------------------------------------------------------

    \121\ DC People's Counsel March 16, 2018 Comments to PEPCO at 5-
6.
---------------------------------------------------------------------------

    92. DC People's Counsel argues that amending the formula rate to 
recover historical FAS 109 amounts and provide for automatic pass 
through of ongoing FAS 109 amounts is unnecessary to return tax savings 
to ratepayers resulting from the Tax Cuts and Jobs Act. DC People's 
Counsel notes that although PEPCO argues the instant case is the

[[Page 46726]]

``next rate case'' following the 2006 Settlement Agreement, the 
requested 60-day schedule is insufficient to thoroughly explore the 
ramifications of PEPCO's proposal.\122\ DC People's Counsel also states 
that it would be unwise to approve PEPCO's proposal until the 
Commission completes its review of ADIT issues implicated by the Tax 
Cuts and Jobs Act under Docket No. RM18-12-000.\123\
---------------------------------------------------------------------------

    \122\ Id. at 7-8.
    \123\ Id. at 9.
---------------------------------------------------------------------------

    93. DC People's Counsel argues that PEPCO's proposal does not meet 
the Commission's criteria for single-issue treatment of ratemaking. DC 
People's Counsel states that the Commission has limited the use of 
single-issue treatment to ``ADIT treatment in formula rates when such 
revisions are only considered mere differences in timing,'' and that 
PEPCO's proposal represents a significant departure from previous 
Commission-approved accounting methods. DC People's Counsel further 
argues that the proposed treatment of FAS 109 amounts will likely 
result in changes in other component costs that warrant the 
Commission's full understanding, which is not possible in a single-
issue rate case.\124\
---------------------------------------------------------------------------

    \124\ Id. at 9-10.
---------------------------------------------------------------------------

3. Answer of PEPCO
    94. PEPCO filed in its answer nearly identical responses to 
Delmarva's responses to protesters' arguments on the following three 
issues: (1) Single-issue rate treatment; (2) the allegation that 
recovery of FAS 109 amounts would violate the 2006 Settlement Agreement 
and would result in retroactive ratemaking; and (3) severing formula 
rate adjustments pertaining to the Tax Cuts and Jobs Act from other 
portions of ACE's proposal.
    95. PEPCO asserts that SMECO failed to cite precedent that 
precludes PEPCO from correcting accounting errors, such as PEPCO's 
reversal of amortizations of FAS 109 amounts. PEPCO instead argues that 
Duquesne and PPL support its proposal to correct these amortizations to 
align rate treatment of FAS 109 amounts, and therefore SMECO's argument 
should be summarily rejected.\125\
---------------------------------------------------------------------------

    \125\ PEPCO March 29, 2018 Answer at 13-14.
---------------------------------------------------------------------------

    96. Finally, PEPCO argues that various challenges raised by SMECO 
regarding numerical values in the proposal are more appropriately 
raised within the annual formula rate update and challenge process. 
PEPCO states that the formula rate protocols provide a robust process 
for obtaining discovery on and challenging particular items included in 
the annual rate update, and therefore the Commission should reject 
SMECO's arguments without prejudice to their right to raise those 
issues in that forum.\126\
---------------------------------------------------------------------------

    \126\ Id. at 14.
---------------------------------------------------------------------------

4. SMECO's Answer to the Answer
    97. SMECO argues that there is no provision in Attachment 1 of 
Attachment H-9A or any other portion of the settlement agreement or 
Formula Rate established as part of the 2006 Settlement that preserves 
PEPCO's ability to collect FAS 109 deferred tax amounts at a future 
date. Further, SMECO argues that Section 6.11 of the 2006 Settlement 
makes clear that the Settling Parties are not to rely on any term not 
expressly set forth in the Settlement by stating, ``none of the 
Settling Parties has relied upon any representation, express or 
implied, not contained in this Settlement.'' \127\ Additionally, SMECO 
argues that until PEPCO revised its formula rate protocols effective 
December 3, 2015, the formula rate protocols provided that PEPCO's 
annual updates would become final and no longer subject to change or 
challenge by any entity on the latter of the passage of the challenge 
period or final FERC order on the annual update, subject to judicial 
review.\128\
---------------------------------------------------------------------------

    \127\ SMECO April 13, 2018 Answer to Answer at 3-4.
    \128\ Id. at 4.
---------------------------------------------------------------------------

    98. SMECO argues that PEPCO misstates the applicability of Order 
No. 144 and associated cases and Commission guidance to its filing in 
this proceeding. SMECO further argues that even if PEPCO's erroneous 
interpretation of the 2006 Settlement and the Order No. 144 precedent 
is considered in a light most favorable to PEPCO, recovering deferred 
tax liabilities thirteen years after they could have been captured in 
the Formula Rate since its implementation on 2005, is not a reasonable 
period.\129\
---------------------------------------------------------------------------

    \129\ Id. at 6.
---------------------------------------------------------------------------

    99. SMECO argues that it is not seeking to prevent PEPCO from 
recovering prior FAS 109 amounts due to ``erroneous accounting'' that 
has now been corrected. SMECO argues that while PEPCO describes it as 
an ``accounting error,'' PEPCO's amortization of FAS 109 amounts in 
fact reflects that PEPCO's accounting department recognized that PEPCO 
had not sought or received Commission approval for the deferral of FAS 
109 amounts and must amortize the FAS 109 amounts as required under 
GAAP.\130\
---------------------------------------------------------------------------

    \130\ Id at 7-8.
---------------------------------------------------------------------------

    100. SMECO argues PEPCO does not meet its FPA section 205 burden of 
proof in this proceeding when it argues that the issues SMECO has 
raised in its protest should be deferred to the annual update process. 
SMECO asserts that the issues it has raised are pertinent to the 
justness and reasonableness of PEPCO's Formula Rate revisions and 
should be addressed in the instant proceeding.\131\
---------------------------------------------------------------------------

    \131\ Id. at 8.
---------------------------------------------------------------------------

5. DC People's Counsel Comments on Deficiency Letter Response
    101. In its response to PEPCO's response to the Deficiency Letter, 
DC People's Counsel reiterates its opposition to PEPCO's proposal to 
recover FAS 109 deferred tax assets.\132\
---------------------------------------------------------------------------

    \132\ DC People's Counsel July 30, 2018 Comments on Deficiency 
Letter Response at 1-2.
---------------------------------------------------------------------------

    102. DC People's Counsel states that PEPCO's current transmission 
Formula Rate plan does not include FAS 109 deferred tax assets. 
However, PEPCO's application proposes a modification to the Formula 
Rate plan that would include historical FAS 109 deferred tax assets in 
the Formula Rate plan dating back to December 31, 2004.\133\ DC 
People's Counsel expresses concern regarding PEPCO's request to modify 
its Formula Rate plan to now include these historical FAS 109 deferred 
asset balances going back to December 31, 2004 and to provide for 
automatic pass through in formula-based transmission rates of similar 
deferred assets.\134\
---------------------------------------------------------------------------

    \133\ Id. at 5.
    \134\ Id. at 6.
---------------------------------------------------------------------------

    103. DC People's Counsel concludes that the explanations provided 
in PEPCO's response are insufficient to justify inclusion of such FAS 
109 deferred asset balances in PEPCO's revised Formula Rate plan at 
this time. Given PEPCO's history of ``black box'' settlements and the 
lengthy period (from mid-2005 through 2017) over which PEPCO has 
accumulated such balances, DC People's Counsel recommends excluding the 
FAS 109 deferred asset amortizations from the adjustment to PEPCO's 
transmission rates at this time, to allow for detailed scrutiny and 
analysis of those balances in a complete rate case.\135\
---------------------------------------------------------------------------

    \135\ Id. at 7.
---------------------------------------------------------------------------

6. PEPCO Answer to DC People's Counsel Comments on Deficiency Response
    104. PEPCO argues DC People's Counsel has not alleged, much less 
supported, an argument that formula elements outside of the proposed 
FAS 109 modifications are incorrect and that there is no basis for 
ordering a complete rate case that goes beyond the issues

[[Page 46727]]

raised in PEPCO's filing.\136\ PEPCO argues that the Commission 
accepted a single issue filing considering amendments to a formula rate 
to provide for rate recovery of FAS 109 amounts in May 2018 in 
Ameren.\137\
---------------------------------------------------------------------------

    \136\ PEPCO August 13, 2016 Answer to DC People's Counsel 
Comments on Deficiency Letter Response at 5.
    \137\ Id. at 5 (citing Ameren, 163 FERC ] 61,163).
---------------------------------------------------------------------------

    105. PEPCO argues the Commission's policy and precedent permitting 
rate flow through of FAS 109 amounts is clear and argues the 
Commission's recent ruling in its Pipeline Tax Final Rule describes and 
summarizes the Commission's relevant tax ratemaking policies, and makes 
clear that PEPCO's filing is well founded.\138\ PEPCO argues the 
findings in the Pipeline Tax Final Rule concerning FAS 109 adjustments 
are directly applicable in this proceeding, because PEPCO's filing 
relies on the exact same policies and precedent. PEPCO argues that it 
is subject to the Commission's accounting rules that require accrual of 
FAS 109 amounts to a regulatory asset or liability, and the precedent 
providing for later rate pass through.\139\
---------------------------------------------------------------------------

    \138\ Id. at 5-6 (citing Interstate and Intrastate Natural Gas 
Pipelines; Rate Changes Relating to Federal Income Tax Rate, Order 
No. 849, FERC Stats. & Regs. ] 31,404 2018)).
    \139\ Id. at 7.
---------------------------------------------------------------------------

    106. With respect to DC People's Counsel's argument to accept 
certain aspects of PEPCO's filing, while rejecting others, PEPCO argues 
that neither the FPA nor Commission precedent permit the Commission to 
somehow sever the adjustments related to the Tax Cuts and Jobs Act from 
the other portion of the FAS 109 modifications in the filing. PEPCO 
argues that in doing so, it would transform the filing from a fair and 
evenhanded amendment intended to have taxes flowing through rates match 
actual tax liabilities over time into an entirely different rate scheme 
in which tax liabilities of the utility would not be adequately 
reflected in rates. Further, PEPCO argues there is no basis for 
rejecting, delaying, or otherwise preventing the effectiveness of the 
proposed FAS 109 amendments.\140\
---------------------------------------------------------------------------

    \140\ Id. at 8.
---------------------------------------------------------------------------

VI. Discussion

A. Procedural Matters

    107. Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.214 (2018), the notices of intervention and the 
timely, unopposed motions to intervene serve to make the entities that 
filed them parties to the specific proceeding in which they intervened.
    108. Rule 213(a)(2) of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.213(a)(2) (2018), prohibits an answer to a 
protest and an answer to an answer unless otherwise ordered by the 
decisional authority. We will accept the answers to the protests and 
the answers to the answers in the specific proceeding in which they 
were filed because they have provided information that assisted us in 
the decision-making process.

B. Substantive Matters

    109. We find that Exelon Companies have not shown that their 
proposed Formula Rates provisions allowing for the recovery of 
previously incurred income tax amounts are just and reasonable and 
therefore we reject their filings. While we do not find Exelon 
Companies' proposal to refund deferred amounts related to the recent 
Tax Cuts and Jobs Act or its proposal to recover or return deferred 
income tax amounts on an ongoing basis to be unjust and unreasonable, 
we reject Exelon Companies' proposal as a whole, in recognition of 
Exelon Companies' statements that accepting only certain aspects of its 
proposal would ``transform this filing into an entirely new rate 
scheme.'' \141\
---------------------------------------------------------------------------

    \141\ E.g., ComEd Transmittal at n.8.
---------------------------------------------------------------------------

    110. As described below, our rejection of the Exelon Companies' 
filings is without prejudice to Exelon Companies submitting new filings 
with a mechanism to refund or recover, as appropriate, deferred income 
tax excesses and deficiencies related to the recent Tax Cuts and Jobs 
Act and any future income tax changes, any new originations of past 
income tax changes, and taxes on AFUDC Equity associated with current 
and future years' depreciation expense.\142\ As described below, we 
also announce a limited compliance period under Order No. 144 for other 
utilities to make section 205 filings to recover past ADIT in certain 
circumstances.
---------------------------------------------------------------------------

    \142\ Further, our action here is not intended to prejudge 
future action by the Commission in the Notice of Inquiry concerning 
the Tax Cuts and Jobs Act.
---------------------------------------------------------------------------

1. Timing of Exelon Companies Filings
    111. As the Commission found in the November 16 Order involving 
BGE, we find that the deferred amounts Exelon Companies seek to recover 
here should have been captured when Exelon Companies' Formula Rates 
were implemented in 2005 (for Delmarva, ACE and PEPCO) and 2007 (for 
ComEd).\143\ While Order No. 144 put ratepayers on notice that 
companies may make adjustments for recovery of certain tax 
deficiencies, the Commission required such adjustments to be made for 
the purpose of transitioning to full normalization in ``the applicant's 
next rate case following the applicability of the rule.'' \144\ Exelon 
Companies' initial Formula Rate filings included line items that 
expressly excluded recovery of these items in their Formula Rates.\145\ 
Exelon Companies thus failed to comply with the requirement in Order 
No. 144 that recovery should be addressed in the ``next rate case'' at 
the time they initially filed their Formula Rates.
---------------------------------------------------------------------------

    \143\ November 16 Order, 161 FERC ] 61,163 at P 18.
    \144\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,519. 
This requirement is reflected in the Commission's regulations 
regarding tax normalization, which state that, if the public utility 
has not provided deferred taxes in the same amount that would have 
accrued had tax normalization been applied for transactions 
occurring any time before the test period, or if tax rate changes 
cause the accumulated provision for deferred income to become 
deficient or in excess, the public utility is required to compute 
the income tax component in its cost of service by making provision 
for any excess or deficiency in deferred taxes. 18 CFR 35.24(c) 
(2018).
    \145\ For ComEd, see Formula Rate Filing, Docket No. ER07-583-
000, Appendix A, Attachment H-13, at line 40 (filed Mar. 1, 2007) 
(line item for ``ADIT net of FASB 106 and 109'') (emphasis added). 
For ACE, Delmarva and PEPCO, see Formula Rate Filing, Docket No. 
ER05-515-000, Appendix A, Attachments H-1, H-3 and H-9, at line 40 
(filed Jan. 31, 2005) (line item for ``ADIT net of FASB 106 and 
109'') (emphasis added).
---------------------------------------------------------------------------

    112. Exelon Companies insist that they did not run afoul of this 
guidance because their Formula Rate filings in 2005 (for Delmarva, ACE 
and PEPCO) and 2007 (for ComEd) resulted in settlements \146\ that 
expressly excluded FAS 109 amounts from current rates,\147\ and the 
settlement for Delmarva, ACE and PEPCO included a rate moratorium 
preventing them from filing a further rate case until 2009.\148\ While 
it is true that the Formula Rate proceedings in 2005 (for Delmarva, ACE 
and PEPCO) and 2007 (for ComEd) were resolved via settlements that 
expressly excluded FAS 109 amounts, we disagree with Exelon Companies' 
characterization of this exclusion as ``leaving the issue to be

[[Page 46728]]

addressed in some later proceeding.'' \149\ Exelon Companies argue that 
interpreting the settlements to require them to eliminate or reduce 
their FAS 109 regulatory assets, instead of deferring recovery for the 
future, reads extraneous provisions into the settlements.\150\ However, 
the settlements did not expressly reserve deferred income tax issues, 
as Exelon Companies contend; rather, the settlements were silent on 
this point. The Exelon Companies' settlements were thus not analogous 
to the Stingray settlement, which expressly provided a compromise level 
of adjustment to deferred tax accounts.\151\ Accordingly, in finding 
that the Exelon Companies' 2005 and 2007 Formula Rate cases constituted 
the ``next rate case'' for purposes of Order No. 144, we are not 
disregarding the settlement, but rather interpreting the references to 
line items being ``net of'' or ``less'' FAS 109 amounts to mean that 
the Exelon Companies did not intend to pursue recovery of these 
amounts, whether at the time of the settlement or 10 years later. 
Moreover, because Exelon Companies did not request recovery of FAS 109 
amounts in their initial filings of their Formula Rate cases, Exelon 
Companies could not have deferred recovery of FAS 109 amounts for the 
next rate case unless they expressly addressed this issue in the 
settlements of their Formula Rates.
---------------------------------------------------------------------------

    \146\ Order No. 144 states that ``[t]he rule, of course, leaves 
undisturbed the ability of the parties to reach a settlement on any 
of the issues covered by the rule.'' Order No. 144, FERC Stats. & 
Regs. ] 30,254 at 31,519.
    \147\ For ComEd, see Offer of Settlement, Docket No. ER07-583-
000, (filed October 5, 2007) (Attachment H-13, at line 40 (line item 
for ``ADIT net of FASB 106 and 109'') (emphasis added) and 
Attachment 1--ADIT Worksheet, which states: ``Less FASB 109 Above if 
not separately removed''). For ACE, Delmarva and PEPCO, see Offer of 
Settlement, Docket No. ER05-515-000, (filed March 20, 2006) 
(Attachments H-1, H-3 and H-9, at line 40 (line item for ``ADIT net 
of FASB 106 and 109'') (emphasis added) and Attachment 1--ADIT 
Worksheets, which state: ``Less FASB 109 Above if not separately 
removed'').
    \148\ E.g., Delmarva Transmittal at 19.
    \149\ E.g., ComEd Transmittal at 35.
    \150\ Id. at 35-36.
    \151\ Id. at 34-35.
---------------------------------------------------------------------------

    113. In addition, Exelon Companies failed to comply with the 
directive in Order No. 144 to begin the process of adjusting its 
deferred tax deficiencies and excesses ``so that, within a reasonable 
period of time to be determined on a case-by-case basis, [it would] be 
operating under a full normalization policy.'' \152\ According to 
Exelon Companies, even after its 2005 and 2007 Formula Rate proceedings 
were resolved by settlement, and after the rate moratorium established 
in the settlements for Delmarva, ACE and PEPCO ended in 2009, this is 
the first rate case since to address these issues.\153\ Exelon 
Companies still do not explain why they waited an additional nine and a 
half years to make their February 23, 2018 filings. And Exelon 
Companies' apparent conclusion that they could hold these amounts in 
reserve indefinitely conflicts with the language of Order No. 144. 
Order No. 144 also established that rate applicants must ``begin the 
process of making up deficiencies in or eliminating excesses in their 
deferred tax account reserves so that, within a reasonable period of 
time to be determined on a case-by-case basis, they will be operating 
under a full normalization policy.'' \154\ We find that the 
``reasonable period of time'' language was intended to work in 
conjunction with the ``next rate case'' requirement, not as an 
alternative. In other words, requiring applicants to begin the process 
of making up deficiencies or returning excesses so as to be operating 
under a full normalization policy ``within a reasonable period of 
time'' does not negate the requirement that applicants must seek 
recovery in their next rate case. As explained above, Exelon Companies 
failed to file for recovery in its next rate case as required by Order 
No. 144 or reserve the issue for future consideration through 
settlement. Having failed to meet that requirement, they cannot now 
claim that their filing would provide for recovery within a 
``reasonable period of time.''
---------------------------------------------------------------------------

    \152\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
    \153\ ComEd Transmittal at 39; Delmarva Transmittal at 34-35; 
ACE Transmittal at 33; PEPCO Transmittal at 35.
    \154\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560 
(emphasis added).
---------------------------------------------------------------------------

    114. We further disagree with Exelon Companies' assertion that 
Order No. 144 did not impose any requirement on utilities to make a 
rate filing. Exelon Companies suggest that by using the term ``rate 
applicant,'' defined in the regulation text as a utility ``that makes a 
rate filing,'' the Commission was signaling in Order No. 144 that 
utilities need only begin the process of recovering deficiencies or 
refunding excesses after they filed a rate case, without imposing any 
requirements as to when that rate case must be filed.\155\ Exelon 
Companies' reading is inconsistent with the intent of the quoted 
sentence, which requires rate applicants to begin the process ``so 
that, within a reasonable period of time to be determined on a case-by-
case basis, they will be operating under a full normalization policy.'' 
\156\ If, as the sentence suggests, the goal was for utilities to begin 
operating under a full normalization policy within a reasonable time, 
interpreting this ``reasonable period of time'' requirement to be 
triggered only after a rate case is filed with no parameters as to when 
the rate case must be filed defeats this purpose. Additionally, while 
Exelon Companies stress that Order No. 144 did not actually direct 
utilities to make a rate filing,\157\ the Commission directed utilities 
to ``begin the process'' of making up deficiencies or eliminating 
excesses, and required a rate applicant to compute the income tax 
component in its cost of service by making provision for any excess or 
deficiency in its deferred tax reserves resulting both from the prior 
flow through treatment of timing differences and from tax rate changes, 
which would require a rate filing.\158\ In sum, while the language in 
Order No. 144 recognizes that the reasonable timing for implementing 
tax normalization may vary and thus provides some flexibility, Exelon 
Companies' reading would render the timing purely discretionary.
---------------------------------------------------------------------------

    \155\ ComEd Transmittal at 38; Delmarva Transmittal at 33; ACE 
Transmittal at 32; PEPCO Transmittal at 33.
    \156\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
    \157\ ComEd Transmittal at 37-38; Delmarva Transmittal at 33; 
ACE Transmittal at 32; PEPCO Transmittal at 33.
    \158\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560.
---------------------------------------------------------------------------

    115. Exelon Companies further assert that subsequent cases 
interpreting Order No. 144 have established that recovery in a 
``reasonable period of time'' means that deferred tax amounts should be 
flowed back ``over the remaining life of the property that generated 
the deferred tax reserve.'' \159\ However, we disagree with Exelon 
Companies' position that the Commission's use of a ``reasonable period 
of time'' referred solely to the time period to amortize the tax 
deficiencies.\160\ Rather, the Commission expressed the intention in 
Order No. 144 that utilities take the necessary steps to ensure that 
they would be operating under a full normalization policy within a 
reasonable period of time, that to be operating under full 
normalization, the method to be used should be a Commission-approved 
method, and that provision for such differences be included in the 
income tax component of cost of service. While the choice of 
normalization method is

[[Page 46729]]

certainly relevant to this objective,\161\ so is the timely proposal of 
provisions to recover deficiencies and excesses of deferred income tax 
(including the proposed choice of normalization method) to be 
adjudicated in the companies' next rate case. In other words, requiring 
applicants to select normalization methods that will ensure a timely 
transition to full normalization would be meaningless if the applicants 
can defer filing those proposed methods over the course of several rate 
cases.
---------------------------------------------------------------------------

    \159\ ComEd Transmittal at 39; Delmarva Transmittal at 34; ACE 
Transmittal at 32-33; PEPCO Transmittal at 34 (citing Opinion No. 
345, 50 FERC at 62,148, and Nat. Gas Pipeline of America, 13 FERC ] 
61,266).
    \160\ In the proceedings underlying Opinion No. 345, intervenors 
used the term ``reasonable period of time'' to question whether the 
speed at which deficiencies would be flowed back to customers using 
the Average Rate Assumption Method (ARA Method) would comply with 
the policy expressed in Order No. 144. See Opinion No. 345, 50 FERC 
at 62,148. The Commission found that it was reasonable to flow back 
the two percent of deferred taxes related to timing differences 
using the ARA Method (required under the Tax Reform Act of 1986 for 
the other amounts), because the ARA Method provided a reasonable way 
to flow back deferred amounts ``over the remaining life of the 
assets that generated the deferred taxes'' and because the impact on 
customers would be so minor. Id. at 62,149. The Commission did not 
comment on intervenors' characterization of the term ``reasonable 
period of time'' nor apply Order No. 144 in reaching this result.
    \161\ See Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,560 
(``Since the appropriateness of any method to accomplish the 
objective of full normalization at current tax rates has not been 
analyzed by the Commission on a generic basis, the Commission is, at 
this time, requiring resolution of this problem on a case-by-case 
basis.'').
---------------------------------------------------------------------------

    116. In the November 16 Order, the Commission held that 
``[c]ontrary to BGE's assertions, . . . utilities do not have 
unfettered discretion to defer these [deferred] tax amounts on their 
books for decades without timely seeking regulatory approval to collect 
them.'' \162\ Exelon Companies take umbrage to the suggestion that they 
are seeking to recover decades-old amounts.\163\ As Exelon Companies 
assert, deferred income taxes necessarily reflect a timing difference 
in the recognition of current income tax effects on the tax return and 
recognition on the books in future periods. However, as Exelon 
Companies accede, these items were amortized and recovery of these 
items was included in rates through black box settlements through 2005 
(for Delmarva, ACE and PEPCO) and 2007 (for ComEd), then expressly 
excluded by Exelon Companies until their February 23, 2018 filings, 
more than a decade later. In other words, our concern is not that 
deferred income taxes are, by definition, collected over a period of 
time, but that the Exelon Companies are now seeking to recover amounts 
that should have been recovered between 2005 or 2007 and 2018.
---------------------------------------------------------------------------

    \162\ November 16 Order, 161 FERC ] 61,163 at P 19.
    \163\ ComEd Transmittal at 34-35; Delmarva Transmittal at 30; 
ACE Transmittal at 28-29; PEPCO Transmittal at 30.
---------------------------------------------------------------------------

    117. In the November 16 Order, the Commission cited Stingray \164\ 
for the proposition that recording a deferred tax liability does not 
guarantee that the utility will be able to recover this amount, as 
express approval is needed from the Commission.\165\ Exelon Companies 
state that the Commission recognized in Stingray that there could be 
remaining unamortized amounts that were properly recoverable in rates 
on an ongoing basis in the years after the settlement.\166\ Exelon 
Companies claim that they similarly assumed that an amortized portion 
of the FAS 109 regulatory asset was recovered in rates prior to 2005 
(for Delmarva, ACE and PEPCO) and 2007 (for ComEd), and has limited 
their filings to seeking recovery of remaining balances and new 
accruals as of 2005 and 2007 respectively.\167\ As we recognized in 
Stingray, recovery of remaining unamortized balances of regulatory 
deferrals is permissible on an ongoing basis, provided that the utility 
properly addresses the manner of recovery. Exelon Companies present no 
arguments in their applications that have persuaded us that deferred 
income tax amounts were reserved for future collection.
---------------------------------------------------------------------------

    \164\ Stingray, 50 FERC ] 61,159.
    \165\ November 16 Order, 161 FERC ] 61,163 at P 19.
    \166\ ComEd Transmittal at 34-35; Delmarva Transmittal at 30; 
ACE Transmittal at 29-30; and PEPCO Transmittal at 30.
    \167\ Id.
---------------------------------------------------------------------------

2. Matching
    118. As the Commission explained in Order No. 144 \168\ and in the 
November 16 Order,\169\ the primary rationale for tax normalization is 
matching the costs of plant (i.e., tax benefits from depreciation 
expense) to the periods to which they are allocated in rates. To 
operate properly, ``tax normalization allocates the tax benefits of an 
expense to the same time periods that the expense itself is 
allocated.'' \170\ The Commission found in Order No. 144 that the 
properly applied tax normalization method was more equitable than the 
flow-through method, which, through its inequitable allocation of tax 
costs over time, distorted the Commission's pricing policies.\171\
---------------------------------------------------------------------------

    \168\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,522.
    \169\ November 16 Order, 161 FERC ] 61,163 at n.30.
    \170\ Order No. 144, FERC Stats. & Regs. ] 30,254 at 31,522.
    \171\ Id.
---------------------------------------------------------------------------

    119. In the cases before us, Exelon Companies argue that, in the 
November 16 Order, the Commission ``suggested'' that BGE's filing 
violated the Commission's matching policy because it sought recovery of 
amounts long after the underlying assets have been retired or have 
stopped being depreciated.\172\ They contend that, like BGE, they meet 
the matching test because the filings are tied to recovery over the 
remaining life of appropriately chosen assets.\173\ They conclude there 
is no basis for concern that ``matching'' of costs and asset lives has 
somehow been violated.\174\
---------------------------------------------------------------------------

    \172\ ComEd Transmittal at 40 & n.85 (citing November 16 Order, 
161 FERC Stats. & Regs. ] 61,163 at P 20).
    \173\ Id. at 40.
    \174\ Id. at 41.
---------------------------------------------------------------------------

    120. In the November 16 Order, the Commission made a finding that 
``[b]ecause BGE did not address the tax deficiency in a reasonable 
time, its proposal no longer has the requisite matching of the 
amortization period with the relevant transmission assets.'' Thus, the 
Commission found that it was ``not appropriate for BGE to propose, at 
this late date, a mechanism to recover years of accumulated deferred 
tax liability amounts.'' \175\
---------------------------------------------------------------------------

    \175\ November 16 Order, 161 FERC ] 61,163 at P 21.
---------------------------------------------------------------------------

    The Commission found it troublesome to allow recovery of these 
amounts for plant that was either fully depreciated or retired by the 
time BGE submitted its filing.\176\
---------------------------------------------------------------------------

    \176\ Id. P 20.
---------------------------------------------------------------------------

    121. Exelon Companies argue that their instant proposals, and BGE's 
proposal in Docket No. ER17-528, are all consistent with the 
Commission's matching policy. Exelon Companies' arguments, however, 
mischaracterize the Commission's matching policy. The Commission's 
matching policy does not, as suggested, hinge on whether the regulatory 
assets are ``linked to assets that are still in service.'' Exelon 
Companies' basis for contending that their proposals do not violate 
matching principles is that their use of the industry standard PowerTax 
software verifies that the Flow-Through Items regulatory asset is 
linked to assets that are still in service.\177\ This ignores, however, 
that assets often can and do remain in service after the amortization 
period has expired and the assets are fully depreciated. This was an 
important factor in the Commission's findings in the November 16 Order 
that Exelon Companies' arguments ignore.
---------------------------------------------------------------------------

    \177\ Id.
---------------------------------------------------------------------------

    122. For example, Exelon Companies propose to recover the Flow-
Through Items over the remaining life of the assets in place at the 
time they implemented their Formula Rates (i.e., in 2005 or 2007). 
However, they have failed to show that these assets have not been fully 
depreciated and that they are still in service. The correct time period 
for recovery of the tax benefits from the depreciation expenses for 
these assets was over the remaining life of the assets in place at the 
time the switch to full normalization occurred (i.e., in the 1970s). 
The Commission has never approved such a re-amortization period as 
proposed by the Exelon Companies for the regulatory assets at issue 
here, and nothing presented here convinces

[[Page 46730]]

us that this would be appropriate. Further, with regard to AFUDC 
Equity, the Exelon Companies propose to develop new South Georgia tax 
provisions for each year's new AFUDC Equity origination and adjust the 
amortization for any retirements or changes in depreciation rates. 
However, South Georgia catch-up provisions are not supposed to change 
unless the tax rates change.
    123. Exelon Companies also propose to recover accumulated amounts 
associated with AFUDC Equity that has already been depreciated.\178\ 
However, to ensure consistency with the matching principle, only the 
additional taxes associated with the relevant year's depreciation of 
AFUDC Equity are eligible for recovery.\179\
---------------------------------------------------------------------------

    \178\ In response to the Deficiency Letter, Exelon Companies 
explain that the requisite formulaic data inputs to determine the 
taxes associated with the current year's depreciation expense (i.e., 
gross accumulated AFUDC Equity in transmission plant, depreciation 
rates and applicable income tax rates) do exist, but the proposed 
tax adjustments for the tax effects associated with AFUDC Equity do 
not match their current year's depreciation expense.
    \179\ November 16 Order, 161 FERC ] 61,163 at P 20.
---------------------------------------------------------------------------

3. Prior Precedent
    124. We find unpersuasive the arguments by Exelon Companies that 
recovery of the amounts from 2005 or 2007 and going forward is 
consistent with Order No. 144, FAS 109 and the 1993 FAS 109 Guidance 
Letter, the 2014 Staff Guidance on Formula Rate Updates, and the orders 
in PPL, Duquesne, VEPCO, and ITC.
    125. In support of their argument, Exelon Companies briefly discuss 
each of these cases. They state that, in PPL, four years had elapsed 
since PPL had implemented its formula rate, and the entire regulatory 
asset amount, as of the date the formula rate was implemented, was 
authorized for recovery. In Duquesne, they state that seven years had 
elapsed since its formula rate was filed, and the utility was similarly 
authorized to recover the amount as of the date of its formula rate. 
Regarding ITC and VEPCO, Exelon Companies state that these cases 
similarly involved a formulaic mechanism for recovery of an amortized 
amount, each year, of transmission-related FAS 109 amounts up through 
the date in which each year's rates are calculated. Unlike PPL and 
Duquesne, Exelon Companies state that the adjustments in ITC and VEPCO 
also included new originating FAS 109 amounts that had been recorded 
after their formula rates were put in place. Taken together, Exelon 
Companies argue that these proceedings make it clear that formulaic 
recovery of FAS 109 amounts from prior to, and after, implementation of 
the formula rate is appropriate, which, Exelon Companies argue, is 
exactly what they propose here.
    126. In addition, while conceding that the PPL, Duquesne, and VEPCO 
orders were delegated letter orders, Exelon Companies point out that 
ITC was not a delegated letter order and argues the delegated orders 
should be given weight as they are consistent with ITC.\180\ These same 
arguments were also raised on rehearing in Docket No. ER17-528-002. 
Consistent with the November 16 Order and rehearing order being issued 
concurrently in that proceeding, we disagree with the Exelon Companies 
for the reasons stated in the November 16 Order, the rehearing order 
and reasons discussed below. As we stated in the November 16 Order, the 
records in the ITC and VEPCO proceedings ``do not reflect that either 
VEPCO or ITC requested a South Georgia catch-up provision to recover 
prior period accumulated amounts related to AFUDC Equity.'' \181\
---------------------------------------------------------------------------

    \180\ See, e.g., ComEd Transmittal at 42-43.
    \181\ November 16 Order, 161 FERC ] 61,163 at P 22.
---------------------------------------------------------------------------

    127. First, we note that three of the orders relied on by Exelon 
Companies are delegated letter orders, which do not establish binding 
precedent on the Commission.\182\ Nor are we convinced that the 
Commission's finding in ITC provides support for Exelon Companies' 
proposals. While ITC did involve a request to recover AFUDC Equity 
deficiencies, the record in this case does not support BGE's claim that 
the recovery granted in this proceeding included deferred amounts. ITC 
did not directly address this issue, merely finding that ``[t]he 
proposed Attachment O revisions and related depreciation rates provide 
for a more accurate annual revenue requirement for the ITC Companies.'' 
\183\
---------------------------------------------------------------------------

    \182\ We will not repeat our discussion from our order on 
rehearing in BGE (being issued concurrently with this order) citing 
numerous cases upholding the long-standing principle that delegated 
letter orders do not establish binding Commission precedent. Nor 
will we repeat here the basis for our conclusion that, even if we 
assumed arguendo that PPL, Duquesne, and VEPCO constitute binding 
precedent, they would not require the Commission to accept BGE's 
proposal. However, that same logic applies equally here.
    \183\ ITC, 153 FERC ] 61,374.
---------------------------------------------------------------------------

    128. Exelon Companies also contend that, while PPL, Duquesne, ITC 
and VEPCO did not expressly address AFUDC Equity, the catchup 
provisions in these cases were calculated based on their entire FAS 109 
balances and recovery provisions would have included the cumulative 
AFUDC Equity amounts among other things. The implementation of FAS 109 
standards for regulatory purposes should be revenue neutral because the 
regulatory assets and regulatory liabilities are offsetting book 
keeping entries. In Idaho Power Co.,\184\ the Commission summarily 
removed the FAS 109 amounts from rate base because the proposed amounts 
in rate base were not revenue neutral and did not result in equal and 
offsetting changes to total assets and liabilities. We also noted that 
accumulated FAS 109 amounts only relate to future cash flows, which are 
not appropriately included in rate base. However, to the extent that 
PPL and Duquesne did accept offsetting amounts of FAS 109 regulatory 
assets and liabilities in South Georgia calculations for transitions 
from the flow-through practices of the Pennsylvania Public Utility 
Commission, they should not have affected the calculation and would not 
have included amounts for prior AFUDC Equity amortization. In contrast, 
Exelon Companies' proposed South Georgia amendments--which are not 
revenue neutral--are amortized over the average remaining life of the 
plant in service, as calculated using their PowerTax and PowerPlant 
software, as of the effective date of their Formula Rate, and include 
in the catch-up provision amounts for AFUDC Equity amortization for 
prior period depreciation since the inception of their formula rates. 
By contrast, Commission accounting policies and precedents provide that 
FAS 109 amortizations are to be collected concurrently with the 
collection of the associated depreciation expense in rates.
---------------------------------------------------------------------------

    \184\ 115 FERC ] 61,281, at P 27 (2006) (Idaho Power).
---------------------------------------------------------------------------

    129. Finally, Exelon Companies argue that recovery of the past 
expenses would not present a problem of retroactive ratemaking because, 
on appeal of Order No. 144, the court held that a provision for 
recovery of deficient deferred taxes relating to prior years is not 
retroactive.\185\ In this regard Exelon Companies argue that, because 
customers' rates in past years did not reflect these expenses, if the 
FAS 109 amounts flow through rates, Exelon Companies proposals will 
place customers in exactly the same position as if they had included a 
formulaic rate recovery of FAS 109 amounts in past rates.\186\ As 
discussed above, while we recognize that deficient deferred taxes, by 
their nature, will be recovered over a period of years, our concern is 
that the

[[Page 46731]]

Exelon Companies are seeking to recover amounts that should have been 
recovered in prior periods.
---------------------------------------------------------------------------

    \185\ ComEd Transmittal at 44 & n.98 (citing Public Systems, 709 
F.2d at 85).
    \186\ Id. at 44.
---------------------------------------------------------------------------

4. Guidance
    130. We note that our rejection of Exelon Companies' filings for 
the reasons stated herein does not prohibit them from recovering all 
prior period tax deficiencies and AFUDC Equity. To the extent that 
public utilities have undepreciated AFUDC Equity, even if the related 
assets were placed into service in prior years, they may file to 
recover the tax effect on an ongoing basis if properly supported under 
FPA section 205. In addition, we note that several of the Exelon 
Companies experienced recent tax increases at the state level (e.g., 
increases in the Illinois state income tax rate occurred in 2011 and 
2015, and increases in the Maryland state corporate income tax rate 
occurred in 2001 and 2008), and a portion of the deficient ADIT may 
still be eligible for recovery, given the lengthy amortization period 
associated with excess or deficient ADIT.\187\ Should Exelon Companies 
seek recovery of such amounts, they should fully support these amounts 
by providing detailed workpapers, as well as provide for the reduction 
of the associated ADIT liabilities from rate base.
---------------------------------------------------------------------------

    \187\ The guidance that we are providing does not address Flow 
Through Items. While Exelon Companies have not specified the date on 
which they adopted full normalization, we do not expect that, if 
Exelon Companies had begun amortization as of the date on which full 
normalization occurred, ADIT associated with the adoption of full 
normalization remains to be recovered.
---------------------------------------------------------------------------

    131. Exelon Companies may submit, for example, new FPA section 205 
filings with a mechanism to refund or recover, as appropriate, deferred 
income tax excesses and deficiencies related to the recent Tax Cuts and 
Jobs Act and any future income tax changes, any new originations of 
past income tax changes, and taxes on AFUDC Equity associated with 
current and future years' depreciation expense. Should Exelon Companies 
seek recovery of ADIT amounts in new FPA section 205 filings, they may 
obtain such recovery or refund of excess or deficient ADIT to be 
calculated as of the effective date in the new filings.
5. Limited Compliance Period
    132. We take this opportunity to provide guidance on what would 
constitute a ``reasonable period of time'' to file for recovery under 
Order No. 144. Consistent with the requirement in Order No. 144 that 
FAS 109 recovery for ADIT excesses and deficiencies should at least be 
addressed in the ``next rate case,'' we announce a limited period in 
which public utilities may file to recover past ADIT if the public 
utility did not file a rate case subsequent to the Commission's 
issuance of Order No. 144 or if the public utility properly preserved 
\188\ its right to recover past ADIT through settlement terms.\189\ If 
one of these two conditions are met, we will permit a public utility to 
make a FPA section 205 filing to revise its formula rate provisions to 
allow for the refund or recovery of all previously incurred income tax 
amounts as a result of full tax normalization within one year after 
this order is published in the Federal Register, i.e. this one-year 
time period continues to constitute ``a reasonable period of time'' 
under Order No. 144 to file for recovery.
---------------------------------------------------------------------------

    \188\ By ``properly preserved,'' we mean that the settlement of 
the ``next rate case'' included terms that expressly reserved the 
right of the utility to file to recover past ADIT in a future rate 
case.
    \189\ While we find Exelon Companies did not expressly reserve 
recovery of deferred income tax amounts for future consideration in 
their settlements, we note that Order No. 144 permits a company to 
reserve in a settlement such issues for future consideration. Order 
No. 144 states that ``[t]he rule, of course, leaves undisturbed the 
ability of the parties to reach a settlement on any of the issues 
covered by the rule.'' Order No. 144, FERC Stats. & Regs. ] 30,254 
at 31,519. Reading this sentence in the context of the rule, parties 
may reach a settlement on any of the issues concerning the 
ratemaking method for deferred income tax recovery, and if the 
Commission approves the settlement, it complies with Order No. 144.
---------------------------------------------------------------------------

    133. Regarding the recovery of ADIT amounts incurred in the future 
after the expiration of this limited compliance period, we also clarify 
that it is the Commission's expectation that public utilities will make 
FPA section 205 filings to recover such ADIT amounts within two years 
after they are incurred.
    The Commission orders:
    The revisions to Exelon Companies' Formula Rates are hereby 
rejected, as discussed in the body of this order.

    By the Commission.

    Issued: September 7, 2018.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2018-19994 Filed 9-13-18; 8:45 am]
 BILLING CODE 6717-01-P