KPMG report: FERC orders allow public utility to defer sales tax through use of procurement subsidiary (multistate)
A KPMG report concerning FERC orders in response to tariff revisions requested by a public utility.
A KPMG report concerning FERC orders in response to tariff revisions
The Federal Energy Regulatory Commission (FERC) issued a pair of orders in response to tariff revisions requested by a public utility (petitioner), approving the use of a procurement company subsidiary to facilitate the cash flow deferral of sales tax while preserving the petitioner’s rate base related to invested capital.
The two orders are: Duke Energy Carolinas, LLC, 181 FERC ¶ 61,215 (December 15, 2022) and Duke Energy Florida, LLC, 181 FERC ¶ 61,217 (December 15, 2022).
The procurement company subsidiary will purchase assets exempt from tax under Florida’s sale for resale exemption and then lease those assets to the petitioner. This structure will prevent the lump sum payment and capitalization of sales tax on purchases and defer sales tax over the course of the lease stream. This deferral will align the payment of Florida taxes with the use of the taxed equipment and will reduce capitalized sales tax costs that are passed to the petitioner’s customers through the rate making process. The petitioner also voluntarily agreed to withhold recovering the cost of setting up the subsidiary until after the benefit of the structure exceeds its cost. FERC agreed to grant a waiver of equity accounting and will allow consolidated accounting that will eliminate intercompany transactions and treat the two entities as one for tariff and rate base purposes. The petitioner and its customers will benefit from the form of the intercompany lease transactions, and the petitioner will be able to earn a rate of return on all its invested capital because of consolidated accounting.
KPMG observation
The issuance of these FERC orders appears to create an opportunity for regulated utilities that has long been a common practice for deregulated energy companies and across many other capital-intensive industries. Regulated utilities need to explore whether similar opportunities exist, if for no other reason than to properly manage the rates paid by customers.
For more information, contact a member of the KPMG Power & Utilities Tax Team:
Glenn Todd, National Tax Industry Leader, Power & Utilities | gtodd@kpmg.com
Steve Howard, Business Tax Services Managing Director | stevehoward@kpmg.com
Stewart Jolly, State and Local Tax Managing Director | sjolly@kpmg.com
Emily Gauthier, State and Local Tax Managing Director | egauthier@kpmg.com
Scott Jackson, State and Local Tax Partner | sbjackson@kpmg.com
Nicole Umpleby, State and Local Tax Managing Director | numpleby@kpmg.com
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