On December 22, 2017, President Donald Trump signed into law a $1.5 trillion tax overhaul bill that will bring about many changes for utility companies and the electric power sector. While the tax rate for utilities has dropped from 35% to 21%, their stocks have not reflected these savings.
Most utility stocks trade like bonds, which means that they fall when interest rates rise. However, the tax savings for regulated utilities is passed along in the form of lower rates for the consumer. Passing along the savings to consumers helps the utility companies to abide by the financial accountability part of the new tax bill.
Benefits of a Lower Tax Rate
In order for regulated utilities to reap the benefits of the lower tax rate, they must invest more in capital projects that will help them to expand. Unlike other businesses that are only allowed to deduct 30% on their taxes under this new tax reform bill, utilities were given a 100% exemption. It’s a change that will allow utilities to move forward with their capital investments now, but this growth will eventually result in rate increases for consumers.
Tax Exemption Boundaries
At the moment, it’s unclear as to how far the new 100% tax exemption can be applied by regulated utility companies. Most of these corporations are owned by holding companies that may also be eligible for the tax savings. Ultimately, it may require a ruling by the Internal Revenue Service to establish the boundaries.
Another provision of the tax bill dealing with the renewable energy industry is the Base Erosion Anti-abuse Tax (BEAT) that was added in the Senate’s tax version. While its original provision put $12 billion of renewable energy deals in jeopardy, it was amended before the final bill was passed, allowing for the renewable energy industry to offset up to 80% of the BEAT tax.
Tax Extender Bills
Several items were not addressed in the new tax bill, which leaves them open for consideration at a later date. This would include the orphan technologies like geothermal generation, fuel cells, biomass, and combined heat and power plants. While there is still much to do regarding tax extenders, the utility industry is happy overall.