SESSION OF 2020
SUPPLEMENTAL NOTE ON SUBSTITUTE FOR SENATE
BILL NO. 126
As Amended by Senate Committee of the Whole
Brief*
Sub. for SB 126 would create and amend law relating to
the tracking and collection of state and federal income tax by
certain public utilities.
Income Tax Exemption
The bill would exempt the following utilities from Kansas
income tax for tax years ending on or after December 31,
2021:
● Every electric and natural gas public utility, as
defined in law, that is subject to rate regulation by
the KCC; and
● Any utility that is a cooperative, as defined in law,
or owned by one or more cooperatives.
Additionally, such utilities would not be permitted to be
included in a consolidated or unitary combined return, or to
collect income tax as a component of retail rates.
Tracking Changes to Income Tax Collection
The bill would require a public utility, as defined in KSA
66-104, that includes expenses related to income taxes as a
component of its retail rates to track and defer into a
____________________
*Supplemental notes are prepared by the Legislative Research
Department and do not express legislative intent. The supplemental
note and fiscal note for this bill may be accessed on the Internet at
http://www.kslegislature.org
regulatory asset or liability, as appropriate, an overcollection
or undercollection of income tax expenses if the income tax
rates assessed on a utility are adjusted as a result of any
changes in state or federal law.
Application for New Rates
The bill would require a utility to file an application for
new retail rates reflecting adjusted income tax rates with the
KCC within 60 days of enactment of such a change in state or
federal law if the adjustment results in an overcollection or
undercollection of income tax expenses that is equal to or
exceeds 0.25 percent of a utility’s KCC approved base
revenue level from the utility’s most recent rate proceeding.
The utility would then be required to refund or collect the
tracked amounts from their retail customers in a manner
approved by the KCC.
KCC Order
The KCC would be required to issue an order
addressing an application for adjusted retail rates due to a
change in income tax expenses within 120 days. Such an
order would be required to:
● If requested by the utility, give due consideration to
the common interests of the utility and its
customers, including but not limited to:
○ The use of a two-year implementation of
current period rate changes to maintain the
credit quality of the utility by ensuring that any
such change in rates would not cause the
utility’s credit metrics that are traditionally
considered by credit rating agencies to
deteriorate to a level that could impair the
utility’s current credit rating.
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If a retail rate change to address adjusted income tax
expense is implemented over a period of time, the utility
would be required to track and defer any overcollection or
undercollection of income tax expenses as a regulatory
liability or asset, as appropriate, that would accrue interest at
the utility’s weighted cost of capital, as determined by the
KCC in the utility’s most recent general rate proceeding, and
refund or collect the balance in the next full general rate
proceeding.
In the event a utility has a full general rate case pending
or has notified the KCC of its intention to file such an
application, at the time any adjusted income tax rates
become effective, the bill would allow the KCC to issue an
order finding that such adjusted income tax rates should not
be reflected in retail rates until a utility’s new retail rates
become effective following its general rate proceeding. The
bill would require the utility to demonstrate the public interest
would be promoted by excluding adjusted income tax rates
from its retail rates.
Full Rate Proceeding Clarification
The bill would make clear that a filing resulting from
adjusted income tax rates could not require the utility to file a
full general rate case, or require the utility to update any
component of retail rates other than the income tax expense
component. The bill would provide that rate updates resulting
from changes in income tax expenses would not be
considered a violation of any existing rate moratorium
agreement.
Excess Accumulated Deferred Income Tax Balances
The bill would require excess accumulated deferred
income tax balances resulting from income taxes adjusted
due to changes in state or federal law remain unamortized on
the utility’s books of account until new retail rates from its
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next full general rate proceeding after the adjusted income
tax rates take effect, at which time such balances would be
required to be amortized and reflected in retail rates.
If requested by the utility, excess accumulated deferred
income tax balances resulting from changes in state law
effective January 2021 would be amortized into retail rates
over a period of not less than 30 years by order of the KCC.
Excess accumulated deferred income tax balances
resulting from any other changes in state or federal law would
be amortized into retail rates by order of the KCC in a manner
consistent with requirements of state and federal tax law and
relevant regulations, and in a manner that will not impair the
utility’s credit rating.
Municipal and Cooperative Utilities
The bill would clarify that provisions related to
adjustments for state or federal income tax expenses would
not apply to municipal electric or natural gas utilities, or to a
cooperative.
Definitions
The bill would define “overcollection or undercollection
of income tax expense” as the portion of utility revenue
representing the difference between the cost of service as
approved by the KCC in the utility’s most recent base rate
proceeding and the cost of service that would have resulted
had the provision for state or federal income taxes been
based upon the adjusted corporate income tax rate. The bill
would specify that “overcollection or undercollection of
income tax expense” would not include the effects of
accumulated deferred income taxes or excess accumulated
deferred income taxes.
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Technical Changes
The bill also would make technical changes.
Background
The bill was introduced by the Senate Committee on
Assessment and Taxation. The bill was referred to the Senate
Committee on Utilities on February 8, 2019.
In the March 20, 2019, Senate Committee hearing, a
representative of the Kansas Industrial Consumers Group
(KICG) provided proponent testimony, stating reduction in
utility income tax collection would directly reduce utility rates
because tax expenses are passed on to consumers. Written-
only proponent testimony was provided by representatives of
Renew Kansas Association and the Kansas Grain and Feed
Association.
Opponent testimony was provided by representatives of
Black Hills Energy, Evergy, Kansas Gas Service, and Liberty
Utilities. Opponents stated the bill could negatively impact
certain deferred tax benefits that have accrued for utility
customers, resulting in increased rates, multiple rate cases in
a single year, and implementation of rate reductions at an
unreasonable pace. Written-only opponent testimony was
submitted by Atmos Energy Corporation.
Neutral testimony was provided by a representative of
the KCC, outlining concerns with various provisions of the bill
identified by KCC staff.
In the January 28, 2020, Senate Committee hearing,
representatives of the Citizens’ Utility Ratepayer Board
(CURB), KICG, and the Wichita Regional Chamber of
Commerce provided proponent testimony. The
representatives stated generally the bill would offer an
opportunity to lower electric rates for residential and industrial
consumers. Written-only proponent testimony was provided
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by Americans for Prosperity Kansas and by a representative
of Renew Kansas Association and the Kansas Grain and
Feed Association.
Opponent testimony was provided by representatives of
Black Hills Energy, Evergy, Kansas Gas Service, Liberty
Utilities, and Sunflower Electric Power Corporation.
Opponents generally stated they are not opposed to the
concept of the bill, but are concerned it would not achieve the
desired result of lowering electric rates and have a negative
impact on utility credit ratings.
Neutral testimony was provided by a representative of
the KCC. The representative’s testimony was substantially
similar to testimony provided at the March 20, 2019, Senate
Committee hearing.
The Senate Committee adopted a substitute bill that
included the following changes:
● Allow provisions of the bill to apply in situations
where income tax in undercollected;
● Establish what circumstances must exist before a
utility must file an application for new rates;
● Clarify that a utility would not need to file a full
general rate case when overcollection or
undercollection of income tax occurs;
● Clarify that an application for adjusted rates would
not constitute a violation of any existing rate
moratorium agreement if it only updates income tax
expense components of a utility’s base rates;
● Establish requirements for an order issued by the
KCC in response to an application for adjusted
rates resulting from a change in state and federal
income tax law;
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● Clarify that provisions related to adjustments for
state or federal income tax expenses would not
apply to municipal electric or natural gas utilities, or
a cooperative; and
● Clarify that provisions related to the income tax
exemption would not apply to cooperative utilities
or to a utility owned by one or more cooperative,
subject to rate regulation by the KCC.
The Senate Committee of the Whole amended the bill
to:
● Increase the amount of time a utility would have to
file an application for new retail rates;
● Clarify how the rate of interest on a recorded
income tax expense that is implemented over time
is calculated;
● Clarify procedure when a utility has a pending rate
case before the KCC, or has notified the KCC of
such an intent at the time any adjusted income tax
rates become effective;
● Clarify language regarding amortization of excess
accumulated deferred income tax balances;
● Clarify provisions related to exemption from
Kansas income tax;
● Clarify the definition of “overcollection and
undercollection of income tax expense”; and
● Make several technical and conforming changes.
According to the fiscal note prepared by the Division of
the Budget on the bill as introduced, the KCC indicates
enactment of the bill would have no effect on agency
expenditures. Additionally, the Department of Revenue was
unable to determine the fiscal effect enactment of the bill
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would have, if any, on the agency or state revenues. A fiscal
note was not immediately available on the substitute bill, as
recommended by the Senate Committee. Any fiscal effect
associated with enactment of the bill is not reflected in The
FY 2020 Governor’s Budget Report.
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Statutes affected: As introduced: 79-32
Version 2: 79-32
{As Amended by Senate Committee of the Whole}: 79-32