• 12 hours Shell Oil Trading Head Steps Down After 29 Years
  • 16 hours Higher Oil Prices Reduce North American Oil Bankruptcies
  • 18 hours Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 19 hours $1.6 Billion Canadian-US Hydropower Project Approved
  • 21 hours Venezuela Officially In Default
  • 23 hours Iran Prepares To Export LNG To Boost Trade Relations
  • 1 day Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 1 day Saudi Oil Minister: Markets Will Not Rebalance By March
  • 1 day Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 2 days Rosneft Announces Completion Of World’s Longest Well
  • 2 days Ecuador Won’t Ask Exemption From OPEC Oil Production Cuts
  • 2 days Norway’s $1 Trillion Wealth Fund Proposes To Ditch Oil Stocks
  • 2 days Ecuador Seeks To Clear Schlumberger Debt By End-November
  • 2 days Santos Admits It Rejected $7.2B Takeover Bid
  • 2 days U.S. Senate Panel Votes To Open Alaskan Refuge To Drilling
  • 2 days Africa’s Richest Woman Fired From Sonangol
  • 3 days Oil And Gas M&A Deal Appetite Highest Since 2013
  • 3 days Russian Hackers Target British Energy Industry
  • 3 days Venezuela Signs $3.15B Debt Restructuring Deal With Russia
  • 3 days DOJ: Protestors Interfering With Pipeline Construction Will Be Prosecuted
  • 3 days Lower Oil Prices Benefit European Refiners
  • 3 days World’s Biggest Private Equity Firm Raises $1 Billion To Invest In Oil
  • 4 days Oil Prices Tank After API Reports Strong Build In Crude Inventories
  • 4 days Iraq Oil Revenue Not Enough For Sustainable Development
  • 4 days Sudan In Talks With Foreign Oil Firms To Boost Crude Production
  • 4 days Shell: Four Oil Platforms Shut In Gulf Of Mexico After Fire
  • 4 days OPEC To Recruit New Members To Fight Market Imbalance
  • 4 days Green Groups Want Norway’s Arctic Oil Drilling Licenses Canceled
  • 4 days Venezuelan Oil Output Drops To Lowest In 28 Years
  • 4 days Shale Production Rises By 80,000 BPD In Latest EIA Forecasts
  • 5 days GE Considers Selling Baker Hughes Assets
  • 5 days Eni To Address Barents Sea Regulatory Breaches By Dec 11
  • 5 days Saudi Aramco To Invest $300 Billion In Upstream Projects
  • 5 days Aramco To List Shares In Hong Kong ‘For Sure’
  • 5 days BP CEO Sees Venezuela As Oil’s Wildcard
  • 5 days Iran Denies Involvement In Bahrain Oil Pipeline Blast
  • 7 days The Oil Rig Drilling 10 Miles Under The Sea
  • 8 days Baghdad Agrees To Ship Kirkuk Oil To Iran
  • 8 days Another Group Joins Niger Delta Avengers’ Ceasefire Boycott
  • 8 days Italy Looks To Phase Out Coal-Fired Electricity By 2025
Alt Text

Google Gets There First: Autonomous Cars On The Road

Google’s self-driving car project, Waymo,…

Alt Text

EU Aims To Reform World’s Biggest Carbon Market

The European Union is divided…

Alt Text

The Undisputed Leader Of Tomorrow’s Oil & Gas Markets

According to the Executive Director…

Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

More Info

Power Companies Snubbed By Trump’s Tax Proposal


We have often thought that tax policy should be written by the U.S., Department of Agriculture. Who better to deal with all the sacred cows and gored oxen? As the Trump administration turns to address tax policy, eager for legislative victory, one aspect will unite Washington lobbyists. Those representing industries that presently receive a tax exception, will of course seek to retain it. Those industries lacking beneficial tax exemptions will exert considerable influence to obtain them. A cynical mind might suggest that our tax code's complexity accrues to the benefit of Congressman--perhaps even directly via campaign contributions.

Lacking halos and wings, the U.S. electric power industry is no exception. We cannot claim special information about the Trump administration's tax policies. But we can examine a few tax proposals in light of the peculiar nature of the regulated electric power industry.

Regulated industries are different from others in one key respect. They can't move. They are literally and physically tied to a particular geographic region. It is their so-called service area, where they produce and sell their vital, commodity product.

If, on the other hand, a large privately held company like Apple and its top executives and board suddenly decided to move from Cupertino, California to say Luxembourg, they could do so. Companies in non-utility industries move their factories and headquarters all the time.

But Georgia Power, for example, one of Southern Company's principal utility subsidiaries, no matter where it claimed to be headquartered would still face state regulators in Atlanta. Ditto for all other regulated utilities in the U.S. They can't seek and receive the benefits of favorable offshore (or onshore for that matter) tax havens.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

One of the most controversial changes to the tax code would be the elimination of the tax deductibility of interest payments. Regardless of intent, this reduces the attractiveness of debt financing by raising its cost. This would also discourage financial speculation and highly levered corporate buyouts for the same reason. Overall, and longer term, it could put industry on a sounder footing by carrying less debt and thus less financial risk. Related: Texas Oil Production Remains Strong…But For How Long?

If this were to happen, the fast-paced private equity industry might complain but what about America's staid electric utilities? They borrow a lot of money for operations. Debt is about 55 percent of the capital structure (how assets are financed) of the average electricity provider.

Losing the tax deductibility of interest expense would reduce utility net income via higher taxes by as much as 20 percent.

But at times like these, regulated utilities often hear that James Taylor line, "You've got a friend". That "friend" is the state public utility commission.

Regulated companies will claim that adverse tax policy changes have caused a reduction of net income. If this lowers earnings below a certain threshold, which it certainly would, the utility managers would be justified in seeking to increase customer electricity rates to compensate for the difference.

We believe the resultant rate hike would be roughly 2 percent, not a big number. But to qualify for even that modest level of rate increase, income first has to decline below a given level. Many utilities now find themselves in the somewhat enviable position of earning more than the so-called required rate of return set by regulators. As a result, the kindness of regulators in this respect in the near future may be somewhat muted.

While utilities may be voracious users of corporate debt, they are also predominantly profitable entities, wholesale power generators excepted. This makes them taxpayers. Reduce the U.S. corporate tax rate from 35 percent to the discussed 15 percent rate and industry wide net income could increase by as much as 20 percent.

Regulated companies are in theory constantly under the scrutiny of state regulators. And even the most laxed of regulators would feel some obligation to share the wealth so to speak with customers. Especially with an earnings increase of that magnitude.

Unless of course it could be proved that the utility was approaching something like dire financial straits, was failing to even earn its allowed return and thus needed to keep all the additional funds as barely adequate recompense. Related: Kurdish Independence Could Deal A Major Blow To Oil Markets

This is possible but remains a low probability outcome nevertheless. A corporate income tax reduction along the lines discussed would permit state regulators to reduce customer electricity rates by about 2 percent. The political impulse to claim credit for distributing that type of largesse is rather strong.

But there is a third possibility. U.S. corporate tax rates are reduced from 35 percent to 15 percent. But the new, lower rate is applied to a higher pretax net income. Why? Because interest expense may no longer being deductible as well. The two tax policy changes begin to cancel each other out somewhat as utilities would be paying a lower tax rate on a far higher level of income.

Given the significant debt burden of the U.S. electric utility industry and the associated interest expense, the net impact of the two potential tax policy changes would increase after tax net income by about 7 percent. We think amounts of that magnitude would likely invite unwelcome regulatory scrutiny and only modest chance that the utilities retain these savings. Passing along these tax policy related earning boosts to customers could might reduce the total electric bill by about 1 percent.

These are admittedly rough figures. But they lead to the conclusion that electric companies might benefit less than their customers from two significant proposed changes to U.S. corporate tax policy. It's an unusual outcome for such an avowedly pro-business administration.

You can find Leonard Hyman's lastest book ‘Electricity Acts’ on Amazon

By Leonard Hyman and Bill Tilles

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News