NAC704.6532. Contributions to corporate capital.

     1. The Commission hereby adopts by reference section 118 of the Internal Revenue Code, 26 U.S.C. § 118, as amended.

     2. All contributions made pursuant to section 118 of the Internal Revenue Code will be increased by an income tax gross up amount pursuant to this section and the utility’s tariff. Except as otherwise provided in subsection 8, the income tax gross up will be calculated under the method as described in subsection 3 for depreciable assets and the method as described in subsection 5 for nondepreciable assets. For rate-making purposes, contributions will be treated as described in subsection 7.

     3. For depreciable assets, the income tax gross up percentage is the present value of the sum of annual revenue requirements associated with the inclusion of the contribution-related federal income tax amount in the rate base divided by the contribution. The contribution-related federal income tax amount is calculated by multiplying the contribution by the marginal statutory federal income tax rate for the utility. The discount rate to be used in calculating the present value of the sum of annual revenue requirements associated with the inclusion of the contribution-related federal income tax amount in the rate base is the interest rate set for customer deposits that is effective on January 1 of that year in accordance with NRS 704.655. Until the utility has recovered the contribution-related federal income tax amount through the tax benefits of accelerated depreciation on the amount of the contribution, the annual revenue requirement associated with the inclusion of the contribution-related federal income tax amount in the rate base must be calculated using the pretax authorized rate of return for the utility. Except as otherwise provided in subsection 4, the pretax authorized rate of return for the utility must be calculated using a return on equity for the utility that is increased by the statutory income tax rate applicable to the utility using the methodology set forth in subsection 5. For the purpose of calculating the income tax gross up amount for the first year, the annual revenue requirement shall be deemed to be earned at the midpoint of the year.

     4. For the purpose of subsection 3, unless otherwise determined by the Commission in a water or sewer utility’s general rate case, the authorized rate of return used to calculate the annual revenue requirement for the water or sewer utility shall be deemed to be 10.2 percent. This authorized rate of return is calculated by adjusting the weighted average return on equity, which is deemed to be 6 percent, for federal income taxes. This weighted average return on equity is calculated using an equity ratio which is deemed to be 40 percent and a return on equity which is deemed to be 15 percent.

     5. For nondepreciable assets, in addition to the contribution, the contributor pays the full income tax burden utilizing the statutory income tax rate applicable to that utility. The income tax gross up percentage is 1 divided by the difference between 1.00 and the statutory income tax rate applicable to that utility. For example, using a 35 percent income tax rate, the income tax gross up percentage is 1 divided by 0.65 (1.00 - 0.35), which equals 1.538462.

     6. The utility must file a revision to the income tax gross up percentage in its tariff annually to reflect the interest rate set for customer deposits that is effective on January 1 of that year in accordance with NRS 704.655. In addition, the utility must file a revision to the income tax gross up in its tariff when a change in one or more of the components of the income tax gross up calculation, as provided in subsection 3 or 5, would result in a change in the income tax gross up percentage of 1 percent or more.

     7. The account activity and balances resulting from accounting for the gross up on contributions would be afforded rate-making treatment. For example, deferred federal income tax assets that result from the inclusion of the contribution and income tax gross up in taxable income would be included in the rate base and increase revenue requirement. Conversely, revenue requirement would be reduced as the benefit of future tax depreciation deductions reduces related deferred taxes (i.e., rate base), and as deferred income (i.e., income tax gross up) is amortized and recognized.

     8. Utilities that receive annual amounts of contributions which are less than 1 percent of total operating revenues or which qualify for simplified procedures or methodologies for a change of rates pursuant to NRS 704.095 may, in lieu of an income tax gross-up method elect to use one of the following methods:

     (a) Rate-base method. The amount of the contribution would not be subject to a gross up. Increased federal income tax that results from the inclusion of the contribution in taxable income would be afforded deferred income tax treatment, thereby increasing rate base. The benefit of future tax depreciation deductions are used to reduce rate base (rate-base effects are reduced to zero at the end of the related assets’ tax life).

     (b) Flow-through method. The amount of the contribution would not be subject to a gross up. Increased federal income tax that results from the inclusion of the contribution in taxable income would increase current federal income tax expense for rate-making purposes. Future tax depreciation benefits would reduce federal income tax expense for rate-making purposes.

     (Added to NAC by Pub. Service Comm’n, eff. 8-31-89; A by Pub. Utilities Comm’n by R152-10, 11-1-2012)