[Federal Register Volume 70, Number 113 (Tuesday, June 14, 2005)]
[Notices]
[Pages 34467-34468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11659]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL05-109-000]


Tax Deduction for Manufacturing Activities Under the American 
Jobs Creation Act of 2004; Guidance Order on Tax Deduction for 
Manufacturing Activities Under American Jobs Creation Act of 2004

Issued June 2, 2005.


Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher and Suedeen G. Kelly


    1. This order provides guidance on the Commission's ratemaking 
policy with respect to the Tax Deduction for Manufacturing Activities 
(TDMA) in section 102 of the American Jobs Creation Act of 2004 (the 
Act).\1\ The Act provides for a deduction for income attributable to 
certain domestic production activities, including income from the sale 
of electricity and natural gas produced in the United States.\2\ The 
TDMA will have ratemaking implications for public utilities that make 
jurisdictional sales of electricity at cost-based stated rates or cost-
based formula rates, which are discussed further below, but not for 
jurisdictional natural gas pipelines.
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    \1\ Pub. L. No. 108-357, 118 Stat. 1418 (2004) (adding 
additional section 199 to the Internal Revenue Code, 26 U.S.C. 1 et 
seq. (2000)).
    \2\ Act, section 102, section 199(c)(4)(A)(i)(III) (2004).
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Background

    2. On October 22, 2004, the President signed the Act into law. The 
TDMA provides for a deduction of up to 9 percent \3\ of the income 
attributable to qualified production activities. Income from qualified 
production activities includes income from the lease, rental, sale, 
exchange or other disposition of electricity, natural gas or potable 
water

[[Page 34468]]

produced in the United States. However, the TDMA does not apply to 
income attributable to the transmission and distribution of 
electricity, natural gas and water. When fully implemented, the TDMA 
will be the equivalent of reducing the effective federal corporate 
income tax rate on production activities from 35 percent to 32 
percent.\4\
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    \3\ The TDMA will be phased in so that the allowable deduction 
equals 3 percent from 2005-2006, 6 percent for 2007-2009, and 9 
percent from 2010 onwards. Act, section 102, section 199(a)(2) 
(2004).
    \4\ For individuals, the reduction in the effective tax rate 
varies depending on the individual's tax bracket, but, in any case, 
the amount of the allowable TDMA cannot exceed 50 percent of the 
individual's W-2 wages of the employer for the taxable year. Act, 
section 102, section 199(b)(1) (2004).
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Discussion

    3. The TDMA is a special deduction that reduces the amount of 
income tax due from energy sales. The TDMA will have ratemaking 
implications only for public utilities that make jurisdictional sales 
of electricity at stated cost-based rates and cost-based formula rates. 
Income taxes are a cost that is included in the determination of 
virtually all cost-based rates. Accordingly, we expect these public 
utilities to appropriately reflect the TDMA amounts in any future 
filings to change their cost-based stated rates and cost-based formula 
rates.
    4. Additionally, some public utilities utilize cost-based formula 
rates that are designed to automatically track changes in costs. The 
Commission is concerned that certain of the formulas established to 
develop rates may not be structured in a way that will provide an 
adequate mechanism for tracking the TDMA amount. Accordingly, we direct 
these public utilities to separately identify the TDMA amounts in any 
future filings to change their cost-based formula rates.
    5. Moreover, since the TDMA only affects rates for jurisdictional 
entities to the extent that the TDMA amounts are reflected in the cost 
of service, the TDMA will not have any ratemaking implications for 
jurisdictional entities to the extent that they engage in the sale of 
electricity at market-based rates.
    6. The TDMA also does not have any ratemaking implications for 
jurisdictional pipelines. The TDMA applies only to income attributable 
to qualified production activities, and jurisdictional pipelines do not 
engage in production activities.
    The Commission orders: Public utilities with cost-based stated 
rates or cost-based formula rates for electric energy sales should 
appropriately reflect the TDMA amounts in any future filing to change a 
stated cost-based rate or formula rate.

    By the Commission.
Linda Mitry,
Deputy Secretary.
[FR Doc. 05-11659 Filed 6-13-05; 8:45 am]
BILLING CODE 6717-01-P