PNM Resources : Direct Testimony of Larry T. Morris Taxes PNM 2025 Rate Request 24 00089 UT

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION	)
OF PUBLIC SERVICE COMPANY OF NEW	)
MEXICO FOR REVISION OF ITS RETAIL	)
ELECTRIC RATES PURSUANT TO ADVICE )
NOTICE NO. 625	)	Case No. 24-00089-UT
	)
PUBLIC SERVICE COMPANY OF NEW	)
MEXICO,	)
	)
Applicant	)
	)

DIRECT TESTIMONY

OF

LARRY T. MORRIS

June 14, 2024

NMPRC CASE NO. 24-00089-UT

INDEX TO THE DIRECT TESTIMONY OF LARRY T. MORRIS

WITNESS FOR

PUBLIC SERVICE COMPANY OF NEW MEXICO

I.	INTRODUCTION AND PURPOSE	1
II.	RULE 530 SCHEDULES H-9 THROUGH H-13	3
III.	STAND-ALONE TAX CALCULATION	5
IV.	ACCOUNTING FOR INCOME TAXES	8
V.	DEPRECIATION NORMALIZATION REQUIREMENTS	15
VI.	NOL ADIT NORMALIZATION REQUIREMENTS	16
VII.	FUTURE TEST PERIOD NORMALIZATION REQUIREMENTS	20
VIII.	BASE PERIOD ADJUSTMENTS	22
IX.	TEST PERIOD ADJUSTMENTS	24

1. FEDERAL INCOME TAX RATE CHANGE AND EXCESS DEFERRED

	TAXES	27
XI.	INFLATION REDUCTION ACT OF 2022	29
XII.	CONCLUSIONS	33
PNM Exhibit LTM - 1	Statement of Qualifications
PNM Exhibit LTM - 2	ADIT Accumulated Deferred Income Tax
PNM Exhibit LTM - 3	ITE Income Tax Expense
PNM Exhibit LTM - 4	ITC Investment Tax Credits
PNM Exhibit LTM - 5	IRS Private Letter Ruling 8818040
PNM Exhibit LTM - 6	IRS Private Letter Ruling 201436037
PNM Exhibit LTM - 7	IRS Private Letter Ruling 201436038
PNM Exhibit LTM - 8	IRS Private Letter Ruling 201438003

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NMPRC CASE NO. 24-00089-UT

INDEX TO THE DIRECT TESTIMONY OF LARRY T. MORRIS

WITNESS FOR

PUBLIC SERVICE COMPANY OF NEW MEXICO

PNM Exhibit LTM - 9 IRS Private Letter Ruling 201519021

PNM Exhibit LTM - 10 IRS Private Letter Ruling 201534001

PNM Exhibit LTM - 11 IRS Private Letter Ruling 201548017

SELF AFFIRMATION

ii

		DIRECT TESTIMONY OF
		LARRY T. MORRIS
		NMPRC CASE NO. 24-00089-UT
1	I.	INTRODUCTION AND PURPOSE
2

1. Q. Please state your name, position, and business address.
2. A. My name is Larry T. Morris. I am the Director of Tax for PNMR Services Company
3. ("Shared Services"). Shared Services provides corporate services through shared
4. services agreements to its parent company, PNM Resources, Inc. ("PNMR"), and
5. all of PNMR's subsidiaries, including Public Service Company of New Mexico
6. ("PNM" or "Company"). My business address is 414 Silver SW, Albuquerque, NM
7. 87102. A description of my position and background is included in PNM Exhibit
8. LTM-1.This exhibit also includes a list of cases in which I have provided testimony
9. at the New Mexico Public Regulation Commission ("Commission" or "NMPRC").
10. My testimony is filed on behalf of PNM.

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1. Q. What is the purpose of your direct testimony in this case?
2. A. My direct testimony addresses the following:

16	i.	I discuss the stand-alone method of accounting for income taxes used in
17		this rate case.
18	ii.	I discuss the normalized income tax accounting methods used by PNM, as
19		required by the Financial Accounting Standards Board ("FASB")
20		Accounting Standards Codification Topic 740 ("ASC 740").
21	iii.	I discuss the income tax depreciation normalization requirements of the
22		Internal Revenue Service ("IRS").

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		DIRECT TESTIMONY OF
		LARRY T. MORRIS
		NMPRC CASE NO. 24-00089-UT
1	iv.	I discuss the IRS income tax normalization requirements that relate to
2		deferred tax assets resulting from Net Operating Loss ("NOL")
3		carryforwards.
4	v.	I discuss the IRS income tax normalization requirements specific to future
5		test period filings.
6	vi.	I discuss the Inflation Reduction Act of 2022 (the "IRA"), which was
7		enacted August 16, 2022, and the IRA's impacts on this rate case.
8

1. Q. Please list the Rule 530 schedules you are sponsoring.
2. A. I am sponsoring the following Rule 530 Schedules:

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H-9 Federal and state income taxes

H-10 Reconciliation of net income per books to net income for income tax purposes

H-11 Income tax effect as result of applicant joining in a consolidated federal income tax return

H-12 Accumulated tax deferrals

H-13 Investment tax credits

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1. Q. How does your testimony relate to the testimony presented by other Company
2. witnesses?
3. A. My testimony is directly related to the computations of Accumulated Deferred
4. Income Tax ("ADIT") and income tax expense that are used in the cost of service
5. studies contained in PNM Exhibit KTS-3, presented by PNM witness Sanders.

2

		DIRECT TESTIMONY OF
		LARRY T. MORRIS
		NMPRC CASE NO. 24-00089-UT
1	II.	RULE 530 SCHEDULES H-9 THROUGH H-13
2

1. Q. Please describe the purpose of Rule 530 Schedules H-9 through H-13.
2. A. Rule 530 Schedule H-9 shows the calculation of federal and state income tax
3. expense for the Base Period, Adjusted Base Period, and Test Period.1 The
4. calculation of income tax expense in Rule 530 Schedule H-9 is used in the
5. determination of revenue requirement for the Test Period, just as it has been in
6. PNM's prior rate cases. PNM Exhibit LTM-3 provides the calculations of the
7. income tax expense included in Rule 530 Schedule H-9.

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1. Rule 530 Schedule H-10 reconciles book income and current taxable income for
2. the Base Period, Adjusted Base Period, and Test Period. The calculation of current
3. taxable income is purely informational and is not included in the cost of service, as
4. it does not affect total tax expense recoverable in rates. PNM Exhibit LTM-3
5. provides the calculations of the taxable income included in Rule 530 Schedule H-
6. 10.

17

1. Rule 530 Schedule H-11 requires an analysis of the tax effects from filing a
2. consolidated federal income tax return. I provide this analysis in Section III of my
3. testimony.

21

1 The Base Period in this case is calendar year 2023; the Test Period is July 1, 2025 to June 30, 2026. The Adjusted Base Period captures that period between the Base Period and Test Period.

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DIRECT TESTIMONY OF

LARRY T. MORRIS

NMPRC CASE NO. 24-00089-UT

1. Rule 530 Schedule H-12 provides details of the ADIT activity and balances for the
2. 12 months ended December 31, 2023, as well as ADIT balances for the Adjusted
3. Base Period and Test Period. The ADIT accounts included in rate base are those
4. that relate to underlying assets or liabilities included in rate base. ADIT accounts
5. that relate to assets and liabilities excluded from rate base are also excluded from
6. rate base. PNM Exhibit LTM-2 provides the calculations of the ADIT included in
7. Rule 530 Schedule H-12.

8

1. Rule 530 Schedule H-13 provides details of the accumulated deferred Investment
2. Tax Credit ("ITC") for the Base Period, Adjusted Base Period, and Test Period.
3. PNM Exhibit LTM-4 provides the calculations of the ITC amortization included in
4. Rule 530 Schedule H-13.

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1. Q. Please describe the calculation of income tax expense on Rule 530 Schedule H-
2. 9.
3. A. Rule 530 Schedule H-9 calculates the income tax expense to be recovered in rates
4. for the Base Period, Adjusted Base Period, and Test Period. The calculation begins
5. with net pre-tax income as determined in the cost of service. Net pre-tax income is
6. then adjusted for permanent book/tax differences. The adjusted net income is then
7. multiplied by the statutory New Mexico and federal income tax rates to determine
8. the preliminary tax expense. The preliminary tax expense is then reduced by the
9. annual amortization of ITC as shown on Rule 530 Schedule H-13, other allowable

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DIRECT TESTIMONY OF

LARRY T. MORRIS

NMPRC CASE NO. 24-00089-UT

1. tax credits, and the reversal of excess deferred income taxes. The tax expense on
2. Rule 530 Schedule H-9 is calculated on a fully normalized basis, as that term is
3. defined below. Therefore, the income tax expense on Rule 530 Schedule H-9 is
4. correctly not adjusted for the effect of temporary book/tax differences. This is
5. because temporary differences determine only the timing of the payment of taxes,
6. and not the actual amount of tax expense. These temporary differences are
7. reflected, along with the permanent differences, in the calculation of current taxable
8. income on Rule 530 Schedule H-10.

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10III. STAND-ALONE TAX CALCULATION

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1. Q. Is the income tax expense in the cost of service calculated on a stand-alone
2. basis or a consolidated basis?
3. A. The income tax expense included in the cost of service is calculated on a stand-
4. alone basis. No effects of filing a consolidated income tax return are included in
5. the cost of service. This is consistent with prior PNM rate applications and prior
6. Commission orders.

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1. Q. As required by Rule 530 Schedule H-11, please address the effects of filing
2. consolidated income tax returns.
3. A. There are no effects on PNM resulting from its inclusion in the consolidated income
4. tax returns filed by PNMR. A pro-formastand-alone income tax return is prepared
5. for each of the affiliated companies, including PNM. These returns are, in turn,

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DIRECT TESTIMONY OF

LARRY T. MORRIS

NMPRC CASE NO. 24-00089-UT

1. included in the PNMR consolidated income tax return, which is filed with the IRS.
2. In 1984, PNM adopted an Inter-Company Tax Allocation Policy ("ITAP") that has
3. been uniformly applied since that time without significant changes. Under that
4. policy, each affiliated company is treated on a stand-alone basis for purposes of
5. computing its income tax expense. Their stand-alone income tax returns are then
6. combined to create the consolidated income tax return. This method did not change
7. with the formation of the holding company, PNMR, except that PNMR, rather than
8. PNM, became the ultimate taxpayer liable to the IRS. PNMR (rather than PNM,
9. as in the past) pays to the IRS the total current tax liability of the consolidated
10. group. PNM and each of the other affiliated companies then reimburse PNMR for
11. their respective stand-alone tax liabilities.

12

1. In 2005, PNMR filed as a registered holding company under the federal Public
2. Utility Holding Company Act of 1935 ("PUHCA"). As a result of that filing, slight
3. changes to the ITAP were required. Slight changes were also made when the ITAP
4. was redrafted in 2008, following the repeal of PUHCA. Those changes never cause
5. PNM to be responsible to PNMR for tax expense in excess of PNM's stand-alone
6. share of the consolidated liability. Additionally, in some cases, a current tax
7. expense or benefit that occurs at a consolidated level is allocated pro-rata to the
8. business unit whose business activity resulted in the particular benefit or expense.
9. No such items or allocations exist in the Test Period.

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DIRECT TESTIMONY OF

LARRY T. MORRIS

NMPRC CASE NO. 24-00089-UT

1 Q. Why is the stand-alone calculation the appropriate method to use in

1. determining tax expense to be included in the cost of service study?
2. A. The stand-alone tax returns reflect the current tax expense resulting from the
3. income and expenses related to the business activities of each separate company.
4. As such, the stand-alone calculation correctly matches the current tax expense of
5. each entity with the income and expenses that created that tax liability. The stand-
6. alone calculation prevents cross-subsidization of one company by another. As
7. discussed earlier, the consolidated return is merely a summation of all the stand-
8. alone tax returns for the affiliated companies included in the consolidated group.
9. No tax benefits or expenses are created as a result of filing a consolidated return.

1. Q. Does the stand-alone calculation used in the ITAP and the cost of service

1. comply with the Final Order in NMPRC Case No. 3137?
2. A. Yes, it does. The Final Order in NMPRC Case No. 3137 requires that:

15	PNM's payment to the holding company for income tax shall be limited to
16	PNM's share of the current income tax liability of the consolidated
17	corporation.
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1. The ITAP ensures that PNM pays no more (or no less) than its stand-alone share of
2. the consolidated tax liability. The stand-alone income tax calculation was used by
3. PNM in its filings in NMPRC Case No. 3137 for both the original cost of service
4. and the illustrative cost of service filed in support of the stipulation in that case. It
5. is the only method that ensures that PNM will always pay its share of tax expense,
6. or be paid for its share of tax benefit, and no more. Any type of consolidated tax

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