INCOME TAXES

On December 22, 2017, the TCJA was enacted and signed into law with substantially all of the provisions of the TCJA having an effective date of January 1, 2018. The most significant change to PGE’s financial condition was the federal corporate tax rate decrease from 35% to 21%.

PGE proposed to defer and refund the expected net benefits from 2017 and 2018 related to the TCJA under a deferral application filed with the OPUC on December 29, 2017. On December 4, 2018, PGE received OPUC approval to refund a total of $45 million dollars to customers for the 2017-2018 net benefits associated with the TCJA. The refund will begin amortizing in customer prices on January 1, 2019 over a two-year period.

The protected excess deferred income tax is amortized using the average rate assumption method and is included in the 2019 General Rate Case as a refund to customers.

Income tax expense consists of the following (in millions):



	Years Ended December 31,
	2018			2017		2016
Current:
Federal	$	12		$	4	$	10
State and local	22			12		3
	34			16		13
Deferred:
Federal	(15		)	61		23
State and local	(2		)	9		14
	(17		)	70		37
Income tax expense	$	17		$	86	$	50

The significant differences between the U.S. federal statutory rate and PGE’s effective tax rate for financial reporting purposes are as follows:



	Years Ended December 31,
	2018		2017		2016
Federal statutory tax rate	21.0	%	35.0	%	35.0	%
Federal tax credits⁽¹⁾	(16.7	)	(14.0	)	(18.2	)
Change in federal tax law⁽²⁾	—		6.1		—
State and local taxes, net of federal tax benefit	6.5		5.0		4.8
Flow through depreciation and cost basis differences	1.5		1.5		0.2
Excess deferred tax amortization⁽³⁾	(4.1	)	—		—
Other	(0.8	)	(2.1	)	(1.2	)
Effective tax rate	7.4	%	31.5	%	20.6	%

(1)

Federal tax credits consist primarily of production tax credits (PTCs) earned from Company-owned wind-powered generating facilities. The federal PTCs are earned based on a per-kilowatt hour rate, and as a result, the annual amount of PTCs earned will vary based on weather conditions and availability of the facilities. The PTCs are generated for 10 years from the corresponding facilities’ in-service dates. PGE’s PTC generation ended or will end at various dates between 2017 and 2024.

(2) For the year ended December 31, 2017, includes a $17 million increase to Income tax expense related to the remeasurement of deferred income taxes as a result of the enacted tax rate change under the TCJA.

(3) The majority of excess ADIT related to remeasurement under the TCJA is subject to IRS normalization rules and will be amortized over the remaining regulatory life of the assets using the average rate assumption method.

Deferred income tax assets and liabilities consist of the following (in millions):



	As of December 31,
	2018		2017
Deferred income tax assets:
Employee benefits	$	134	$	128
Price risk management	36		56
Regulatory liabilities	26		14
Tax credits	52		50
Other	9		4
Total deferred income tax assets	257		252
Deferred income tax liabilities:
Depreciation and amortization	511		496
Regulatory assets	115		132
Total deferred income tax liabilities	626		628
Deferred income tax liability, net	$	369	$	376

As of December 31, 2018, PGE has federal credit carryforwards of $52 million, consisting of PTCs, which will expire at various dates through 2038. PGE has analyzed the provisions of the TCJA and its effects on the Company’s deferred income tax assets, and PGE believes that it is more likely than not that its deferred income tax assets as of December 31, 2018 and 2017 will be realized; accordingly, no valuation allowance has been recorded. As of December 31, 2018, and 2017, PGE had no unrecognized tax benefits.

PGE and its subsidiaries file a consolidated federal income tax return. The Company also files income tax returns in the states of Oregon, California, and Montana, and in certain local jurisdictions. The Internal Revenue Service (IRS) has completed its examination of all tax years through 2010 and all issues were resolved related to those years. The Company does not believe that any open tax years for federal or state income taxes could result in any adjustments that would be significant to the consolidated financial statements.