Opinion ID: 2173140
Heading Depth: 2
Heading Rank: 3

Heading: Federal Income TaxesPost-1969 Property

Text: With respect to post-1969 public utility property, the Internal Revenue Code provides that a utility may use as a method of depreciation: (A) a subsection ( l ) method [straight-line depreciation], (B) a method otherwise allowable under this section [accelerated depreciation] if the taxpayer uses a normalization method of accounting, or (C) the applicable 1968 method [the method used prior to August of 1969], if, with respect to its pre-1970 public utility property of the same (or similar) kind most recently placed in service, the taxpayer used a flow-through method of accounting for its July 1969 accounting period. I.R.C. § 167( l )(2). If the conditions provided by subparagraph (C) are met, the Commission may, in its discretion, require a public utility to use accelerated depreciation with flow-through for post-1969 property for rate-making purposes without jeopardizing the utility's right to take accelerated depreciation. In paragraph (4)(A) of section 167( l ) of the Code Congress provided a method by which utilities could avoid the effect of paragraph (2)(C), set forth above: If the taxpayer makes an election under this subparagraph before June 29, 1970, in the manner prescribed by the Secretary, in the case of taxable years beginning after December 31, 1970, paragraph (2)(C) shall not apply with respect to any post-1969 public utility property, to the extent that such property constitutes property which increases the productive or operational capacity of the taxpayer with respect to the goods or services described in paragraph (3)(A) and does not represent the replacement of existing capacity. I.R.C. § 167( l )(4)(A). If the Water Companies had made a valid election under this subparagraph, the available depreciation methods would be limited to those provided in § 167( l )(2)(A) and (B), namely, straight-line depreciation or accelerated depreciation with normalization. Treas.Reg. § 1.167( l )-2(a)(1) (1978). See Federal Power Commission v. Memphis Light, Gas & Water Division, 411 U.S. 458, 93 S.Ct. 1723, 36 L.Ed.2d 426 (1973). In the present case, the Water Companies did not produce evidence that they had made any election under paragraph (4)(A). The flow-through of the benefits of accelerated depreciation on post-1969 property was at issue in New England Telephone & Telegraph Co. v. Public Utilities Commission, Me., 390 A.2d 8 (1978). In that case, New England Telephone, which had been using a straight-line depreciation method, switched from straight-line to accelerated depreciation with normalization on its post-1969 property. Thus, paragraph (2)(C) of section 167( l ) was not applicable because New England Telephone had not used a flow-through method of accounting for its July, 1969, accounting period. We held that the Commission abused its discretion in requiring flow-through of the benefits of accelerated depreciation for rate-making purposes while ordering the Company to continue using a normalized method of accounting in its regulated books of account. The present case differs from New England Telephone in a crucial respect: Unlike New England Telephone, the Water Companies were subject to the operation of paragraph (2)(C) of I.R.C. § 167( l ). As we noted in the discussion of pre-1970 property, above, the Commission could properly act on the basis that before August, 1969, the Water Companies' rates had been determined by using accelerated depreciation with flow-through and thus the conditions for application of I.R.C. § 167( l )(2)(C) have been satisfied. Nothing in I.R.C. § 167( l ) prevents the Commission from determining the Water Companies' rates on the basis of accelerated depreciation with flow-through for post-1969 property. In conclusion, we find no error or abuse of discretion in the Commission's requiring that, for rate-making purposes, the Water Companies flow through the benefits of both state and federal accelerated depreciation.