Opinion ID: 2347721
Heading Depth: 1
Heading Rank: 10

Heading: Accelerated Depreciation (Federal)

Text: The Commission permitted the Companies to normalize their accelerated depreciation on utility property acquired on or after January 1, 1970 (post-1969 property). However, on utility property acquired prior to January 1, 1970 (pre-1970 property), the Commission required the Companies to flow through the benefits of accelerated depreciation. On appeal, the Companies allege that the Commission's decision requiring the flow-through of accelerated depreciation on pre-1970 property was erroneous. [34] Under federal income tax law, a utility is entitled to deduct as a cost of doing business a reasonable depreciation allowance on its qualified property. 26 U.S.C. § 167 (1971) (§ 167). [35] For tax purposes the Companies used accelerated depreciation, one of the permissible methods of depreciation under § 167. [36] However, for rate-making purposes the Companies sought permission to use straight-line depreciation or normalization. Because accelerated depreciation results in a greater deduction than straight-line during the early years of an asset's life, the Companies would be initially collecting more from their customers than they would be paying to the federal government under their method of accelerated taxpaying and straight-line bookkeeping. The Companies have proposed that this extra money be placed in a deferred tax reserve account which would provide them with interest-free capital until the deferred taxes became due. The Commission felt constrained by the 1969 amendments to § 167 and therefore permitted normalization on post-1969 property. However, on pre-1970 property it followed its long-standing policy of using accelerated depreciation for rate-making purposes thereby flowing through to the utility's customers the benefits of lower current taxes in the early years of an asset's life. In Central Maine Power Co. v. Public Utilities Commission, 153 Me. 228, 136 A.2d 726 (1957), this Court considered the issue of flow-through versus normalization and there upheld the Commission's decision requiring flow-through. We stated: The proper treatment of depreciation and taxes calls for the exercise of judgment by those trained in the field of utility regulation. There are choices to be made in the impact of both depreciation and taxes upon the present and future ratepayers. The Commission, apart from the matter of accelerated amortization, has allowed only the current income tax as a charge in rate making. It takes the position in substance that the creation of an income tax deferred reserve under the circumstances outlined would extend into the unforseeable future charges to provide for expenses which might never arise, or to meet which, when and if the need should arise, the Company could seek relief before the Commission. There is nothing unreasonable in the conclusion reached. For example, a reduction in the tax rate might substantially lessen any anticipated impact on future ratepayers. Rates do not stand forever, and corrections may be made from time to time. Id. at 248-49, 136 A.2d at 738-39. The Companies, conceding that Central Maine Power controls the case at bar, ask us to reconsider its vitality in light of the 1969 amendments to Section 167 of the Internal Revenue Code. Under the 1969 amendments, the Code differentiates between pre-1970 and post-1969 public utility property. For pre-1970 property, the Code provides that a utility may use 1) straight-line depreciation, 2) the method used prior to August of 1969 if it also employs normalization, or 3) accelerated depreciation with flow-through, but only if that method was used prior to August of 1969. [37] In interpreting the pre-1970 utility property provision, the United States Supreme Court has declared that a utility may not unilaterally switch from flow-through to normalization. Rather, if a utility is flowing through the benefits of accelerated depreciation, it must continue to do so unless the appropriate regulatory body permits a change. Federal Power Commission v. Memphis Light, Gas and Water Division, 411 U.S. 458, 93 S.Ct. 1723, 36 L.Ed.2d 426 (1973). Responding to the lower court opinion which held that the 1969 amendments prohibited a regulatory agency from permitting a utility to switch from flow-through to normalization on its pre-1970 property, the Court stated: We find no trace of a suggestion that the Federal Power Commission was denied the authority to determine whether on particular facts the abandonment of flow-through by a utility . . . would be in the public interest . . . even though it might increase rates. Id. at 472-73, 93 S.Ct. at 1731-32, 36 L.Ed.2d at 437. The burden was on the Companies to convince the Commission that a change from flow-through to normalization would be in the public interest. The Commission's decision reveals that they failed to carry that burden. We need not decide whether it would have been an abuse of the Commission's discretion to prohibit a switch from flow-through to normalization if such a showing had been made for the record reveals that the Companies fell far short of sustaining their burden. The Companies argued that normalization is consistent with generally accepted accounting principles. If this is true, it is not controlling, for while a company's accounting methods may be considered by the Commission, they cannot dictate rate-making policies. Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 359 F.2d 318, 336 (5th Cir. 1966). The Companies also argued that it would be discriminatory to permit the benefits of accelerated depreciation to accrue to present customers at the expense of future customers. Even assuming that future customers pay higher rates because of accelerated depreciation, the Companies were mute on the Commission's concern that flowing through the benefits of accelerated depreciation is a hedge against the possibility of a change in the tax law which would erase any benefits that may have been deferred. More importantly, the Companies never addressed themselves to the Commission's implicit premise: normalization with its deferred tax reserve account is inconsistent with a basic rate-making principle that customers are to be charged only the utility's actual and current federal income tax liability. [38] Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, supra at 327. Having found nothing in the 1969 amendments concerning pre-1970 property which would undermine Central Maine Power and believing that its premises are sound, [39] we affirm the Commission's decision.