Opinion ID: 263341
Heading Depth: 1
Heading Rank: 4

Heading: meaning of order 204

Text: 27 The preliminary substantive question here presented is whether Order 204, correctly interpreted, requires the Company to use the Commission's deferred tax accounts in its reports to the Commission. The Company argues that it does not. 28 A. DEFERRED ACCOUNTING FOR STATE PURPOSES AND MANDATORY USE OF FPC ACCOUNTS. In the discussion accompanying Order 204, the Commission reviewed the possible alternative methods of treating tax deferrals in FPC accounts. It rejected both reserve and restricted surplus treatment because the former, while a direct method of providing for future tax liability, overly emphasizes a liability concept, and the latter, by treating the fund as surplus, even though restricted, tends to disregard its essential character as provision from income committed to the single purpose of providing for future taxes. 19 F.P.C. 837, 840 (1958). To meet the objections inherent in each label, the Commission determined to create a new balance sheet account which should not be a part of earned surplus or of reserves. It ordered that the new account be entitled Accumulated Deferred Taxes on Income. The declared purpose was to assure clear disclosure of this important item and lessen the possibilities of misunderstanding and misinterpretation of the nature and purposes of accumulated tax deferrals. 29 The Company presses its view that the accounts, as described in Order 204, themselves indicate that their use is not mandatory. Specifically it points to the language of Paragraphs D of Accounts 281 and 282. 5 Account 282-D is as follows: 6 30 D. The use of this account and the accounting described above are not mandatory for any utility, which in accordance with a consistent policy, elects not to follow deferred tax accounting even though liberalized depreciation is used in computing taxes on income. [Our italics] 31 The Company's argument runs as follows: Even though it uses deferred tax accounting in its reports to state commissions, it elected, as a deliberate corporate decision, not to follow deferred tax accounting in its reports to the FPC but to use instead the flow-through method. To complete the statement of the Company's position, it should be added that it also looks to the introductory language of Accounts 281 and 282: 32 The subaccounts below are provided for the use of Public Utilities and Licensees which (a) have filed with the Commission, copy of an order or other authorization by a state public service commission having jurisdiction, authorizing accounting for deferred taxes on income, [or] (b) in the absence of necessity of authorization by a state public service commission having jurisdiction, have filed with the Commission a statement of proposed plan of accounting for deferred taxes on income   . [Our italics] 33 From this the Company concludes that, since it has not filed the above-described order or statement, it need not use the FPC accounts. 34 We think that the Company misinterprets these sections and ignores the Commission's intent as expressed in Order 204. It is undisputed that the Company does use deferred tax accounting for state purposes. The Order makes it plain that its principal purposes are to provide the accounts    whereby public utilities and licensees    utilizing deferred tax accounting can account for and report tax deferrals related to liberalized depreciation under section 167 and accelerated amortization under section 168 of the Internal Revenue Code. Where in Paragraphs D the Order declares that the use of the accounts is not mandatory, it does not mean that a company may always decline to use the FPC deferred accounts. The use of the accounts is  not mandatory only when a utility in accordance with a consistent policy, elects not to follow deferred tax accounting. [Our italics] However, by eliminating the double negative from the above-quoted Paragraphs D, it becomes manifest that if a utility does use deferred tax accounting, the use of the accounts prescribed in the Order is mandatory. 35 The option or election left to a utility which uses rapid depreciation or accelerated amortization is whether or not to normalize its income, i. e., to use deferred accounting, or to forego such normalization. In the instant case the company has made its election. For state purposes it has elected to normalize its income. Necessarily the use of the FPC accounts became mandatory. The Company does not have an additional option to report to the FPC as though it did not normalize. 36 If the Commission intended to permit utilities using deferred tax accounting for state purposes to avoid using it for Commission purposes, it would be senseless for the Order to specify that companies not using deferred tax accounting at all need not use it for Commission purposes. 37 In the discussion which is made a part of Order 204 the Commission makes a significant comment. In setting forth the reasons for not mandatorily requiring its deferred tax accounts in all cases, it says: 38 This non-mandatory feature is desirable, among other reasons, to avoid to the extent possible conflict with requirements which may be prescribed by state regulatory authorities having major rate regulatory responsibilities, some of which may authorize and others deny deferred tax accounting. 39 This reason clearly illuminates the Commission's objective in including the filing provision. As noted above, the use of deferred tax accounting is beneficial to a utility insofar as it insulates its rates from changes resulting from the use of liberalized depreciation and accelerated amortization. One possible conflict to which the Commission alluded, and against which it sought to guard, was suggested to us in argument. If the Commission were to require a utility to use deferred tax accounting in all cases, there might be danger that the utility would use the Commission's order as a basis for arguing to a state that it must conform by permitting normalization. To avoid such conflicts, Order 204 included the filing provision as an assurance that the utility was rightfully using deferred tax accounting. 7 40 B. TREATMENT OF ACCUMULATED DEFERRALS. To effectuate the purpose of Order 204 of earmarking all tax deferrals, the Commission further ordered the Company to include in the deferred tax accounts $1,080,747 representing the sum previously transferred by the Company to unrestricted Earned Surplus when Tennessee and West Virginia discontinued deferred tax accounting in whole or in part. This FPC requirement is in accord with the Commission's Accounts 281 and 282, and we find no error. 41 Order 204 became effective January 1, 1958. It was to be assumed that as of that date utilities would have property as to which they had used accelerated amortization and liberalized depreciation. In the case of accelerated amortization, Account 281 8 specified the account balance in terms of amounts applicable    for tax purposes. Tax purposes is, in turn, unlimited to any particular period of time. Accordingly, if for tax purposes accelerated amortization were used prior to 1958, the accumulated annual provision must be reflected in the account balance as of January 1, 1958. 42 The same is true with respect to liberalized depreciation. 9 Account 282 specifies the account balance in terms of amounts applicable to the    plant    of each vintage year    [in respect to which] liberalized depreciation methods    have been used   . A vintage year is the year in which the particular plant was installed or placed in operation. Therefore, if the vintage year was prior to 1958, the accumulated annual provision is to be reflected in the account balance, as of January 1, 1958. 43 Consistent with the foregoing, Paragraphs B of Accounts 281 and 282 prescribe methods for determining the pay-back from these accounts so as to balance out and complete the normalization process during all years in which rapid depreciation expense write-offs have been used. To facilitate this, all annual provisions for deferred taxes on income, whenever accumulated, must be reflected in the balances of Accounts 281 and 282. In Cities of Lexington, we agreed with the utilities that provision should be made for pay-backs, for it could not be assumed that the fund would never be needed. In the instant case the pay-back will not take place for some years and, by requiring the use of the Commission's deferred tax accounts in the meantime, the public will be assured that the accumulated deferral will not be paid out to shareholders and the rate payers be called upon to replenish the fund. It would have been incongruous simply to ignore this accumulation and permit its identity to be dissolved in unrestricted Earned Surplus. 44 For these reasons, we hold that Order 204 does require the Company to use the Commission's deferred tax accounts when reporting to the Commission. 10