Opinion ID: 2268472
Heading Depth: 2
Heading Rank: 3

Heading: Allocation of Additional Tax Depreciation

Text: The second issue raised by the company's petition for certiorari is whether the commission properly allocated certain sums representing additional tax depreciation between interstate and intrastate accounts. It is the company's basic position that the commission acted arbitrarily and abused its discretion by assigning nearly all of one portion of such depreciation to an interstate account. Depreciation, of course, is the process of continued loss to property resulting from factors such as wear and tear and technological obsolescence which eventually leads to the retirement of that property. The amount of depreciation experienced annually may be reflected as a deduction from income for tax purposes. The Internal Revenue Service (IRS) permits the company to calculate depreciation of some property on an accelerated scale which has the effect of allowing a larger depreciation early in the life of the property and smaller amounts later on. The IRS also provides a guideline depreciation scale which sets annual depreciation for certain other property in more constant amounts over the life of the property. Even more conservative than either of these scales is the depreciation of property as carried on the company's own books of account. The amounts by which accelerated exceeds guideline depreciation and guideline exceeds book depreciation are appropriately referred to as additional tax depreciation. Internal Revenue Service regulations require that additional tax depreciation on property acquired after 1969 be normalized. See IRC sec. 167(1). That is, for ratemaking purposes, a utility treats the additional tax depreciation as if the tax deduction for that amount of depreciation did not exist and computes the amount of tax that would be owed if the deduction were, in fact, income and adds the amount of the hypothetical tax to the cost of service. The cost of service and, therefore, the rates charged to customers are artificially inflated. The effect of this accounting procedure is to collect from current rate payers those taxes which will not, in fact, become due until some future date and thus to spread the tax burden more evenly among present and future customers of the utility. On the other hand, additional depreciation on property acquired prior to 1970 is treated as a flow-through item. That is, the tax deduction to which the company is entitled for depreciation is reflected currently in the company's tax calculations and this tax benefit is thus passed on immediately to the consumer in the form of lower rates. In the present case, the company experienced a total difference between accelerated and guideline depreciation on all property (both interstate and intrastate) of $2,569,000 of which $380,000 was attributable to pre-1970 properties and $2,189,000 was attributable to post-1969 additions to property. Although the additional tax depreciation attributable to pre-1970 properties was lowered by the commission from $380,000 to $259,000 in order to reflect the ratio of intrastate to total rate base, none of the parties seems to dispute the accuracy of these figures nor does any party question the various allocations that the commission made of these sums between interstate and intrastate accounts. [10] The sole point of disagreement arises from the commission's treatment of the difference between guideline and book depreciation for the test year. Because certain federal environmental regulations will have forced the premature retirement of certain of the company's facilities by 1982, the company was forced also to accelerate its book depreciation of those facilities. This resulted in book depreciation exceeding guideline depreciation and thus a negative entry was required for this portion of additional tax depreciation in the amount of $1.069 million. In its filing, the company sought to have this entire sum offset against the aggregate difference between tax and book depreciation. The net result of the company's approach would have been to decrease the company's intrastate tax deduction thereby producing an inflated intrastate tax expense. Naturally, such increased expense would have been reflected in higher rates. The commission's resolution of the dispute involving the allocation of these sums was relatively simple. It adopted the view proffered by the council's witness that because most of the excess of book over guideline depreciation was attributable to the generation plant in Providence, Rhode Island, and because this plant is identified as a part of the electric system's interstate rate base, $967,000 of the excess must be excluded from the company's intrastate cost of service. Consequently, only the remaining $102,000 of the proposed $1.069 million was allocated to offset the aggregate difference between accelerated and guideline depreciation of intrastate rate base. The resulting higher tax deduction precipitated a lower tax liability on intrastate rate base and thus a lower cost of service than the company would liked to have had approved. The gravamen of the company's objection to this portion of the report and order is that, although the production facilities in Providence are interstate in character, its intrastate customers have, in past years, benefited by a flow through of construction tax benefits and the usual excess of guideline over book depreciation. The company maintains that it would be inequitable at this point to shift the burden of tax liabilities to its only interstate customer, NEPCO, when that entity has never been the beneficiary of the company's past favorable tax status. In a more speculative vein, the company alleges that the FPC will probably not allow this shifting of burdens from intrastate to interstate customers and, thus, that the ultimate tax burden will fall upon the company's security holders, presumably in the form of reduced dividends. Because utilities and their regulatory overseers rarely indulge in simplicity, that characteristic, when ascribed to a particular regulatory methodology, is not necessarily a vice. Thus, unless the company shows that the commission abused its discretion, we cannot fault the commission's chosen method of allocating the excess of book over guideline depreciation strictly on the basis of the percentage of that figure attributable to interstate power generating facilities. The company's attempt to invoke he aid of equity to alleviate the burden that this allocation of tax liabilities precipitates upon its sole interstate customer in no way undermines the presumed reasonableness that the commission's decision on this point enjoys. The commission reached its result on the basis of undisputed legal evidence both as to dollar amounts and as to inter/intrastate ratios. These findings were set forth in specific language in the report and order and they provide a specified and reasonable basis for the result reached. Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 277, 302 A.2d 757, 762 (1973). That part of the company's petition regarding the allocation of additional tax depreciation is, therefore, denied.