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54 IRET Policy Bulletin 1 (1991)

handle is hein.taxfoundation/iretpbul0013 and id is 1 raw text is: September 20, 1991 _No. 54 PUBLIC UTILITIES AND THE ALLOCATION OF CONSOLIDATED RETURN TAX BENEFITS When a public utility is a member of an affiliated group of companies, the traditional regulatory practice for ratemaking purposes has been to keep the utility's revenues and expenses separate from those of other group members. This means, among other things, that the utility's tax expense allowance for ratemaking purposes should be computed as though the utility were an independent company filing a separate tax return. It has long been regarded as sound regulatory policy not to commingle the income and expenses of public utilities with those of nonregulated affiliates lest utility customers end up subsidizing or being subsidized by non-utility operations. Some public utility commissions would now like to make an exception to this rule with respect to the tax benefits that may result from filing consolidated tax returns. A group of affiliated companies may sometimes reduce its total federal tax liability by filing a consolidated corporate income tax return because, if one group member has losses, a consolidated filing permits the member's losses to be netted against the income of the rest of the group. If the affiliates filed separate returns, restrictions in the tax code might bar much of the loss from being recognized for tax purposes. Of relevance here, suppose an affiliated group contains, among its members, a regulated utility with profits and a nonregulated company suffering losses. Some public utility commissions have suggested allocating to the utility a portion of the tax benefits achieved when the group files a consolidated return on which it nets out the losses of the nonregulated company. Such an allocation would reduce the utility's federal tax expense for ratemaking purposes and permit public utility commissions to trim utility rates. An alternative regulatory approach is to apply the allocated tax benefits against the utility's rate base. Because the utility's net return is computed as a percentage of its rate base, a smaller rate base would decrease the amount that the utility must be permitted to collect from its customers. The federal government's involvement in this controversy comes via an indirect route. Taxes play a significant role in public utility rate setting. Beginning in 1969, Congress added to the tax code rules known as normalization requirements, that stipulate how federal tax depreciation allowances are to be handled in public utility ratemaking calculations. The federal government was Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 * Washington, D.C. 20006 Taxation (202) 463-1400 * Fax (202) 463-6199 e Internet www.iret.org

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