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Phantom Taxes: The Big Paycheck

Fortnightly Magazine - July 1 1996

75 percent of XYZ's $2 billion in stranded-asset costs through ADFIT advances, and shareholder equity pays the rest, XYZ's balance sheet would look like this:


Other than nuclear $6 billion

Nuclear plant $0.5 billion

Total: $6.5 billion

Less Accumulated Depreciation $1.5 billion

Net utility plant: $5 billion

Total: $5 billion

Capitalization and Liabilities


Shareholder Equity $1.5 billion

Long-term Debt $3 billion

ADFIT $0.5 billion

Total: $5 billion

1. According to the Energy Information Administration's Composite Balance Sheet for Major U.S. Investor-owned Electric Utilities from 1990 through 1994, 1994 industry ADFITs totaled over $107 billion. One might reasonably assume that half this amount represented customer advances for ADFITs. ADITCs totaled another $12.7 billion.

2. The normalization requirements are contained in IRC secs. 167(I)(accelerated depreciation), 16(i)(9)(accelerated cost recovery system), and 46(f)(investment tax credit).

3. For the sake of convenience, the term ADFIT will include ADITCs.

4. In its aftermath, the Shoreham settlement has continued to generate large decommissioning costs, interim carrying costs, and other associated expenses that LILCO deducted for tax purposes but has capitalized for ratemaking purposes. As a result, LILCO has booked another $850 million of Shoreham-related ADFITs between 1990 and 1994. That means that LILCO has enjoyed a positive Shoreham-related ADFIT cash flow (i.e., tax reimbursements in excess of tax payments) approaching $2 billion.

In this author's opinion, the rights and obligations between shareholders and ratepayers connected with this accumulated $2 billion ratepayer advance (em and with the associated $2-billion tax obligation for embedded LILCO capital gains arising from the ratepayer bailout of LILCO's Shoreham-related debt (em had never been fully sorted out. A recent article notes that the $2-billion tax obligation now marks the principal impediment to the proposed public takeover of LILCO. "Lilco Deal Faces Huge Tax Liability," New York Times, June 2, 1996. Curiously, the connection between this capital gains liability and the ADFITs has so far escaped public debate.

5. For the sake of clarity, the sidebar does not deal with the issue of excess ADFITs from the reduction in the maximum marginal corporate income tax rate in the Tax Reform Act of 1986, from 46% to 34%. With that rate reduction, pre-1987 accruals of deferred taxes exceeded the amount needed to pay back taxes at the lower, post-1986 rate.

6. Utilities with a more balanced capital investment spread can (and do) effectively defer this reversal perpetually by continuing to make new capital investments subject to accelerated depreciation.

7. Priv. Ltr. Ruls. 8920025, 8836052.

8. See, e.g., Priv. Ltr. Ruls. 96-13-004, 95-47-008, 95-52-007, 93-12-007, and 90-41-051.


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