[BETA] Fortnightly

ADFITs: Not a Phantom

In his article, "Phantom Taxes: The Big Payback" (Courts and Commissions, 7/1/96, p. 41), David Wise argues that utility recovery of stranded facility costs should be reduced by the balance of accumulated deferred income taxes (ADFIT) attributable to stranded costs. He theorizes that the ADFIT balance represents tax collected from customers that exceeds current tax payments and, thus, should be returned to them by reducing the stranded-cost receivable.

This argument sounds reasonable, but stops short of the complete transaction. The ADFITs at issue arose because of accelerated depreciation (em i.e., tax depreciation exceeded book [straight-line] depreciation. When property is written down to reflect its reduced value as a stranded cost, this process is reversed [depreciation accruals fall short of straight-line cost] and the deferred taxes go away (at least to the extent of the portion written down). Thus, no deferred taxes are available to refund to customers.

Mr. Wise also omits discussion of the federal tax cost to the utility when it recovers stranded costs from customers. He chooses to ignore the fact that monies a utility receives from ratepayers for stranded assets create taxable income. The deferred taxes will shelter this tax liability as they were intended to do when collected.

Mr. Wise's idea for reducing the stranded-asset receivable for the ADFIT, then, is to leave the utility with a tax cost to be funded by the stockholders.

John Fay

Vice President, Taxes

Columbia Gas System Service Corp.

Wilmington, DE

"Lucky" Discounts:

So What?

Editor Bruce Radford's column "The Lucky Few" (Frontlines, 7/1/96, p. 4) makes it clear that neither he nor John Hanger, a utility commissioner from Pennsylvania, understand competitive markets. They complain that some large industrials with competitive options are securing special-contract rates.

Hanger says: "The industrial customers that are receiving these discounts have been able to obtain them because they now have a form of customer choice. These customers can choose to self-generate."

So what? That is nothing new. These customers have always had the option to self-generate, and many of them did. But in the past the utility companies could not compete for that load. They offered their standard rate, and the customer just left the system (em which meant that costs for all remaining customers went up. It was called "uneconomic bypass."

Hanger goes on to say, "The challenge for this Commission is to give all customers choice, not just a lucky few."

First of all, luck has nothing to do with it. These customers have choices because of their size and usage characteristics. Also, does Hanger intend to be so magnanimous in granting suppliers the same choice to decide who they do and do not want to serve? He could do this by setting up a pool similar to the "assigned risk" pool of the auto insurance business (em each supplier was assigned a portion of those customers that everyone had declined to serve, customers who would then pay market prices.

What Radford and Hanger don't understand about markets that go from regulation to competition is that the transition will produce