NARUC Goes on Record

In a recent article, "Why Taxes Do Distort Emissions Trading" (Feb.15, 1995), Stanley I. Garnett II, chief financial officer of Allegheny Power System, Inc. discusses a legislative proposal currently promoted by his firm and the Chicago Board of Trade (CBOT). This proposal seeks to amend current Internal Revenue Service policy on federal tax treatment of the proceeds of emission allowance sales.

Throughout 1994, Allegheny Power and CBOT sought an endorsement of the proposal from the National Association of Regulatory Utility Commissioners (NARUC). The matter came to a vote at the NARUC summer meetings in July 1994 in San Diego, CA, and received qualified support "conditioned on the simultaneous adoption of legislative language which specifically codifies that rate regulatory agencies could continue to order any ratemaking treatment deemed appropriate by the agency with respect to all or a portion of the gains received on the sale of emission allowances." The language of the Allegheny-CBOT proposal did not then and does not yet contain this safeguard, and therefore does not enjoy NARUC's endorsement.

This qualifying language is critical, particularly in light of the electric industry's longstanding practice of using the federal tax code to restrict state commissions (PUCs) from ordering so-called flowthrough ratemaking treatment of federal tax benefits. One could write volumes about the holy wars of the past three decades over normalization versus flowthrough accounting treatment of accelerated depreciation, investment tax credits, and excess deferred tax benefits (em to name but three.

To date, most PUCs have accepted the argument that proceeds of emission allowance sales ought to be flowed through to ratepayers because they are already paying for a clean air compliance strategy that may include fuel-switching, more expensive coal, or scrubbing equipment.

Mr. Garnett is highly critical of flowthrough accounting, which he describes as the "problem" addressed by the proposal he champions. He argues that flowthrough accounting creates a "serious rate shock" and "risks potentially wild swings in utility bills." Whatever the merit of his arguments, let it be clearly understood that NARUC's endorsement of tax law revisions in this area is by no means a call to revise current regulatory practice.

When and if the Allegheny-CBOT proposal is revised to include the regulatory safeguards prescribed in the NARUC resolution, it may gain our active support.

Bob Anderson

President, National Association of

Regulatory Utility Commissioners

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