Lapas attēli
PDF
ePub

treated consistently. The CTA affects tax expense or deferred taxes without affecting depreciation or, in some cases, rate base. Public utility property is the hostage and denial of accelerated depreciation is the reaction to a normalization violation. Fortunately, Code Section 168 is broad enough to cover this issue.

3. Explain how CTAS could result in unfair competition among INGAA members. Would flow through of CTAS make a pipeline more competitive by lowering its rates?

Answer #3: Take the example of two pipelines serving the same competitive market. Each pipeline has similar costs. The only exception is the group in which each pipeline is consolidated for income tax purposes: one consolidated group includes non-regulated affiliates that receive tax benefits and the other consolidated group does not. The tax benefits earned by the non-regulated affiliate would, in the first instance, be used to lower the rates of the pipeline member of the consolidated group. No change to rates would occur with the pipeline in the other consolidate group. The loss of the tax benefits by the non-regulated affiliate would cause it to be uncompetitive. This result, in my view, completely undermines the tax neutrality goal of the 1986 Tax Act.

4. How significant would the impact on INGAA members be if the ratemaking bodies were free to flow to ratepayers the economic benefit of consolidated tax adjustments?

Answer #4: At the time we were considering the effect of the IRS's proposed regulations, sixteen of our INGAA member companies performed a quick review of the three prior years' tax returns to estimate the impact of the regulations. That review disclosed a reduction in rate base of $1.3 billion would have been incurred under the regulations. That would mean investors in regulated activities would have $1.3 billion invested in assets for regulated activities that would earn no rate of return. This would occur at a time when the industry is already experiencing the economic difficulties resulting from regulatory changes that seek to transform the way pipelines have traditionally operated. Any further economic impacts arising as a result of CTAS would strain the resources of pipelines to unacceptable levels, raise rates, and discourage investment in the very types of activities for which Congress has provided tax incentives.

5. Do ratepayers share in the risk of nonregulated business ventures of your company?

Answer #5 With efficient regulation, ratepayers do not bear the cost of non-regulated ventures. It is the obligation of regulatory bodies to perform audits of regulated companies to insure that no cross-subsidization takes place. Cross-subsidization would exist if the ratepayer of the regulated company absorbed costs from nonregulated entities. This is not the case with natural gas pipeline companies. Since ratepayers do not bear the burden or risk from non-regulated ventures, then equity would dictate that ratepayers should not receive any benefits from such ventures either.

6. You make an argument for "stand-alone" treatment. Isn't it true that if a

conglomerate's non-regulated companies perform poorly, the entire enterprise is affected, and the ratepayers suffer, especially if the debt on the public utility is downgraded?

Answer #6 That is where the regulators come in. They have the right to approve debt/equity structure, rate of return and prudency of costs to insure ratepayers are not disadvantaged and do not cross-subsidize non-regulated ventures. In situations where non-regulated companies perform poorly, the system works: the stockholders suffer reduced dividends and lower stock prices. Ratepayers are not affected.

Thank you for the opportunity to respond to these questions. Should you need clarification or any additional information, please call me or John Ams of INGAA at (202) 626-3200.

Sincerely,

G. Stephen Arnold

cc: Rep. Don Sundquist

Chairman RANGEL. The next panel, the Honorable Joseph Rhodes, Jr., vice chairman of Pennsylvania Public Utility Commission, representing the National Association of Regulatory Utility Commissioners; Irwin Popowsky, consumer advocate, Pennsylvania Office of Consumer Advocates, representing the National Association of State Utility Consumer Advocates; Robert Wilson, special assistant to the Pennsylvania Public Utility Commission; Victoria Montanaro, an accountant, representing the State of Florida Office of Public Counsel; Ann Causseaux, regulatory analyst supervisor, representing the Florida Public Service Commission.

We will start off with Joseph Rhodes.

STATEMENT OF HON. JOSEPH RHODES, JR., VICE CHAIRMAN, PENNSYLVANIA PUBLIC UTILITY COMMISSION, AND MEMBER, COMMITTEE ON FINANCE AND TECHNOLOGY, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Mr. RHODES. Thank you, Mr. Chairman.

Parenthetically, on a personal note, I would like to now, 20 years later, thank you for your support you gave me when I served on another commission, the Scranton Commission in the summer of 1970, you might recall that summer?

Chairman RANGEL. Yes, that's some time ago.

Mr. RHODES. Some time ago. Chairman Rangel, and members of the subcommittee, my name is Joseph Rhodes, Jr., I am vice chairman of the Pennsylvania Public Utility Commission and a member of the committee on finance and technology of the National Association of Regulatory Utility Commissioners [NARUC], on whose behalf I am testifying here today.

I will be speaking from the perspective of a State public utility commissioner who will be representing the view of NARUC which has taken the position that consolidated tax savings adjustments are legal and not a violation of the normalization requirements that Congress has established in the Tax Code.

In light of the IRS' withdrawal of its proposed rules concerning consolidated tax savings adjustments, the NARUC believes that Congress should take no legislative action in this area. We view the issues of consolidated tax returns and normalization requirements as separate parts of the Tax Code that must be used in accordance with their intended purposes.

Restricting the use of consolidated returns through an inaccurate interpretation of normalization would lead to preemption of State utility commission regulatory powers and ultimately do great harm to the Nation's utility ratepayers. To do so would simply be bad public policy.

The NARUC position is based on three fundamental points. First, legal precedent exists for State public utility commissions to make consolidated tax savings adjustments to a regulated utility's cost of service. Second, the Tax Code should not be used to subsidize utility diversification, which unfortunately has not always been successful and has led to failed investments and cross-subsidization that adversely affects ratepayers.

And finally, prohibiting the use of consolidated tax savings adjustments would violate State's rights and would needlessly intrude

upon and restrict the ability of State utility commissioners to effectively regulate utility companies.

Let me deal with the first point. The U.S. Supreme Court in 1967 upheld the right of a commission-in this case the Federal Power Commission-to make a consolidated tax return adjustment in calculating the cost of service component of the rates charged by a regulated gas pipeline company. In this decision, the Court correctly recognized that the Commission did not exceed its statutory authority to adjust the rates of the utility to reflect the fact that the utility would owe less to the Federal Government as a result of the consolidated tax filing by its affiliated group.

This decision remains unchallenged, even though it preceded the introduction of normalization in the Tax Code. It is apparent that neither the IRS nor the utilities have seen fit to challenge this decision, although now they have apparently come to the conclusion that this case law should be overturned.

Notwithstanding the Supreme Court's decision, we believe that Congress should respect the fundamental difference that exists in the current Tax Code with respect to tax savings that result from consolidated returns, and normalization of such capital investment incentives as accelerated depreciation.

When a utility takes an accelerated depreciation deduction it is well aware that the benefit is only temporary and that a reversal will have to take place in the future. Such is not the case with consolidated tax savings. These savings are permanent meaning that the money will never be paid to the IRS or have to be repaid to ratepayers over the lifetime of an asset as in the case of utility powerplant equipment.

Second, we believe that if Congress decides that none of the benefits of consolidated tax filings should be shared with utility ratepayers, a clear message will be sent to the utility industry-diversify all you want and do it at the expense of the utility ratepayers. Congress might have intended that its normalization mandate would benefit utility ratepayers by providing low-cost cash for utility capital requirements, but this has not always been the result. Diversification not reinvestment is a growing trend among public utility holding companies.

Many of these holding companies have been in position to invest considerable sums of money in nonutility oriented businesses because of the infusion of cash from the regulated subsidiaries. And in the vernacular of an act of Wall Street brokers, these are known as cash cows because of the steady stream of revenues and dividends that they generate.

It is one of the NARUC's major policy principles that utilities should not be encouraged to diversify into unrelated nonutility operations in order to ensure that the full resources of management are devoted to public service. Diversification also creates an added regulatory burden on State commissions to monitor the gross crosssubsidization activities of a holding company. This situation poses a real challenge to State PUC's to ferret out these abuses and to put a stop to them. With limited resources, such as we have, it poses an almost impossible task. As U.S. District Court Judge Greene pointed out in his recent order lifting the MFJ restrictions on the Bell regional holding companies:

If Federal regulators are not able to prevent anticompetitive conduct by the financially mighty and politically influential regional companies, one would have to be an incurable optimist to suppose that State regulators could do so.

Thus, from a policy and practical standpoint, we strongly object to any rulemaking or legislation that would encourage situations in which regulated utility ratepayers must bail out a holding company that has invested millions in far flung interests that have gone sour. If losses in unregulated subsidiaries do not result in reduced tax obligations for utility customers you would, in effect, set up the ratepayer as the deep pockets for the holding company's diversification.

Finally, restricting the use of consolidated tax savings adjustments, as was done in the IRS rulemaking, represents a clear case of Federal preemption of States' rights. Let me explain briefly. We view the Federal tax liability of a utility as one of the operating expenses that may be legitimately recovered through its base rates. As such, when there is a reduction in this liability, by the use of a consolidated tax return filing, State regulators should have the right to reflect this adjustment in the amount of the expenses that the utility will recover. Limiting State regulators to reflect consolidated tax savings by making rate base deductions only, as the IRS rules propose, will severely restrict our ability to balance rate payer and utility interests.

That is why the NARUC, today, calls upon Congress to allow the current tax law to stand, and to allow State commissions to make adjustments based on consolidated filings on a utility-by-utility basis.

On behalf of NARUC, I want to thank you for the opportunity to testify here today and I would be glad to answer any questions at the appropriate time.

Thank you, Congressman.

[The prepared statement follows:]

« iepriekšējāTurpināt »