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
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