JOHN K. VAN DE KAMP Attorney General
JOHN T. MURPHY Deputy Attorney General
AGO 82-804
No. 82-804
California Attorney General Opinion
Office of the Attorney General State of California
April 28, 1983
THE
HONORABLE NORMAN S. WATERS, A MEMBER OF THE CALIFORNIA
ASSEMBLY, has requested an opinion on the following question:
Is the
accelerated cost recovery system (ACRS) authorized by the
Economic Recovery Act of 1981 constitutional when applied to
state-regulated public utilities?
CONCLUSION
The
accelerated cost recovery system (ACRS) authorized by the
Economic Recovery Act of 1981 is constitutional when applied
to state-regulated public utilities.
ANALYSIS
Users
of the products and services of a state-regulated public
utility pay that utility "just and reasonable"
rates set by the California Public Utilities Commission
(CPUC). (Cal. Const., art. XII, § 3; Pub. Util. Code,
§ 451.) These rates are calculated on the basis of two
major considerations: (1) determination of "cost of
service," i.e., the operating expenses of the utility,
and (2) determination of a "reasonable return" on
the utility's investment, "which is found by
multiplying its authorized rate of return by the value of
property devoted to a public use (rate base)."
(Southern Cal. Gas Co. v. Public Utilities
Com. (1979) 23 Cal.3d 470, 474; County of San
Francisco v. Public Utilities Com. (1971) 6
Cal.3d 119, 129.) As to the first consideration, federal
income taxes are a part of a utility's cost of service
and, as such, are passed on to the ratepayers in the
ratemaking process. (Southern Cal. Gas Co. v.
Public Utilities Com., supra, at p. 474.)
In
August 1981, the federal Economic Recovery Tax Act of 1981
(ERTA; Pub.L. 97-34; 95 Stat. 172) was signed into
law.
1Among the features of this law was the
establishment of an accelerated cost recovery system (ACRS)
for federal income tax treatment of property placed in
service after 1980. (Int. Rev. Code, § 168.) Generally,
ACRS allows the cost of a tangible, depreciable capital asset
("recovery property") to be recovered over a period
of time which may be shorter (thus, more rapid or
accelerated) than a period based on the useful life of the
asset or the income-producing life of the asset. For recovery
property other than real property, the cost recovery period
is determined by the asset class life (3, 5, 10 or 15 years).
Such property may be written off, with corresponding yearly
tax deductions, at specified percentages applied to the
unadjusted basis of the property. Real property which
qualifies as recovery property is assigned a 15-year cost
recovery period at percentages set forth in Treasury
Department regulations under specified formulas. (Int. Rev.
Code, § 168(b)(2)(A) - (B).)
At the
outset, our concern is with that part of the act (Int. Rev.
Code, §168(e)(3)(A)) which conditions use of ACRS upon
application of a "normalization" accounting
procedure:
"The term 'recovery property' does not include
public utility property (within the meaning of section
167(1)(3)(A))2if the taxpayer does not use a
normalization method of accounting". (Emphasis
added.)
Under a
normalization method the utility computes and pays its
federal income tax using ACRS, thereby deducting larger
depreciation allowances from current tax liability than would
be allowable under a straight-line depreciation
method.
3However, for ratemaking purposes the
utility's federal income tax is recomputed as if the
straight-line method rather than the ACRS method had been
used and the recomputed federal tax liability is incorporated
into the tax expense component of cost of service. The
difference between the actual federal tax paid and the
recomputed federal tax is entered in the utility's books
as a reserve for deferred taxes. (See City of Los Angeles
v. Public Utilities Com. (1972) 7 Cal.3d 331,
339, fn. 3.)
On the
other hand, in the ratemaking process, the utility's
actual federal tax liability might be passed on to the
ratepayers in the tax expense item of cost of service. This
alternative to normalization is known as
"flow-through."
On
December 15, 1981, the CPUC issued an interim decision in
case no. 93848.
4The CPUC made the following findings of
fact (Slip Opn., pp. 17-18):
"1. The Act [ERTA] makes a number of changes in the tax
law that impact all ratepayers.
". . . . . . . . . . . . . . . . . . . . . .
"3. Under ACRS the cost of an asset is recovered over a
predetermined period generally shorter than the useful life
of the asset or the period the asset is
...