Public Utilities:

Disposition of Excess Deferred Taxes

GGD-91-51: Published: Sep 27, 1991. Publicly Released: Nov 4, 1991.

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Pursuant to a congressional request, GAO provided information on the treatment of privately owned public utilities' excess deferred tax reserves created by the Tax Reform Act of 1986, focusing on: (1) the origin of excess deferred taxes and how utilities may and may not use them; (2) how fast excess deferred tax balances can be passed on to utility customers under normalization; (3) policy issues involving normalization treatment for deferred and excess deferred taxes; and (4) the benefits and costs of the normalization requirement for utilities and utility customers.

GAO found that: (1) public utilities' excess deferred taxes were approximately $17.9 billion at the end of 1987, which represented about 6 percent of their 1987 aggregate gross revenues; (2) the period over which excess deferred taxes can be passed on to ratepayers under the normalization requirement varies by utility industry and for companies within industries; (3) under normalization, about 69 percent of all electric, telephone, and gas pipeline excess deferred taxes can be returned to rate payers by 2000; (4) several policy issues must be considered when determining the disposition of excess deferred taxes; (5) normalization advocates believe that normalization treatment, rather than flow-through for excess deferred taxes, preserves the distribution pattern of capital cost reductions among ratepayers, but some state utility regulators believe that the uniform requirement that all utilities normalize the return of excess deferred taxes diminishes the utilities ability to balance ratepayers' and utilities' interests; (6) on average, utilities benefit from deferred taxes because the increased cash flow from being permitted to charge ratepayers an amount for income taxes that exceeds their taxes payable enables them to raise capital less expensively than flow-through utilities; and (7) if the normalization requirement of the Tax Reform Act of 1986 were repealed, state public utility commissions could order the return of utilities' excess deferred tax balances to ratepayers at a faster rate than under normalization.