EXHIBIT NO. 7 TABLE 58.-Estimated value of accelerated-depreciation certificates, interest-free loans, and other subsidy benefits to private electric companies from June 9, 1951, through July 11, 1956 [Application under the electric power goal was suspended on Dec. 3, 1953, reopened in April 1955, and closed again on Jan. 1, 1956] TABLE 58.-Estimated value of accelerated-depreciation certificates, interest-free loans, and other subsidy benefits to private electric companies from June 9, 1951, through July 11, 1956-Continued 7,948, 958 8.836, 022 1, 275, 126 7,481, 829 1,343, 680 4, 987, 970 2,278, 952 13, 119, 610 11, 460, 176 18, 106, 117 197, 132 19, 294, 184 59, 306, 926 Pennsylvania Power Co. Pennsylvania Water & Power Co. Philadelphia Electric Co. Portland General Electric Co.. 26, 213, 661 12, 803, 856 23, 268, 084 Potomac Edison Co.... Potomac Electric Power Co. Potomac Light & Power Co. Public Service Company of Colorado Public Service Company of Indiana, Inc. Public Service Company of New Mexico. Public Service Company of Northern Illinois. Public Service Company of Oklahoma... Public Service Electric & Gas Company of New Jersey. Rockland Light & Power Co.. South Carolina Electric & Gas Co. South Carolina Generating Co South Indiana Gas & Electric Co. South Penn Power Co. Southern California Edison Co. 616,000 124, 319, 266 6, 035, 952 381.446 79, 118 54, 949, 115 2, 312, 920 5,341, 504 Southwestern Public Service Co.. 16, 031, 192 26, 976, 102 29,986, 500 20,065, 041 4,327, 350 25, 390, 824 4, 560, 000 16,927, 500 7,734,000 44, 557, 500 38,892, 000 61, 446, 097 669,000 939,000 33, 345,000 96,000 65, 478, 000 279, 349, 140 45, 574, 950 267,962, 101 120, 104, 325 36, 378,000 88,960, 389 7, 345, 500 10, 175, 447 79,297, 500 45, 063, 750 23, 257, 725 26, 098, 500 924,000 43, 452, 000 78, 964, 086 20, 484,000 11, 425, 125 1,294, 500 64, 597, 950 53,526, 000 14, 136, 239 36, 306, 021 30, 248, 366 7,920, 000 268,500 186,478, 899 7,849, 275 18, 127, 275 54, 404, 497 48, 130, 500 68,583, 450 27, 702,000 64,864, 327 9, 129, 207 1,592, 857 6, 997, 500 112,500 2,712, 760 141.873, 121 45,033, 030 53, 897, 550 11, 723, 874 10,704, 315 5,080, 465 2,861, 028 25, 435, 500 2,080, 500 23, 134, 500 4, 720, 398, 877 EXHIBIT No. 8 CLYDE T. ELLIS' STATEMENT MAY 17, 1957, BEFORE THE FEDERAL POWER COMMISSION (Docket No. R-126) In the Matter of Amendment of Uniform System of Accounts Prescribed for Public Utilities and Licensees and Natural-Gas Companies and of Annual Reports, Forms Nos. 1 and 2, To Provide for Accounting and Reporting of Provision for Future Income Taxes Resulting From Accelerated Amortization BRIEF OF NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION STATEMENT OF THE CASE This brief is submitted in response to the notice of proposed rulemaking, issued by the Federal Power Commission on June 16, 1953, and the notice of extensions of time, dated July 30, 1953. In these notices, the Federal Power Commission proposes to make certain changes in its uniform system of accounts to reflect the income-tax savings, and resulting increase in net income, arising out of the certificates of accelerated amortization received by electric-utility companies. Interested persons were invited to submit their views and comments. This brief is therefore submitted by the National Rural Electric Cooperative Association, the national service organization of the rural electric cooperatives and power districts. It will supplement the statement filed with this Commission on March 5, 1953, by Dr. Clay L. Cochran, economist, on behalf of the National Rural Electric Cooperative Association. Introduction The outbreak of the Korean conflict required an immediate and substantial increase in the defense potential of the country. New plants had to be built and existing plants enlarged--and this had to be done without regard to whether or not those new and additional facilities would have any use after they had performed their defense functions. The Government desired that this needed construction be financed by private funds to the fullest extent possible. The private investor could hardly be expected to invest in facilities which might have only a short useful life unless he was protected against that possibility. Congress therefore enacted section 124A of the Internal Revenue Code. Under the provisions of that section a facility which was being built for defense needs could be fully amortized in a period of 5 years; or, rather, since most of these facilities could be expected to have at least some economic use beyond those of defense, that proportionate part or percentage of the facility which was being built primarily for defense purposes could be amortized in 5 years. Thus the responsible agency of the Government could determine what percent of the total cost of the plant was attributable to purposes of defense and a certificate of accelerated amortization would then be granted for that amount. The company obtaining the certificate could then amortize-or depreciatefor tax pu poses 20 percent of the amount of that certificate for each of 5 years. At the end of 5 years it would have deducted from its gross income for those 5 years 100 percent of the amount of the certificate. It would have saved, in taxes, all of the taxes on that part of its income by which the 20 percent accelerated amortization exceeded its normal rate of depreciation. Thus, if the normal rate of depreciation was 3 percent a year, the company would have been allowed extra depreciation of 17 percent a year of the amount of its certificate, and it would thereby have saved the taxes that would have been due on that 17 percent. It is true that after this 5-year period there will be no further depreciation permitted. As a result, assuming tax rates remain the same, a corporation holding a certificate will have to pay slightly more taxes. Nevertheless, huge amounts of increased profits are involved in these certificates of accelerated amortization. The question is: What shall be done about these huge increased profits of electric utility companies? Statement of importance of problem to National Rural Electric Cooperative Association and its position The National Rural Electric Cooperative Association is vitally interested in the proper disposition of this problem. National Rural Electric Cooperative Association is the national service organization of the rural electric cooperatives and rural power districts of the country. Of the 1,071 Rural Electrification Administration borrowers serving more than 4 million consumers, 899 systems serving approximately 3.5 million consumers are members of the National Rural Electric Cooperative Association. Rural Electrification Administration borrowers in fiscal year 1952 purchased more than 5,749,553,431 kilowatt hours of electric energy from commercial power companies at a cost of over $61 million. Obviously, therefore, National Rural Electric Cooperative Association, on behalf of its members, has a vital interest in preventing overcharges of customers of the electric utility companies. The electric utility companies are monopolies, selling a product or service which the people must have. Their customers are compelled to pay rates which give these companies enough money to pay all of their expenses-including taxes— and a reasonable profit as well. Therefore, any ruling or procedure which will give the companies more than a reasonable profit will also mean that the customers are being overcharged. And the law prohibits the imposition of rates which involve overcharges of the customer. It is true that the present proceedings before this Commission are limited to a consideration of certain accounting changes proposed by the Commission. These changes are apparently intended to reflect only the principal amounts which the electric-utility companies will be able to withhold from their normal taxpayments during the 5-year period of accelerated amortization, and their later use for increased taxes. It is submitted, however, that accounting procedures must bear a direct relationship to the facts of the case, and to the law applicable to those facts; and we do not believe that the proposed changes do this. As will be demonstrated, accelerated amortization will produce extra, and therefore, excess earnings for the companies. The electric-utility industry apparently feels that these excess earnings should be retained by the company and yet should have no effect upon the rate base or the rates charged its customers. National Rural Electric Cooperative Association, on behalf of the rural electric cooperatives of the country-and all other customers of electric utilities-believes that since this money, this excess net income, has been paid by the customers under the rates which they must pay for their electric power, the customers should receive the benefit of it. This is a matter of law, as well as of equity. It is the customers' money and the companies cannot use it as windfall profits. It must be treated either as a contribution by the customers to the capital of the company or as excess profits. If it is treated as a contribution to capital, then it has reduced the company's investment by that amount, and the customers should not have to pay to the companies profits on it. In other words, if it is treated as a contribution to capital, the rate base upon which the charges to the customers are computed must be reduced by that amount, and the rates paid by the customers must also be reduced accordingly. If it is not treated as a contribution to capital, then it can only be treated as excess profits-profits over and above what the companies are legally permitted to earn-and as such the entire amount of those profits must be returned to the customers by rate reductions or refunds. There is no other choice in equity or in law. We do not believe that the proposed accounting changes meet the requirements of the law. Before we can, however, discuss specifically how the accounting should be handled, we must first make certain that there is a clear understanding of the facts of our problem and the law that applies to it. What accelerated amortization means to the electric-utility industry As of September 8, 1953, the electric-utility companies of the country have been issued certificates, pursuant to section 124 A of the Internal Revenue Code, permitting accelerated amortization in a total amount of $1,905,434,502. This means that they will be permitted, for Federal income-tax purposes, to deduct from their gross revenues as expenses the full amount of those certificates over a period of 5 years. They will be permitted to deduct as expenses 20 percent of the amount of those certificates for each of 5 years, although the normal amount that they would be allowed to deduct as a depreciation expense would ordinarily vary downward from approximately 3 percent a year. The companies therefore will be able to retain, as additional net income during that 5-year period, the amounts which they otherwise would have had to pay in income taxes on the extra or excess depreciation allowed. If we assume normal depreciation at 3 percent, the excess depreciation allowed for each of the 5 years is 17 percent. At the end of those 5 years the companies will have retained the taxes on 85 percent of the value of the certificates. Since the present tax rate on electric-utility companies is 52 percent, the companies will have an increase in net income, after taxes, in the amount of 52 percent of 85 percent of the cost of the facility. To illustrate: assuming a certificate of accelerated amortization of $1 million and a normal depreciation of 3 percent, a company would ordinarily be allowed to deduct as depreciation expense only 3 percent of the $1 million or $30,000 a year. Under its accelerated amortization certificate the company will be permitted to deduct a depreciation expense of $200,000 each year for 5 years. The excess depreciation permitted for each of those 5 years is 17 percent, or $170,000. The tax on $170,000, at a rate of 52 percent, would be $88,400. The company would therefore have an increase in its net income-over and above the net income it is permitted as a reasonable rate of return-in the amount of $88,400 for each of the 5 years involved. How great a benefit the electric utility companies as a group will derive from this tax postponement can be easily demonstrated. The electric utility companies are for all practical purposes guaranteed their rate of return. They deal with a necessity in a monopoly situation, and rates can always be adjusted to insure that they receive their reasonable rate of return. The interest-free loan which the Government has made to the electric utility companies through accelerated amortization means that they will earn on those deferred taxes amounts greater than the amounts which will later be needed to pay any increased taxes, and therefore they will benefit by an amount even greater than the amount of the loan. It is as though someone were to make a loan to you of a million dollars without interest, and then further provide that repayments should be at the rate of, let us say, 3 percent of the loan per year, so that the full amount will be repaid in a period of 33% years. Then you can take the million dollars and invest it in absolutely safe securities on which you will be guaranteed 6 percent a year. Obviously, you can make repayments on the loan out of the dividends you receive and still have half of your dividends left, which you can reinvest to earn you an additional 6 percent a year. And this you can do without ever touching the principal which was lent to you. So at the end of the period of repaymentwhen the loan has been repaid in full-you will have left the original amount which was lent you, plus one-half of the earnings for the next 33% years, plus the additional amounts that you can earn through reinvesting your dividends. Actually, you will end up with more than twice the amount that was lent you in the first place. A detailed analysis of the benefits to be received from certificates already granted to electric utilities is attached hereto as exhibit A. This analysis indicates that the total benefits accruing to the commercial electric corporations from the certificates will total over $2,863 million. This, then, is what accelerated amortization means to the electric utility companies. This is the amount that they will receive in excess of what they have already received as a reasonable rate of return. In short, this is the amount by which the customers will have overpaid the companies unless proper provision is made for the protection of the customers. What is to be done for the customers' protection and to effect compliance with the requirements of the Federal Power Act and court decisions that rates shall be reasonable? Congress did not intend to create huge extra profits Congress did not intend, by the enactment of section 124A, either to grant windfall profits to, or change the character of, electric utility companies. In the arguments before this Commission on March 18, 1953, much was said about the intent of Congress in authorizing accelerated amortization for defense facilities. Company spokesmen argued that Congress intended that the electric utility companies should receive the same benefits from accelerated amortization as other companies. We do not argue against this statement as such. We disagree, however, with the meaning which the companies have attached to the word "benefits." The companies' spokesmen defined "benefits" as windfall profits for the companies and their stockholders. With such a definition we emphatically disagree. Congress intended that the benefits be those of additional security, |