BY HOMER E. SAYAD Partner, Saint Louis Office Presented before the Guild of Gas Managers, Boston — February 1958
In December 1957 the Electrical World asserted that one of the ten most difficult problems facing utility company management in 1958 was what to do about liberalized depreciation. It said: "Some utilities see liberalized depreciation as beneficial to them and their customers. But some utilities, considering rulings or the thinking of regulatory bodies, decide not to use liberalized depreciation."
This is not a new problem nor is it an old one. I am sure that most of you have wrestled with it, probably vigorously, in one way or another, since 1954 when the new Internal Revenue Code, was enacted. I shall not therefore review the provisions of Section 167 of the Code which made possible the adoption of a depreciation method that accelerates the deductions in accordance with the double declining-balance method, the sum-of-the-years-digits method, or other similar methods meeting certain tests. Instead, I shall review the current regulatory status of this matter and shall comment on certain implications of recent developments.
Liberalized depreciation as it relates to a single asset results in no permanent deferral of income tax obligations. It simply changes the timing of the deduction. In the early years the deduction is greater than on a straight-line basis and in later years it is smaller. When the depreciable plant as a whole is considered, however, an interesting result may occur because of the mixture of depreciation deductions. Again, thinking of the plant as a whole, in the early years the fast depreciation amount will exceed the straight-line amount. But there will come a time, if fast depreciation is applied to each year's additions, when as to older property straight-line depreciation will exceed fast depreciation and as to newer property the reverse will be true. The combined effect, if there is growth, is that the depreciation deduction based on a liberalized method will continue to exceed the deduction based on the straight-line method. Accordingly, in these circumstances, the period during which additional
working capital is being generated by liberalized depreciation may not be followed by a period when additional funds will be required
to meet tax obligations. It is this feature of liberalized