The normalization reserve required by the House bill is described as a "reserve for deferred taxes." In some jurisdictions the same purpose is accomplished by making adjustments to a depreciation reserve. The bill should not restrict the latter method of reflecting the tax deferral where it

achieves the same result.

2. Public Utility Property

The bill defines public utility property to include property used predominantly in the trade or business of furnishing or sale of electrical energy, water, sewage disposal services, gas through a local distribution system, telephone services (other than those provided by the Communications Satellite Corporation), or transportation of gas, oil (including shale oil) or petroleum products by pipeline, if the rates are regulated by a utilities commission or similar agency. Oil pipelines, unlike gas pipelines, are nonmonopolistic common carriers, subject to the regulation of the Interstate Commerce Commission. Like other common carriers such as

railroads, motor carriers and air carriers, rates for oil pipelines are not fixed so as to provide a guaranteed return

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and the problem which has arisen with respect to the other regulated public utilities described in the bill does not pertain to carriers of oil and other petroleum products. Therefore, references in the definition of section 451 of the bill to "oil," "shale oil," and "petroleum products" should be deleted. On the other hand, the bill should make clear that property of regulated steam producers is within the definition of public utility property.

3. Effective Date

The bill provides that a taxpayer may not use an accelerated method of depreciation with respect to property acquired or constructed before December 31, 1969, unless he used an accelerated method in a tax return filed before

July 22, 1969. The proper cutoff date is not July 22, 1969, since there was no public announcement of a change from the Administration's recommendation of April 22, 1969, until the press release dated July 25, 1969, and even then the announcement did not describe the provision as actually adopted in the bill. The date of July 22, 1969, should be changed to August 1, 1969, wherever it appears in section 451 of the bill. The August 1 date is the date the bill was introduced,

the first date on which the terms of this provision became

available to the public.

Under the bill, this provision is effective only with respect to taxable years ending after July 22, 1969; thus a taxpayer who has not yet filed his return for a taxable year ending before such date could apparently elect accelerated depreciation for such year even if he has not previously used such a method. This is not in accord with the intent of the bill and it should be changed to be effective for all taxable years for which a return has not been filed before July 22, 1969 (or August 1, 1969, as recommended above, hereinafter referred to as the "proper cutoff date").

It appears that certain utilities were collecting rates based upon flow-through, or had filed rate schedules with a regulatory agency based upon flow-through and were thus in effect committed to flow-through, and had reflected accelerated depreciation with flow-through in establishing cost of service and for reflecting operating results in their regulated books of account even though they had not yet filed a tax return using an accelerated method of depreciation. Utilities which

have made such a change in computing their tax expense in their regulated books of account for the latest monthly accounting period ending on or before the proper cutoff date should be permitted to elect an accelerated method of depreciation with flow-through for such property and for future

acquisitions.

Additionally, certain utilities had, prior to the proper cutoff date, filed with the Internal Revenue Service Form 3115, Application for Change in Accounting Method, which would have had the effect of permitting these companies to elect an accelerated method of depreciation for existing property. Although these companies had not reflected their decision to adopt accelerated depreciation for tax purposes in a return filed by that date, the Form 3115 evidences their decision to do so as much as the actual filing of a return. Treasury recommends that utilities which filed a Form 3115 prior to the proper cutoff date be permitted to elect an accelerated method of depreciation for property which is the subject of such Form 3115. In addition, since they had thereby evidenced their intention to elect accelerated depreciation for existing property, they should be allowed to

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elect accelerated depreciation for any year for which a return has not yet been filed (which would not be covered by the Form 3115). Further, if in addition to filing Form 3115, the taxpayer prior to the proper cutoff date used flow-through with respect to such property, he should be permitted to use flow-through with respect to future property.

Utilities which have not elected an accelerated method of depreciation in a tax return filed prior to the proper cutoff date, nor used accelerated depreciation in computing their tax expense in their regulated books of account for a monthly accounting period ending prior to the proper cutoff date, nor filed Form 3115 prior to the proper cutoff date would not be permitted to elect an accelerated method of depreciation for existing property.