Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
September 26, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4494 words
COMMITTEE:
HOUSE WAYS AND MEANS
HEADLINE:
TESTIMONY TAX CODE AND THE HIGH-TECH ECONOMY
TESTIMONY-BY: THEODORE VOGEL , TESTIMONY OF THEODORE
VOGEL, VICE PRESIDENT AND TAX COUNSEL FOR DTE ENERGY COMPANY
BODY:
September 26, 2000 Testimony of Theodore
Vogel, Vice President and Tax Counsel for DTE Energy Company on behalf of Edison
Electric Institute regarding Federal Tax Laws and the New Economy before the
Oversight Subcommittee Committee on Ways and Means United States House of
Representatives My name is Ted Vogel and I am the Vice President and Tax Counsel
for DTE Energy Company, the parent holding company of Detroit Edison Company.
Detroit Edison is an integrated electric utility serving greater southeastern
Michigan with non-regulated subsidiaries active throughout the United States.
DTE has 2.1 million customers, generates and sells over 50 million MWH of
electric energy per year, has approximately 9,000 employees and annual revenues
in excess of $4.7 billion. I am responsible for tax planning and tax compliance
for DTE Energy. I am testifying today on behalf of the Edison Electric Institute
(EEI), specifically the energy supply division of EEI, the Alliance of Energy
Suppliers. Ron Clements, Director of Governmental Relations at EEI, is
accompanying me today. EEI, through its Alliance of Energy Suppliers, serves the
needs and advances the commercial interests of power producers and power
marketers throughout the United States by advancing public policy positions that
enhance the competitiveness and effectiveness of the regulated and unregulated
producers, distributors and sellers of electric energy. THE CRISIS IN ENERGY
SUPPLY The recent headlines that describe the energy supply crisis in the San
Diego region of southern California are a vivid example of the need to construct
additional generation and transmission capacity in many areas of the United
States. Responding to market demand, almost 52,000 megawatts of merchant
generation -- that is, unregulated generating plants selling energy for resale,
not to end-use customers -- are scheduled to come on-line by the end of 2001.
This increase in generating capacity comes far too late, however, to provide
relief from the situation caused by current shortfalls in generating and
transmission capacity. The San Francisco Bay area also experienced several
blackouts this summer as a result of insufficient generating capacity in, or
availability for import into, the state of California. Not only was in-state
generation in too short of supply, but, even worse, the California Independent
System Operator, the quasi- public operator of the transmission grid in
California, could not import enough power from neighboring states to fuel
California's high demand for electricity. Rolling blackouts were instituted in
the San Francisco Bay area on June 14 this summer. Many employees at Silicon
Valley technology companies like Hewlett Packard worked in near darkness with
limited air conditioning. Hewlett Packard's energy manager told Dow Jones News
Service that a blackout in Silicon Valley would cost companies there as much as
$75 million dollars a day in lost revenues.' The investment firm, J. P. Morgan,
reported earlier this month that U.S. demand for electricity is likely to grow
at more than 5% a year, driven largely by the spread of information technology
and telecommunications infrastructure. Information technology and
telecommunications presently account for 16% of U.S. energy consumption,
according to the report. CONGRESSIONAL ACTIM IS NEEDED NOW Energy shortages have
been severe across California, as the state's expanding economy has out-stripped
the construction of new power plants. To quote President Clinton , "The
wholesale price of electricity has risen sharply in California this summer as a
result of tight supplies and growing demand. This is having a particularly heavy
impact where the price hikes are being passed on to consumers, as they are in
the San Diego region." The President released $2.6 million in emergency funds
for low-income families to cope with higher energy costs. He also directed the
Small Business Administration to set up a program for small businesses to apply
for loans to pay their electricity bills. Acknowledging California's
"power-crunch," he renewed his calls to Congress to take up his Energy Budget
initiatives and tax incentives. The explosive growth in electronic equipment,
computers, telecommunications, and bandwidth content has
produced a dramatic increase in the demand for electricity. All elements of this
new energy intensive information-based economy have two things in common. All
the equipment and content utilized in this trend incorporate silicon-based
microprocessors and electricity. Everything is plugged in to an electrical
outlet. Personal computers and servers are nothing more than
electron conversion devices that accept kilowatts though a power source and
convert, create, store, and transmit those kilowatts into digital bits of
information. This new information economy is powered exclusively by electricity.
The Internet is becoming more electricity intensive. Wireless Internet and
telecommunications applications are growing at an even faster rate than basic
Internet growth. Congress must act now. The most efficient manner for Congress
to act is to legislate incentives to encourage the construction of new or more
efficient electric generation facilities. The demand for power in this country
is staggering and, with 16% of all electric energy being used to support
e-commerce and computers generally, annual growth is
outstripping new capacity by an alarming rate. The inability to provide
sufficient generating capacity will have dire impacts for virtually all sectors
of the country's economy. IMPACT OF ELECTRICY INDU STRY RESTRUCTURING Until the
mid-1990's, the investor-owned electric industry was composed entirely of single
state or regional companies that were closely regulated by the various state
public utility commissions. Companies were vertically integrated: they generated
power, transmitted the power across their regions and then distributed the power
to each customer. The companies operated as highly regulated monopolies and had
an obligation to serve all customers. In this regulated market, utilities were
given an opportunity by regulators to recover their investment much differently
than companies that operate in a more competitive marketplace. A regulated
company had little incentive to retire its assets before the end of their useful
life in order to deploy new technology. To have done so may have resulted in
increased costs to customers that would have been unpalatable to state
commissions and, therefore, not recoverable in rates paid for regulated
services. This regulated status explains, in part, why electric assets have
historically had such long recovery periods. This no longer is the state of the
industry today. Nationwide, the structure of the electric industry is rapidly
changing from vertically-integrated, regulated monopolies to unbundled and fully
competitive generation services. Currently, 24 states and the District of
Columbia, encompassing some 70% of the Nation's population, have either passed
electric industry restructuring legislation or enacted regulatory orders to
implement unbundling and competitive customer choice. In these states, this
choice in electric generating service supplier is either currently available,
awaiting a phase-in implementation or part of a "big-bang" implementation in
which all customers have the choice of electric energy supplier all at once.
Because of the introduction of competition, previously applicable rules
regarding the cost recovery of capital simply do not apply any longer. There
also is no regulatory certainty in a deregulated electricity market. This is one
of the clear contributing factors at play in the San Diego situation described
above. Uncertainty has stiffed the interest of competitive generators to build
new plants. In a regulated environment, predictable dividend payments to utility
investors permitted them the opportunity to earn a return commensurate with the
return they would earn in industries with similar risk profiles. In a newly
competitive electricity environment, however, investors will demand a return of,
and a higher return on, their investments over a much shorter period of time to
reflect the vastly increased risks of an unregulated environment. Shorter
capital recovery periods are a key element in attracting these investors. The
electric industry is one of the most capital-intensive industries in this
country, requiring nearly four dollars in investment for each dollar of annual
revenue. Cost recovery, including the federal income tax rules providing for
depreciation and amortization of assets, is of vital
importance. The present 15-20 year depreciation requirement for
generating assets discourages badly needed investment in the construction of new
electric generation facilities and in the repowering of currently mothballed
facilities. NEW TECHNOLOGY"REQUIRES IMPROVED AND ADDITIONAL CAPITAL INVESTMENT
Energy producers must build and maintain. state-of-the-art equipment to
accommodate our nation's new technology. Competitive pressures that arise
through the unbundling of retail electric service requires that all competitors
be as efficient as possible. Because the competitiveness of wholesale markets is
now an established feature of the industry's business landscape, sales for
resale must also be generated as cost-effectively as possible. The advances in
technology require that all new construction be more efficient in terms of the
engineering measurements than equipment manufactured just a few years ago. These
measurements include capacity factor, heat rate and availability factor. New
combined cycle gas turbine generators are much more efficient today, resulting
in more rapid obsolescence of older less efficient generating equipment. Many of
the power plants constructed a generation ago were coal- fired or nuclear. Power
plants being built today are much more likely to be gas turbine facilities,
often operated in a combined- cycle or as cogeneration facilities that produce
steam for industrial process use as well as electricity. Gas-fired turbine
technology has made stunning advances over the last decade. These new
combined-cycle generators operate at energy conversion efficiency levels of 70%
compared to 40-50% only a decade ago. Energy conversion efficiency measures the
efficiency with which one type of fuel is converted to electric energy, which,
in turn, is capable of providing the light, heat or work that consumers expect.
As these advances continue, electric generation equipment suffers much quicker
economic obsolescence than in prior decades when the current
depreciation rates were set. In addition to new generation
facilities, existing electric generation facilities require massive amounts of
investment in order to retrofit these facilities and bring them into compliance
with environmental regulations. The Clean Air Act Amendments, new source review,
the National Ambient Air Quality Standards, and the related state implementation
plans all require significant new capital investment in environmental mitigation
technologies in order to improve air quality and maintain compliance with
federal and state directives. Again, this advanced technology supports the need
for shorter capital recovery periods. THE INEQUITIES OF CURRENT
DEPRECIATION RULES The recovery periods permitted under section
168 of the Internal Revenue Code for assets used to produce and distribute
electricity are much longer than the recovery periods allowed to other capital
intensive industries. As in every other instance of a heavily regulated industry
undergoing deregulation, new technology is being developed and deployed at a
much more rapid pace and makes obsolete many prior investments in property,
plant and equipment. With most of our industry's assets placed in the 15-year
and 20-year recovery period, the present cost recovery system unjustly penalizes
investors in electric generation and makes raising necessary capital much more
difficult. The disparity between electric industry recovery periods and the
recovery periods of other industries is highlighted upon review of asset class
00.4, Industrial Steam and Electric Generation and/or Distribution Systems. This
asset class includes equipment identical to that used by the electric industry
except that the energy generated is used in industrial manufacturing processes
instead of being sold to others. This asset class is given a 15- year life. The
same asset in the hands of an electric company has a 20-year life. No rationale
reasonably supports this distinction. By contrast to the 15-20 year
depreciation lives for electric generation assets,
depreciation lives for other capital intensive manufacturing
processes -- such as pulp and paper mills, steel mills, lumber mills, foundries,
automobile plants and shipbuilding facilities -- are depreciable for Federal
income tax purposes over just 7 years. Chemical plants and facilities for the
manufacture of electronic components and semiconductors can be depreciated over
only 5 years. The power plants that generate electricity have useful lives that
are similar to this production equipment that have recovery periods in the
7-year range. Another area of concern are the restrictions contained in the
description of class life 00.12, Information Systems, that further compounds the
disadvantage suffered by investors in electricity generation, transmission and
distribution facilities. The description excludes computers
that are an integral part of other capital equipment, thus, giving
computers used in a power plant control room a 15 or 20-year
life and a 150% declining balance method. A computer used to
run a highly sophisticated nuclear power plant cannot be expected to be less
susceptible to obsolescence than one used in a cigarette factory, for example,
which currently is recovered within 7 years. The economic life of a process
control computer is not closely related to economic life of the
manufacturing equipment it operates. It belies common sense to treat a process
control computer any differently than a
computer used to administer normal business transactions, yet
these computers perform much more sophisticated "high
technology" processes than normal business computer
applications. Mr. Chairman, to more fully explain the inequities inherent in
current depreciation rates and methods, we have attached a copy
of a letter we submitted to Treasury last November that we hope can be
incorporated into this Subcommittee's formal record. CONCLUSIONS AND
RECOMMENDATIONS We applaud this Subcommittee's efforts to take a long overdue
look at the current federal income taxation system with respect to capital
recovery periods. We agree with the conclusions of a recent Treasury report and
urge you to act on its findings. The Treasury Report (Report to the Congress on
Depreciation Recovery Periods and Methods) states: "Electric,
gas, water, and telephone utilities were all generally regulated at the time the
current class lives were established. Under rate of return regulation, utilities
were not theoretically concerned with depreciation and tax
expense, because rate structures were based on cost-plus pricing. A utility's
rate of return on equity was largely independent of its tax or
depreciation expenses. Consequently, for public utilities, it
is unclear that existing class lives truly represent the actual useful lives of
the property involved. Class lives may be expected to be different in the
current more competitive environment. Producers must maintain state-of-the- art
equipment, which might mean shorter lives and more rapid
depreciation. For example, new generations of combined cycle
gas turbine generators are more efficient today than previously, leading to a
more rapid retirement of such equipment than would have occurred under
regulation." (At page 97 . Congressional action is needed to cure the power
supply emergency facing our country. We encourage you to modernize the tax
treatment of new electric generating capacity to reflect the technical,
environmental and economic realities of the current structure of the electric
industry. Doing so would greatly advance the public interest by insuring against
the dire economic consequences that necessarily accompany electricity
shortfalls. Failing to do so would benefit no one. In recognition of the need to
modernize the capital cost recovery system for electric generation assets, we
wish to commend Ways and Means Committee members Thomas, Jefferson and English
for their leadership in introducing H. R. 4959 to modify the
depreciation of property used in the generation of electricity.
We believe this is a significant first step in helping our nation avoid an
electric supply crisis which would harm all segments of our economy. We would be
pleased to provide this Committee with more information about our industry's
views on depreciation rates and methods for facilities used in
the generation, transmission and distribution of electricity, and how the
current system discourages investment in badly needed new generation capacity
that is necessary to fuel economic growth in this country. We thank you for the
opportunity to participate in this process.
LOAD-DATE:
September 28, 2000, Thursday 
