Summary: Excess deferred taxes were created when the Tax Reform Act of 1986 cut the minimum corporate income tax rate from 46 percent to 34 percent, thereby canceling some future expected income tax payments of privately owned utilities. Section 203(e) of the act requires that return of excess deferred taxes to rate payers be normalized. This involves utilities transferring excess deferred taxes to rate payers through cuts in utility service rates for at least as long as the remaining life of the capital assets that gave rise to them. This report presents information about the treatment of privately owned public utilities' excess deferred tax reserves. GAO (1) describes the origin of the excess deferred taxes and how utilities may and may not use them, including any restrictions on utilities' use of excess deferred taxes to diversify into nonutility activities; (2) provides data on excess deferred tax balances and estimates of how fast they can be passed on to utility customers under normalization; (3) discusses policy issues involving normalization treatment for deferred and excess deferred taxes; (4) describes the benefits and costs of the normalization requirement for utilities and utility customers; and (5) describes the likely reaction of state public utility commissions if section 203(e) was repealed.
