CENTRAL ILLINOIS PUBLIC SERVICE SAYS TAX ALLOCATION AMONG MEMBERS OF CONSOLIDATED GROUP SHOULD BE ON STAND-ALONE BASIS.

SUMMARY: John R. Curtis, assistant treasurer, Central Illinois Public Service Company, Springfield, has expressed his company's strong support for the positions of the Edison Electric Institute in regard to the proposed regulations on the application of the normalization requirements of sections 167(l) and 168(i)(9). Additionally, he has summarized his company's positions regarding the regulations in two general categories: technical matters and policy questions.

Central Illinois Public Service Company (CIPS) is pleased to submit comments on the notice of proposed rulemaking issued by the Department of Treasury, Internal Revenue Service, which would add Regulations sections 1.167(1)-1(h)(7) and 1.168(i)-1 to Part 1 of Title 26 of the Code of Federal Regulations. These proposed regulations provide guidance on the application of the normalization requirements of sections 167(1) and 168(i)(9) of the Internal Revenue Code of 1986, as amended (Code). The proposed regulations establish the extent to which certain ratemaking procedures and adjustments that are based on tax savings attributable to the filing of a consolidated return will be treated as inconsistent with the normalization requirements.

CIPS is a wholly-owned subsidiary of CIPSCO Incorporated. We provide electric service to 307,000 customers in 550 communities and natural gas service to 158,000 customers in 257 communities throughout central and southern Illinois. CIPS is a member of Edison Electric Institute (EEI) which is the association of electric companies.

CIPS strongly supports the positions of EEI which are being submitted to you regarding these proposed regulations. We feel that our positions can be summarized in two general categories: technical matters and policy questions.

TECHNICAL MATTERS

A) CIPS believes that income tax allocation among members of a consolidated group should be based on a "stand alone" basis of calculation. This is consistent with regulatory practices in the utility industry on both the federal level and within many states regarding the treatment of tax losses or benefits of affiliated companies.

B) We agree with the proposed regulations that a cost of service adjustment to regulated income tax expense resulting from consolidated tax savings is a violation of normalization requirements.

C) We strongly disagree with section 1.168(i)-1(c) of the proposed regulations which permits the exclusion of an amount not in excess of the utility's share of consolidated tax savings from the utility's rate base (or, alternatively, treated as no-cost capital). This provision is predicated on the determination that consolidated tax savings are analogous to deferred taxes arising from accelerated depreciation. CIPS disagrees for the following reasons:

1) The depreciation expense of a utility's assets is allowed to be included in cost of service and collected from ratepayers. It is reasonable to share any accumulated tax benefits arising from accelerated depreciation of these assets with ratepayers. However, no component of the costs that underlie consolidated tax savings resulting from affiliated companies is included in rate base or cost of service nor collected from ratepayers. Thus, there is no cost-free capital related to rate base to be shared.

2) Tax losses of affiliated companies are derived from economic losses funded by investors, not ratepayers. The effect of the tax savings merely reduces the shareholders, economic losses either immediately through payment from affiliates or subsequently by offsetting future taxable income. To deny the tax benefit of this loss to shareholders is a confiscation of an asset bought and paid for by shareholders.

D) If the final regulations permit a consolidated tax savings rate base adjustment, CIPS believes that the taxpayer's elected earnings and profits method of allocating the consolidated tax liability should be used in the calculation rather than the arbitrary method selected and set forth in the proposed regulations.

POLICY QUESTIONS

CIPS feels that there are important public policy issues associated with these proposed regulations.

A) The normalization requirements of the Code were legislated by Congress to ensure that the benefits of accelerated depreciation were available to stimulate investment so as to improve the economy and the United States' competitive position in the international economy. These benefits were not intended to be directly "flowed through" to the ratepayer.

CIPS realizes that the proposed regulations do not require, but rather simply give state public utility commissions the flexibility to reduce the utility's rate base by the amount of consolidated tax savings related to non-utility investments. From a practical standpoint, this flexibility equates to investment uncertainty and the net effect will be to discourage -- not stimulate -- new investment in the economy. Therefore, CIPS believes the proposed regulations are counterproductive to the objectives of the normalization requirements, and are contrary to Congressional intent and public policy.

B) Diversification by utility companies represents investment in the United States, and tax policy has been designed to encourage this investment. Diversification is funded by investor funds that are not allocated to the regulated utility's capital structure. Customer funds are not involved in diversification and regulatory commissions ensure that ratepayers are not at risk from utility diversification activities. Furthermore, regulatory authorities do not calculate a utility's return on equity using unregulated subsidiaries' cost of capital. Therefore, the customer does not compensate the investor for the riskiness of the unregulated affiliate, thus demonstrating a lack of ratemaking relationship between the utility's tax expense and that of the unregulated entity. The ratebase adjustment for the allocated consolidated tax savings will result in a benefit for the utility customer whose only relation to the tax loss is that the utility is an affiliate of the unregulated company that had the losses. It is unfair to penalize a non-regulated company and its investors simply because it is a member of a consolidated group that includes a regulated entity.

SUMMARY

CIPS believes that there are strong technical arguments to support the industry's position as stated by EEI regarding the allocation of tax losses of unregulated affiliates, as well as important policy questions. We appreciate the opportunity to present our views and support those of EEI regarding the proposed regulations.

Sincerely,