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APPENDIX H

ACCOUNTING AND RATEMAKING TREATMENT OF RESEARCH AND DEVELOPMENT EXPENDITURES AND LAND HELD FOR Future USE1

A. RESEARCH AND DEVELOPMENT

In 1969 electric utilities and electric utility industry manufacturers invested a total of $150 million in research and development expenditures (electric utilities, $40 million; manufacturers, $110 million). Research and development expenditures as a proportion of operating revenue declined from 0.269% in 1966 to 0.226% in 1969. The level of research expenditures in the electric power industry for 1970 is estimated at less than a quarter of 1% of gross electric operating

revenue.

It is essential that the electric utility industry embark on unprecedented programs of research and development to find new commercially feasible energy sources, and improved technology for the production, transmission and consumption of electricity consistent with preservation of and reduced impact on the environment.

Over the past four years, it is estimated that an average of about $100,000,000 has been spent annually on liquid metal fast breeder reactor research. Of this total the Atomic Energy Commission has spent about $75,000,000 per year, manufacturers about $25,000,000 and $5,000,000, or about 5%, by the private utilities. The electric utility industry should bear a substantially greater proportion of funding and consequent responsibility for this program to accelerate the development of vitally needed nuclear facilities to reduce environmental impact and meet power demand during the remainder of the twentieth century. In addition to the liquid metal fast breeder reactor program, the technology of a gas-cooled fast breeder reactor should be developed.

Breeder reactor development on a commercially feasible scale by 1984 should not only greatly extend our nuclear fuel resources but also conserve our other energy resources, contribute to an ultimate solution of air pollution problems as well as reduce thermal pollution problems, and develop energy at a social and economic cost competitive with conventional thermal steam generating plants of the next generation.

Additional programs which should be thoroughly reviewed to determine the level of funding and priority of development are the following:

—-basic fuel research to minimize air pollutant effects

-pollution abatement procedures by improvement of technology for disposing of solid and gaseous wastes from fossil fuel plants and radioactive waste from nuclear power plants

-high voltage direct current transmission

-undergrounding of high-voltage transmission lines -fuel cell research

-solar energy research

---magnetohydrodynamics (MHD) or other methods for converting heat energy directly into electrical energy without the need for conventional turbines and generators

---development of automatic data-processing techniques and methods for making regional and national electric load forecasts and analyzing the environmental effects of planned systems

-study of long-term effects on human health and other forms from effluents from nuclear and fossil-fueled power plants

-basic research in ecology and the life sciences with respect to air and thermal pollution effects.

During the past few years a number of members of the Federal Power Commission including the present Chairman and other present members of the present Commission, have spoken out in an effort to encourage a higher level of expenditures for research and development by electric utilities particularly with respect to environmental matters. Such efforts to encourage research and development have, from time to time, met with the response by the industry that regulation tends to discourage research and development expenditures on the part of various elements of the industry. In particular, the argument is made that regulated systems are uncertain of the extent to which they will be permitted to recover, by

1 Compiled by Bureau of Power, T. A. Phillips, Chief.

way of rates, expenditures made for research and development, especially where such research and development has been unsuccessful.

A careful examination of the rate making process at the Federal Power Commission and a review of electric utility rate cases before State regulatory commissions provides little support for this contention on the part of the industry. In its regulation of rates for electric service at wholesale in interstate commerce, research and development expenditures have generally been included as a part of the cost of service by the Federal Power Commission. Our review also indicates that State commissions have generally included research and development expenditures as a part of the cost of service for ratemaking purposes. For example, in a recent case before the Michigan Commission, that Commission's staff had argued that research and development expenditures relating to a nuclear reactor that had been constructed mainly as a research project should not be allowed, partly because the reactor was inoperable during the test period due to material failures. In its order the Commission in allowing these research and development expenditures made the following statement:

"With respect to research and development expenses incurred by Edison in 1968, we must admit that this Commission in its Order in Case No. U-1444 in 1963 strongly encouraged the Company to carry on the research and development discussed here. Since that time the electric industry has been subjected to criticism for its failure to devote sufficient resources to research and development. The research and development expenses involved here by Edison are less than one per cent of the Company's gross revenues in 1968. If this amount is to be regarded as excessive because it is four times the level of performance on research and development of comparison companies, then we can only conclude that the comparison companies' efforts regarding research and development are indeed dismal. The problem here is with the use by Staff of the wrong standard without any effort to learn whether performance of the industry in general regardnig research and development is a reasonable yardstick by which to measure Edison's preformance in such a potentially vital field as the development of a fast breeder reactor."

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The Federal Power Commission has taken steps recently to further clarify the manner in which research and development expenses will be treated both for accounting and ratemaking purposes. On December 19, 1968, the Commission authorized Northern States Power Company to amortize a 9.5 million dollar loss on its experimental “Pathfinder" nuclear plant over a ten year period by charges to operating expenses. In announcing this decision the Commission stated that "these expenses are treated as above-the-line items and presumably would be allowed as operating expenses for ratemaking purposes in Federal Power Commission rate proceedings." The Commission further stated that "electric and gas utilities normally will be permitted to charge off as operating expenses for accounting purposes costs resulting from the research and development activities reasonably entered into for the benefit of their utility operations."

On January 27, 1970, the Federal Power Commission issued a proposed rulemaking in Docket No. R-381: "Notice of Proposed Amendments of the Uniform System of Accounts under the Federal Power Commission Act and of the Natural Gas Act to Reflect Changes in Accounting Treatment of Research and Development Expenditures." In initiating this proposed rulemaking, the Commission recognized that misunderstanding of its present accounting treatment of unsuccessful research and development costs may tend to inhibit research and development activity. The Commission stated:

"While strict accounting principles may dictate that research expenditures be charged off in the year incurred, the Commission believes a more flexible approach may meet the regulatory need to stimulate such research and development expenditures, and yet remain within the boundaries of sound regulatory accounting. The Commission believes it to be beneficial to both the consumer and the industry that research and development expenditures should be treated whereby (1) the expenditures will be fully recovered through charges to operating expenses either currently or over a period of years, and (2) the utility will be able to earn a return on unrecovered expenditures.”

The Commission went on to state its policy "that the accounting and ratemaking treatment of research and development expenditures should be consistent,

Michigan Public Service Commission, Opinion and Order, Case No. U-3189, April 22, 1970, p. 10.

Letter from Gordon Grant to Northern States Power Company, dated December 19, 1968, by Direction of the Commission.

providing that such treatment is consistent with the evidence developed in the individual cases." These principles were affirmed by the Commission in its final Order No. 408 in this rulemaking docket issued August 26, 1970.

B. LAND HELD FOR FUTURE USE

There has been considerable variation in the past in the ratemaking treatment accorded to the cost of Land Held for Future Use by regulatory agencies. Most state regulatory commissions have not permitted Land Held for Future Use to be included in the rate base for ratemaking purposes until it actually becomes a part of electric plant in service. A few, including the Federal Power Commission, have permitted the inclusion of Land Held for Future Use where there is a definite plan for its use in the reasonably near future.

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The systems of accounts of the National Association for Regulatory Utility Commissioners and the Federal Power Commission provide that Account 105Electric Plant Held for Future Use "shall include the original cost of electric plant owned and held for future use in electric service under a definite plan for such use. Where no such plan exists, property is to be included in Account 121-No-Utility Property. This treatment has the effect of segregating the accounts in such a way that individual commissions are able to utilize such ratemaking treatment as seems appropriate to them. The Federal Power Commission Audit Program for Public Utilities and Licensees contains the following instruction:

"No limitation is placed on a number of years between the acquisition of land or other property and the date of its planned use in order to have the property considered as plant held for future use. However, any period extended beyond ten years would raise a serious question as to the definiteness as to the plans involved."

On January 22, 1970, the Federal Power Commission issued a Notice of Proposed Rulemaking in Docket No. R-379: Accounting Treatment for Land Held for Future Utility Use and for Profits or Losses Realized Through Sales of Those Lands. The Commission noted that:

under the current economic conditions, we believe that our present accounting and ratemaking policies may be inadequate to meet the future public interest needs of the utility companies and of their consumers. Accordingly, we are proposing to revise those policies, to the extent possible, in order to encourage utility management to acquire land for long rang utility needs”.

Specifically, the rule proposed to delete from Account 105-Plant Held for Future Use, any requirement pertaining to a “definite plan." This would permit the recording in Account 105 of land acquired under long range planning. With respect to ratemaking the Commission stated:

"In general, it will be our policy to allow the ratemaking treatment of land held for future use to track the accounting treatment prescribed therefore, insofar as such treatment is consistent with the evidence developed in individual cases. It is our intention in following such policy to provide impetus to utility management for prudent acquisition of land for utility purposes well in advance of specific construction needs. . . We believe this policy will best serve the public interest as electric utilities and natural gas companies acquire land with a view toward preserving environmental quality.”

On January 7, 1971, the Commission issued its Order No. 420 in this rulemaking Docket No. R-379. This provides, inter alia, for the segregation of Account 105-Electric Plant Held for Future Use as between (1) land and land rights and (2) other electric plant. With respect to land and land rights, such property may now be included in Account 105 without there being a "definite" plan for its future use. In addition, gains and losses from disposition of such land would pass to ratepayers.

F.P.C. GUIDELINES AND RELATED ORDERS AND RULES ON ENVIRONMENTAL MATTERS

1. Order No. 407, issued July 10, 1970, set forth guidelines which should be followed by natural gas pipeline companies in the planning, locating, clearing and maintenance of rights-of-way and the construction of aboveground facilities. 2. Order No. 408, issued August 26, 1970, amended Commission accounting and rate-making policies to encourage more extensive research and development activities by electric and gas utilities.

3. Order No. 412, issued October 22, 1970, in cooperation with the Federal Water Quality Administration and the National Air Pollution Control Administration, amended Commission rules to require electric utilities to annually submit air and water quality control data to help develop and evaluate effective environmental quality control programs.

4. Order No. 414, issued November 27, 1970, implemented procedures for the protection and enhancement of natural, historic, and scenic values in the design, location, construction and operation of hydroelectric project works.

5. Order No. 415, issued December 4, 1970. Implementation of the National Environmental Policy Act of 1969.

6. Order No. 420, adopted January 7, 1971, pursuant to Notice of Proposed Rulemaking issued in Docket No. R-379 on January 22, 1970, revised FPC's accounting procedures to encourage utility management to acquire land for long-range utility needs by amending the Uniform System of Accounts to permit a return on investment in plant sites.

REMARKS OF JOHN N. NASSIKAS, CHAIRMAN, FEDERAL POWER COMMISSION, BEFORE THE NATIONAL ENERGY FORUM, WASHINGTON, D.C., SEPTEMBER 24, 1971

ENERGY AND THE PUBLIC INTEREST

Thomas Paine lived and wrote during an intense period of upheaval and change. Common Sense and other of his works were written in reaction to the chaotic conditions of the Revolutionary Period and helped bring a measure of purpose and order to those traumatic times.

"Suspicion", Paine wrote, "is the companion of mean souls, and the bane of all good society." "Suspicion" often originates with lack of comprehension of the total problem. In government, we carry the heavy burden of decisions made in the public interest-which often require the reconciliation of competing objectives whose zealous advocates stand ready to cast instant suspicion on any conclusion deviating from uncritical and unqualified acceptance of their viewpoint. If we can articulate how the total public interest is being served by our governmental energy policies, we should be able to restore to our society the "common sense" of which Mr. Paine spoke. In a political democracy, supported by our incomparable free enterprise system, we must enjoy the confidence of an informed people with comprehension of the relationship between energy policy and the public interest. Thomas Jefferson once wrote that he knew of "no safe depository of the ultimate powers of the society but the people themselves; and if [they are] not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion." Industry and government have a dual responsibility to serve the public interest and are equally accountable for their policies and decisions. The free enterprise system as we know it cannot long survive without public support for governmental policies and industry decisions which must be designed and coordinated to serve the same public interest.

Two of the overriding objectives of our governmental policy are: 1. A national economy with full employment, stable prices and increased productivity to meet our domestic and international commitments, as well as to improve our individual standard of living; and

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