Reagan tax proposals threaten electric utility cash flows

The administration's tax proposal will have a net negative impact on electric utility cash flows and require additional external financing. Reducing the corporate tax rate from 46 to 33% will directly benefit ratepayers by reducing the revenues required by utilities without hurting cash flows and will improve debt quality. Repeal of the investment tax credit, however, will have the largest impact on those companies making sizable new plant and equipment expenditures. Revenue requirements will increase to the extent that higher debt service costs or dividends must be passed along to ratepayers. The proposed capital cost recovery system (CCRS) prescribes depreciation schedules and recovery periods that produce neutral investment incentives across recovery classes, but analysts conclude that the reduced internal cash flows will force utilities into the capital markets more often.