Project at a Glance

Title: Accounting, tax and financing issues related to air pollution control investments

Principal Investigator / Author(s): Anastasi, Joseph T., Jr.

Contractor: Price Waterhouse

Contract Number: a0-136-32

Research Program Area: Economic Analysis

Topic Areas: Benefits


The report body, following, consists of five chapters dealing with the detail specific considerations relevant to a financial analysis of an investment in pollution control technology. These chapters, in order of presentation, deal with:

· Cost of capital considerations,
· Tax issues and considerations,
· Accounting and financial reporting practices followed in the chemical and petroleum industry,
· Accounting, financial reporting and regulatory issues applicable to the regulated electric utility industry and
· Two hypothetical case studies demonstrating suggested problem methodology.

The following discussion provides a summary of specific chapter content and the research methodology employed for each topic area.

Cost of Capital - In terms of identifying and listing the traditional and academic approaches for calculating the cost of capital, a number of well recognized managerial finance texts were researched. Those most heavily relied upon are listed in the footnotes to the cost of capital report section. General issues and research findings were confirmed with Price Waterhouse technical specialists.

Historic industry capital structures were developed based upon Federal Trade Commission reports. Representative current costs of capital for selected industries were developed based upon published data using the methodology presented in this report. A summary of relevant variables which could in the future impact a company's capital structure, and industry's cost of capital, was developed based on cited current literature. Possible relevant methods of financing the cost of compliance with pollution regulations has been presented, the source of which is cited current literature.

The chapter contains a comprehensive guide containing narratives and illustrations of the theoretical approaches to determining the cost of capital. Special considerations concerning the appropriate measure of the cost of capital for regulated electric utilities are discussed in Appendix II of Chapter I.

Tax Considerations - This report section contains a narrative description of the relevant Internal Revenue code and California Franchise Tax Board regulations, rulings and interpretations. Our research indicates that most of the relevant tax rules and regulations are similarly applicable to the chemical and petroleum refining industries. The regulated electric utility industry has many tax rules and regulations specific to that industry. These considerations have been separately identified in this report. The few significant Federal / California tax treatment differences have been highlighted. The chapter contains specific examples illustrating the impact of the applicable tax considerations.

Accounting Practices for the Selected Industries - We have utilized Price Waterhouse library information resources, and other sources as necessary, to gather accounting pronouncements, practice aides, research papers, and other relevant documents. These information sources included texts; trade publications; research studies; accounting practice surveys; and promulgations of the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and the Federal Energy Regulatory Commission. In addition, Price Waterhouse industry specialists for the selected industries have reviewed these practice areas and research sources.

Hypothetical Case Study - Although not a contract requirement, two hypothetical case studies were developed for the purpose of illustrating:

· The general approach for analyzing the financial impact of capital investments in pollution control equipment and
· The contrast in perspective of such an analysis from the viewpoint of:

-a non-regulated corporation,
-a regulated electric utility,
-the rate-paying consumers.

Another benefit of these case studies is that the various accounting, tax and other applicable financial considerations are presented in relative perspective. The case studies were developed utilizing 'Visicalc" on an IBM personal micro-computer. The recent TEFRA tax considerations have not been incorporated in the hypothetical cases. The case studies are not designed to provide a detailed analysis of each and every consideration in such an analysis, but rather to provide a conceptual overview of suggested problem methodology. For the detail specific considerations required in such an analysis, the reader is directed to the various specific chapters of this report.

For questions regarding this research project, including available data and progress status, contact: Research Division staff at (916) 445-0753

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