Abstract This article presents a study on the normalization versus flow through for utility companies using liberal tax depreciation in accounting in the U.S. The results of an analysis of the simulation model raise a question as to whether a utility commission is justified in permitting companies under its jurisdiction to continue using straight line depreciation for tax purposes. The model demonstrates that using taxes computed on the basis of straight line depreciation as an allowable cost of service results in a higher cost to rate-payers than would be necessary if the important benefits of accelerated depreciation were utilized in rate-making. The company could increase its cash flows and thus obtain interest free capital in the form of deferred taxes. By refusing to use accelerated depreciation the company is refusing to accept this capital contribution. Thus, the model lends support to the thesis that neither the customers nor the stockholders benefit from straight line depreciation. Accordingly, there is reason to question whether it is advisable for a utility commission to permit a company under its jurisdiction to disregard the tax savings afforded by liberalized depreciation.
Brigham et al. (1974) studied this question.