VIII. Proposed guidelines for allocation of the gains.

We propose that the following principles be adopted for the allocation of gains realized upon the sale of any utility asset:

16. These guidelines should apply to the allocation of both gains and losses upon the sale of an asset.

17. The allocation should vary directly, holding everything else constant, with the assumption of the financial risk of the investment.

18. While it is important to ensure that ratepayers are not harmed by the sale of the asset, or that they are compensated if they are, it is equally important to recognize who has borne the burden of the financial risk of the investment.

19. For the majority of cases, ratepayers have borne most of the financial risk and have paid for the asset. Thus it will be typical for most of the gain to be allocated to the ratepayer. The burden of the financial risk should be a primary consideration whenever the gain is allocated between ratepayer and shareholder.

20. There should be no difference in the treatment of depreciable and nondepreciable assets (land) for the purpose of allocating the gain. If land that has been taken out of ratebase is sold, an allocation of the gain or loss should be assessed consistent with the risk that has been shared between the ratepayer and shareholder.

21. The Uniform System of Accounts is useful for the accounting and recording of a transaction, but it is not useful in the determination of how the gain is to be allocated.

22. When all ocating the gain, there should be an incentive to encourage prudent management of utility assets.

23. The allocation should be applied to after-tax gains only.