Several reasons.
Cautionary Note: A great many people have a great deal of money at
stake arguing that depreciation allowances should be accelerated
(particularly for power plants and telecom). Be careful of any
analysis you read on this issue on the Internet. This is one of those
times that it is best to read a textbook for more information. I've
tried to walk a careful line in my answer between the two sides of
this controversial issue.
1. First, the type of firms that are regulated tend to be natural
monopolies: water, energy power plants, and historically telephone
companies.
Traditionally, a natural monopoly does not tend to innovate very
quickly and does not need to replace its equipment often.
For example, a coal burning power plant may be "obsolete", but can
continue to produce electricity for many years after it has been
depreciated to a capital value of zero.
Dams are not often torn down after they are built and replaced with
more "modern" dams. Water pipes distributing water in cities are not
often torn up and replaced.
Recognizing this fact, regulators require longer periods for
depreciation of assets.
However, a great many economists now argue that there is no such thing
as a natural monopoly and that even water distribution systems should
be de-regulated. Public interest advocates on the other hand decry
this trend as selling water for profit, "stealing" water distribution
(or energy distribution) systems paid for by the tax-payers and
"giving it away" to large corporations. This controversy is
especially acute in the Third-world where economists are advocating
privatising public utilities, including water. They argue that by
privatising water companies will invest in fixing leaking pipes, etc.
However, the arguments are not confined to the third-world. Look at
California's energy crisis which many blame on deregulation of the
energy markets. The Economist ( a British weekly magazine) argues
that Scotland should privitise its water supply, like England has
done, and offers statistics claiming that England now has a more
reliable water supply.
Basically, there is so much money surrounding this issue, that I would
not trust anything I read on the Internet.
2. Regulators have a "vested self-interest" in longer depreciation
schedules as depreciation is a significant addition to the total
revenue requrirements of a regulated industry. By lengthening
depreciation, regulators can "artificially" lower regulated prices for
electricity and water (for example by requiring longer depreciation
for water treatment and sewage plants).
The opposing viewpoint would be that regulated industries are
"starved" for capital and we all "suffer" by having "sub-standard"
infrastructure. I'm sure a case in point that will be argued by both
sides of this issue is the recent blackout of the Northeastern United
States. Was it caused by lack of capital to upgrade power
distribution networks? If so, whose fault was it? The "short
sighted" regulators, or the "greedy" power industry.
3. Politicians, whenever they are looking to give businesses a tax
cut and want to claim that they are stimulating the economy, speed up
depreciation allowances, thus encouraging businesses to spend more
money on purchasing new capital equipment because they can write it
off more quickly.
However a regulatory agency would look at the actual working life of
the capital asset and not accelerate depreciation schedules as a means
of artificially stimulating the economy.
Hope this answer is helpful. |
