Public Utility Old Money Preferred Stocks

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Abstract
Public utilities can claim a partial dividends-paid deduction on “old money” preferred stock (OMPS) but the 42 percent dividends-received deduction (DRD) allowed to corporate investors is lower than the 70 percent DRD allowed on other types of preferred stock. This study provides evidence that the implicit tax borne by OMPS is lower than that of other preferred stock and that the estimated implicit tax associated with the 70 percent DRD is much higher than prior research suggests. Evidence is also presented indicating that marginal investors in OMPS are corporations with marginal tax rates between 26.3 percent and 27.2 percent. Finally, this study provides evidence that public utilities use OMPS financing in addition to, rather than as a substitute for, other types of preferred stock. This result suggests that tax considerations influence public utility managers' capital structure decisions even though tax savings flow through to ratepayers in the rate-making process.

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