Barasch v. Pennsylvania Public Utility Com'n
| Decision Date | 09 April 1985 |
| Citation | 491 A.2d 94,507 Pa. 496 |
| Parties | David M. BARASCH, Consumer Advocate of Pennsylvania, Appellant, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION and Pennsylvania Power Company, Appellees. |
| Court | Pennsylvania Supreme Court |
Julian Suffian, Charles F. Hoffman, Harrisburg, for appellee Pa. Public Utility Com'n.
Thomas Gadsen, Alan L. Reed, Albert D. Brandon, Philadelphia, for Pa. Power Co.
Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, HUTCHINSON, ZAPPALA and PAPADAKOS, JJ.
The Consumer Advocate appeals by allowance Commonwealth Court's order affirming the Public Utility Commission in a rate case. In dealing with the rates proposed in Pennsylvania Power Company's Tariff Supplement No. 15 the Commission allowed the Company to "normalize" 1 both its federal and state taxes for three separate classes of property: (1) property placed in service between 1971 and 1980, (2) property placed in service in 1980 and (3) property placed in service after January 1, 1981. The Commission's order approved the setting of rates on the basis of the higher income taxes the utility would hypothetically have paid if it used straight-line depreciation, an historical method of depreciation Specifically, the Commission allowed "normalization" of federal and state taxes for: (1) the difference between depreciation by asset class life (ADR) and straight-line depreciation for property placed in service between 1971 and 1980; (2) the difference between depreciation by the Double Declining Balance method (DDB) and straight-line depreciation for property placed in service in 1980; and (3) the difference between depreciation by the Accelerated Cost Recovery System (ACRS) 2 provided in the Economic Recovery Tax Act of 1981 (ERTA), United States Internal Revenue Code (IRC) Section 168, 26 U.S.C. § 168, and straight-line depreciation for property placed in service after 1980.
related to the asset's actual useful life.
Commonwealth Court, in affirming the PUC order, held (a) that the decision to approve normalization of both state and federal tax expense in all three respects was supported by the Commission's short general analysis of that concept and (b) that the application of normalization to all of these assets did not violate Pennsylvania's longstanding doctrine of allowing only "actual taxes paid" to be considered in the rate base.
The Consumer Advocate challenges those parts of the Commission's order permitting normalization of the state income tax expense for assets placed in service in all three of these periods. He also challenges normalization of the federal income tax expense for assets placed in service for the period 1971 through 1980. He concedes the propriety of normalizing federal taxes for assets placed in service after 1980. The Commission gave no indication that it either recognized any distinction among the situations presented, or that it considered the "actual taxes paid" doctrine.
On the record before us normalization of this utility's state taxes violates the "actual taxes paid" doctrine 3 in all instances and offers no offsetting advantage to ratepayers. The decision to permit normalization of state taxes is therefore reversed.
With respect to normalization of the reduced federal taxes attributable to rapid depreciation allowable on pre-1981 assets we remand to the Commission for further consideration of the "actual taxes paid" doctrine. In so doing we direct the Commission to determine whether the distinctions traced in IRC § 167(l ) between assets placed in service at different times require separate calculation of the annual tax reductions attributable to those assets earlier placed in service. On examination the Commission may find that the decline in those tax deductions, concomitant with the ever-shrinking deductible base of such older assets, can be offset by the continuing tax reductions a going concern will obtain from rapid depreciation on the newer assets which it must from time to time provide. On the other hand, the Commission
may find, after considering trends in both inflation and energy demand, that this continuing provision of new assets is not likely to produce such an offset. In such case the Commission is further directed to determine when the turn around to higher tax expense is likely to occur. Based on that last determination the Commission must finally determine whether it is reasonable to charge current ratepayers for those future tax expenses. Such findings and conclusions are necessary to enable the judiciary to exercise its reviewing function and to deal separately with the rate-making effect of normalization of federal tax expense for each of the three asset categories covered in the Commission's order.
Commonwealth Court described the procedural and factual history of this case as follows:
Proceedings in this case began on April 15, 1981, when Pennsylvania Power Company filed.... Supplement No. 15 requesting an increase in total annual operating revenues of $32,735,000.00 based on a future test year ending December 31, 1981. By order adopted June 11, 1981, the PUC instituted a formal investigation of the lawfulness and reasonableness of the proposed rates.... The matter was assigned for hearing and six complaints against the proposed rate increase were filed.... The complaints were consolidated with the PUC's investigation for hearing and disposition.... [T]he Administrative Law Judge, on December 3, 1981, issued his recommended decision. Exceptions and Replies to Exceptions were timely filed by the Power Company, the PUC trial staff, and the Consumer Advocate.
On January 22, 1981, the PUC entered the Order appealed here and approved rate levels which would produce total annual operating revenues of $164,238,000.00, an increase in total operating revenues of $24,915,000.00. The order also expressly approved the Power Company's claim for normalization of deferred federal and state income taxes.
That part of the order generally allowing normalization of tax expenses increased the Company's claimed expenses for cost of service by $2,777,949.00. That total increase breaks down as follows:
Federal State Total
---------- -------- ----------
CATEGORY I
----------
(1971-1979 Property)
ADR with DDB over longer
book lives with DDB $1,074,293 $265,204 $1,339,497
CATEGORY II
-----------
(1980 Property)
DDB over Straight-line
Depreciation $ 941,286 $232,369 $1,173,655
CATEGORY III
------------
(1981 Property)
ACRS over Straight-line
Depreciation $ 212,371 $ 52,426 $ 264,797
---------- -------- ----------
Total: $2,227,950 $549,999 $2,777,949
The difference between the tax expense allowable for rate purposes under straight line depreciation and the tax deduction allowable under accelerated depreciation is credited to a reserve account for future taxes. However, the revenue required to meet this increased rate-making expense is much greater than the hypothetical tax increase itself. This is because the revenue used to establish the reserve fund is itself largely taxable. In this case, the revenue requirement approximates $5,000,000.00. Under currently applicable corporate tax rates about two dollars of revenue will be generally necessary for every one dollar added to the reserve tax account. 4
In effect, IRC Section 168(e)(3)(C) with its cross-reference to Section 167(l ) makes rapid depreciation unavailable to utilities in computing their federal income tax if they are not allowed to charge the higher current rates necessary to fund the tax reserve account required by normalization. Because the loss of this benefit in computing federal income taxes would result in even higher rates than those resulting from normalization of that tax expense, the Consumer Advocate does not, on this appeal, contest normalization of federal income tax expense for depreciation on post-1980 property (Category III). The Consumer Advocate points out that ERTA requires normalization of federal tax expense when a utility uses ACRS. A utility's revenue requirement is higher if it does not take advantage of ACRS depreciation allowances than if it does not normalize. This result occurs because the ratepayer receives a rate base deduction under normalization which, in turn, reduces the revenue requirement. 5 Thus, flow-through would, for post-1980 assets, increase the cost to the ratepayers. It is for this reason that the Consumer Advocate has not contested the action of the Commission in applying normalization to post-1980 assets.
A reserve for taxes, like any reserve, is a source of current funds. In theory, those funds will be used to finance new capital expenditures until higher taxes fall due. The funds generated from the reserve are, however, available for any proper business purpose. By allowing normalization and assuming the Company will use its deferred tax account to finance its capital expenditures, the Commission is, in fact, requiring current ratepayers to make a forced investment in the Company. 6 The Commission has previously recognized this. In Pennsylvania PUC v. Duquesne Light Co., 43 PUR 4th 27 (1982), the Commission rejected normalization stating that it:
1. forces ratepayers to become involuntary investors;
2. forces the ratepayer to provide an additional dollar to pay the resulting increase in current federal and state taxes for every deferred tax dollar provided by ratepayers;
3. produces an inequity since that ratepayer who pays in the first part of an asset life may not be the one who bears the benefit of underpaying in the latter part of the assets life, and
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