Citizens Energy Coalition, Inc. v. Indiana & Michigan Elec. Co.
| Decision Date | 13 November 1979 |
| Docket Number | No. 2-577A163,2-577A163 |
| Citation | 396 N.E.2d 441 |
| Parties | CITIZENS ENERGY COALITION, INC., Charles W. Cole & Son, Inc., and David P. Schenkel, Intervenors-Appellants, v. INDIANA & MICHIGAN ELECTRIC COMPANY, Petitioner-Appellee, and Public Service Commission of Indiana et al., Appellees. |
| Court | Indiana Appellate Court |
Marcia Sowles, South Bend, Frank E. Spencer, Indianapolis, Robert L. Thompson, Jr., Peebles, Thompson, Rogers & Hamilton, Richard C. VerWiebe, VerWiebe, Snow, Miller & Gray, Fort Wayne, for intervenors-appellants.
Thomas W. Yoder, Livingston, Dildine, Haynie & Yoder, Fort Wayne, for petitioner-appellee.
In June, 1976, Indiana & Michigan Electric Company (Petitioner) filed a petition with the Public Service Commission of Indiana (Commission) seeking authority to increase its rates and charges. Following investigation and public hearings, the Commission approved the petition and granted authority for the rate increases requested. A petition for rehearing and reconsideration was filed by Charles W. Cole & Son, Inc., and David P. Schenkel (Intervenors), and by Citizens Energy Coalition, Inc. (Citizens). It was denied by the Commission. Intervenors and Citizens then filed a timely record of proceedings and assignment of errors, pursuant to Ind. Code 8-1-3-1 Et seq., and this appeal results.
Intervenors and Citizens raise several issues for review in their assignment of errors; however, we need only consider one issue in the disposal of this cause of action on appeal:
Whether the rates approved by the Commission, which were calculated using the statutory federal income tax rate rather than the actual or effective federal income tax rate, were contrary to law.
Petitioner, an Indiana corporation, operates as a public utility furnishing electricity to some 350,000 Indiana residents. Petitioner is also a wholly owned subsidiary of American Electric Power Co., Inc. (AEP), along with numerous other electric companies. In the proceedings before the Commission on its petition for rates increase, Petitioner computed its federal income tax expense for rate-making purposes on the basis of what its tax liability would be as an individual taxable entity at the statutory maximum 48 percent tax rate. It is uncontroverted, however, that Petitioner did not file a separate federal income tax return, instead participating in a consolidated return with AEP and its other subsidiaries pursuant to § 1501 Et seq. of the Internal Revenue Code of 1954, and that neither Petitioner nor AEP incurred any federal income tax liability whatsoever in 1973, 1974, 1975, or in the test year, 1976. In fact, Petitioner's principal witness testified that he could not estimate when, in the foreseeable future, federal income taxes would be incurred. As a result, Intervenors and Citizens contend that no federal income tax expense should have been allowed into the rate-making process.
The Commission, in its final order, granted the rate increases requested by the Petitioner, and it rejected the request by Intervenors and Citizens to adjust the federal income tax expense to its actual expense incurred level of 0 percent. The result of this decision by the Commission is that although the Commission determined that Petitioner required additional net operating income of $20,336,238, it allowed an actual rate increase of $41,771,477 because this amount was needed (considering the federal income tax expense at the 48 percent statutory maximum) to produce the net $20,336,238 after-tax figure.
In so ordering, the Commission relied upon Goodman v. Public Service Commission of District of Columbia, 162 U.S.App.D.C. 74, 497 F.2d 661 (D.C.Cir.1974). In the Goodman case, the Public Service Commission of the District of Columbia calculated a gross rate increase for an electric utility, and applied the maximum statutory tax rate in the calculation. The appellant in the case asserted that the utility had historically paid taxes at an effective rate lower than the statutory rate, and that such lower rate should have been used to determine the new gross revenues allowed to the utility by the D.C. Commission.
The United States Court of Appeals, D.C. District, stated in Goodman, supra, 162 U.S.App.D.C. at 87, 497 F.2d at 674:
In the case at bar, however, the situation is not analogous to the Goodman case, and the Goodman rationale is not applicable. The fact that Petitioner was in a negative federal income tax position in the test year establishes the exact converse of the Goodman circumstances. In Goodman, all allowable deductions for the test year had been used up, and any test year incremental rate increases would have resulted in an increase in federal income tax; in the case at bar, all of the allowable deductions existing on the basis of test year operations had Not been taken into account, and incremental income could have been added to the test year income without producing any incremental federal income tax liability.
Petitioner further contends in its argument that past losses could in no event be utilized by the Commission to adjust rates which must be set in the future. It cites Ind. Code 8-1-2-68 which provides as follows:
"Whenever, upon an investigation, the commission shall find any rates, tolls, charges, schedules or joint rate or rates, to be unjust, unreasonable, insufficient or unjustly discriminatory, or to be preferential or otherwise in violation of any of the provisions of this act, the commission shall determine, and by order fix just and reasonable rates, tolls, charges, schedules or joint rates to be imposed, observed and followed in the future in lieu of those found to be unjust, unreasonable, insufficient or unjustly discriminatory or preferential or otherwise in violation of any of the provisions of this act."
It further cites Indiana Telephone Corporation v. Public Service Commission of Indiana, (1960) 131 Ind.App. 314, 171 N.E.2d 111, which does hold that the Commission may not fix rates which operate retroactively. It contends that to disallow the 48 percent federal income tax increment, because of past losses which are carried forward, is, in effect, retroactive rate-making. Such procedure takes into account things past, which happened under the old rate, and may not be considered in the current or future rate.
The case of City of Evansville v. Southern Indiana Gas and Electric Company, (1976) Ind.App., 339 N.E.2d 562, contains an extensive review of the rate-making process. No effort will be made here to duplicate that review, but the reader is directed to it for the excellent discussion of the process. We will here address ourselves, however, to certain portions of it.
That case recites that the end purpose of the function of the Commission is to establish a rate sufficient to meet the operating expenses of the company plus a fair return which will compensate the investors. Utility's revenues, minus expenses, constitute the return on investments. All legitimate costs, plus depreciation, are allowable. The Commission can disallow, for rate purposes, excessive and imprudent expenditures. Abnormal conditions in the test year must be accounted for, and in-period adjustments made. Certain future conditions may be anticipated and computed in out-of-period adjustments, such as, as concerns us here, taxes. Federal income taxes are a component of the utility cost of service to be reimbursed by the rate payer. Under traditional concepts utility company shareholders and bondholders furnish the capital necessary for the operation of the business. The consumer pays a fair return on the utility capital and in addition, pays the costs of operation, including taxes; but it is well established that the company's investors, not the consumers, must contribute the working capital.
The Commission in the City of Evansville case reflects that a Fair rate of return which a regulated utility is permitted to earn must be based on capital advanced by investors. In that case the utility had depreciated its plant on an accelerated basis and had further claimed certain investment credits which had the effect of lessening the federal income tax in early years and increasing the tax in later years. The Commission had allowed the utility to claim as current expenses not only the taxes actually paid but also an amount equal to the difference between the taxes actually paid, and all the taxes the petitioner would have paid on a straight line basis, and to amortize the tax saving over the useful life of the depreciable plant. These tax deductions were placed in a deferred tax account and were utilized as working capital. The court refused to permit the Commission to add that deferred tax account to the fair value of the used and useful property for the reason that it represented consumer contribution. The utility could not obtain a return on...
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