City of Los Angeles v. Public Utilities Commission, S.F. 22832

• Decision Date: 09 June 1972
• Docket Number: 22828 and 22833,S.F. 22832
• Citation: 7 Cal.3d 331,497 P.2d 785,102 Cal.Rptr. 313
• Parties: , 497 P.2d 785, 94 P.U.R.3d 226 CITY OF LOS ANGELES et al., Petitioners, v. PUBLIC UTILITIES COMMISSION et al., Respondents; PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest. William M. BENNETT et al., Petitioners, v. PUBLIC UTILITIES COMMISSION, Respondent; PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest. CALIFORNIA PUBLIC INTEREST LAW CENTER et al., Petitioners, v. PUBLIC UTILITIES COMMISSION, Respondent; PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest. In Bank
• Court: California Supreme Court

Page 313

102 Cal.Rptr. 313

7 Cal.3d 331, 497 P.2d 785, 94 P.U.R.3d 226

CITY OF LOS ANGELES et al., Petitioners, v. PUBLIC UTILITIES COMMISSION et al., Respondents;

PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest.

William M. BENNETT et al., Petitioners, v. PUBLIC UTILITIES COMMISSION, Respondent;

PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest.

CALIFORNIA PUBLIC INTEREST LAW CENTER et al., Petitioners, v. PUBLIC UTILITIES COMMISSION, Respondent;

PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest.

S.F. 22832, 22828 and 22833.

Supreme Court of California,

In Bank.

June 9, 1972.

As Modified on Denial of Rehearing July 12, 1972.

[497 P.2d 789] [7 Cal.3d 335] William M. Bennett, in pro. per.

Roger Arnebergh, City Atty., Charles E. Mattson, Deputy City Atty., John W. Witt, City Atty., William H. Kronberger, Jr., Deputy City Atty., Thomas M. O'Connor, City Atty., Milton H. Mares and William F. Bourne, Deputy City Attys., W. Keith Woodmansee, Walnut Creek, Michael M. Stein, Beverly Hills, and Rinaldo S. Brutoco, Los Angeles, for petitioners.

Mary Moran Pajalich and Timothy E. Treacy, San Francisco, for respondents.

PETERS, Justice.

In these consolidated proceedings we review Decision No. 78851 of the Public Utilities Commission which authorizes intrastate telephone rate increases in the amount of $143 million annually. We have issued a partial stay providing that all sums collected by Pacific Telephone and Telegraph Company pursuant to the rates authorized by the decision shall be subject to refund in whole or in part upon order of this court should the decision or Decision No. 77984 of the commission be annulled or modified. The latter decision, which related to the calculation of Pacific's federal income tax expense for rate making purposes was rendered during the course of the proceedings which subsequently resulted in the instant rate decision, and we recently annulled the tax expense decision in City & County of San Francisco v. Public Utilities Com., 6 Cal.3d 119, 98 Cal.Rptr. 286, 490 P.2d 798.

In Pacific Tel. & Tel. Co. v. Public Util. Com., 62 Cal.2d 634, 644-645, 44 Cal.Rptr. 1, 7, 401 P.2d 353, 359 the commission's general approach was described as follows: 'It appears that in telephone rate proceedings in California the general approach employed by the commission, and followed in the present case, is to determine with respect to a 'test period' (1) the rate base of the utility, i.e., value of the property devoted to public use, (2) gross operating revenues, and (3) costs and expenses allowed for rate-making purposes, resulting in (4) net revenues produced, sometimes termed 'results of operations.' Then, by determining the fair and reasonable rate of return to be fixed or allowed the utility upon its rate base, and comparing the net revenue which would be achieved at that rate with the net revenue of the test period, the commission determines whether and The same general approach was followed in the instant proceedings, using 1970 as the test year.

[497 P.2d 790] how much the utility's rates and charges should be raised or lowered. . . . The test period is chosen with the objective that it present as nearly as possible the operating conditions of the utility which are known or expected to pertain during the future months or years for which the commission proposes to fix rates. The test-period results are 'adjusted' to allow for the effect of various known or reasonably anticipated changes in gross revenues, expenses or other conditions, which did not obtain throughout the test period but which are reasonably expected to prevail during the future period for which rates are to be fixed, so that the test-period results of operations as determined by the commission will be as nearly representative of future conditions as possible.'

In 1961, section 1705 of the Public Utilities Code was amended to provide that '. . . the commission shall make and file its order, containing its decision. The decision shall contain, Separately stated, findings of fact and conclusions of law by the commission On all issues material to the order or decision. . . .' (Italics added.)

In California Motor Transport Co. v. Public Utilities Com., 59 Cal.2d 270, 273-275, 28 Cal.Rptr. 868, 870, 379 P.2d 324, 326, this court reviewed a commission order applying the new scope of review dictated by the amendment of section 1705. We held that a finding of 'public convenience and necessity' was an ultimate finding and that to be sustained by the court '(e)very issue that must be resolved to reach that ultimate finding is 'material to the order . . ." and must be separately stated. The decision left to the commission the discretion to determine the factors material to public convenience and necessity but held that section 1705 requires it to state what those factors are and to make findings on the material issues which ensue from the factors.

It has been repeatedly emphasized that separate findings are essential to 'afford a rational basis for judicial review and assist the reviewing court to ascertain the principles relied upon by the commission and to determine whether it acted arbitrarily, as well as assist parties to know why the case was lost and to prepare for rehearing or review, assist others planning activities involving similar questions, and serve to help the commission avoid careless or arbitrary action.' (Greyhound Lines, Inc. v. Public Utilities Com. 65 Cal.2d 811, 813, 56 Cal.Rptr. 484, 485, 423 P.2d 556, 557; Pacific Tel. & Tel. Co. v. Public Util. Com., Supra, 62 Cal.2d 634, 648, 44 Cal.Rptr. 1, 401 P.2d 353; California Motor Transport Co. v. Public Utilities Com., Supra, 59 Cal.2d 270, 274-275, 28 Cal.Rptr. 868, 379 P.2d 324.) We must review the findings accordingly.

FEDERAL TAX EXPENSE

Our decision annulling the commission's tax expense decision in City & County of San Francisco v. Public Utilities Com., Supra, 6 Cal.3d 119, 98 Cal.Rptr. 286, 490 P.2d 798, was filed after the commission had established the rates before us. The commission in the instant decision in fixing the amount of Pacific's federal tax expense followed its tax expense decision. Since the latter decision was annulled, the instant decision must also be annulled. ¹

The fact that the commission reopened the proceedings with respect to the question of federal income tax expense after our decision does not militate against this conclusion. In Pacific Tel. & Tel. Co. v In other words, we must annul the rate order now before us, because otherwise the rates therein, which are based in part on the annulled tax expense decision, will become lawful rates for the future and will preclude refunds.

[497 P.2d 791] Public Util. Com., Supra, 62 Cal.2d 634, 649-656, 44 Cal.Rptr. 1, 401 P.2d 353, the commission commenced an investigation into the lawfulness of Pacific's rates, after lengthy hearings it concluded that the rates were excessive, it ordered new, lower rates, and it ordered a refund of excessive rates in the amount of $80 million collected by Pacific during the pendency of the rate proceedings. We annulled the refund order on the ground that general rate making is legislative and looks to the future, that the Legislature has authorized rate changes only for the future, and that the commission did not have power to order refunds on the ground of unreasonableness where the rate had been previously found to be reasonable. It follows that, unless the rate order now before us is nulled, at will become a lawful rate and that all funds collected pursuant to it would belong to Pacific and not be subject to refund.

STATE TAX EXPENSE

The commission concluded that for purposes of computing the expense allowance for Pacific's state corporation franchise tax liability, it would follow the same accounting procedures as to depreciation as the federal tax expense computation, i.e., accelerated depreciation with normalization. Under the commission's 1968 decision, the accounting procedure followed was imputed accelerated depreciation with flow through.

Accelerated depreciation for tax purposes results in a tax saving or deferral. (See City & County of San Francisco v. Public Utilities Com., Supra, 6 Cal.3d 119, 123, 98 Cal.Rptr. 286, 490 P.2d 798.)

The problem presented is whether the tax saving or tax deferral should inure to the benefit of the ratepayer in the form of lower rates or whether the tax saving or deferral should be retained by the utility with no reduction in rates. When the saving is passed on to the ratepayer, the accounting procedure is called accelerated depreciation with flow through. ² When the saving is retained by the utility, the accounting procedure is called accelerated depreciation with normalization. ³

In the decision which we annulled the commission held that Pacific's Federal income tax expense would be computed for rate making purposes on the basis of accelerated depreciation with normalization, and in the instant decision the commission concluded that State corporation tax expense would also be computed on the basis of accelerated depreciation with normalization. ⁴ The commission reasoned: 'If Pacific were to adopt 'Flow-through' accounting for state income taxes using accelerated depreciation, it would not appear to be in compliance with the prerequisite in the Internal Revenue Code that a taxpayer such as Pacific must use the 'normalization method of accounting' to qualify for the use of accelerated depreciation for federal income tax purposes. In any event, the state income taxes are a relatively small portion of total income taxes paid by Pacific. Under these circumstances it is not warranted to consider different accounting and rate-making treatment for state than for federal taxes. We find that the staff was correct in basing its determination of revenue requirement in Exhibit No. 66 on the use of normalization for both state and federal income taxes. This avoids the...