General Tel. Co. of the Southwest v. Public Utility Commission of Texas

Decision Date10 February 1982
Docket NumberNo. 13491,13491
Citation628 S.W.2d 832
CourtTexas Court of Appeals

Ward W. Wueste, Jr., San Angelo, for appellant.

Mark White, Atty. Gen., Martha V. Terry, Asst. Atty. Gen., Austin, for appellee.

PHILLIPS, Chief Justice.

This is an appeal in a rate case by General Telephone of the Southwest from a judgment rendered in favor of the Public Utility Commission of Texas by the trial court.

There are two principal questions for decision. The first is whether appellant General Telephone of the Southwest, a wholly-owned subsidiary of the parent holding company GTE, must bear an imputed share of the debt portion of GTE's capital structure thereby reducing the rate of return allowed on the adjusted value of appellant's invested capital below what it alleges is a fair and reasonable level. This is commonly called "double leveraging." The Commission, appellee found that it must.

The second major question is whether the Commission's order is correct in imputing a share of the debt portion of GTE's capital structure to appellant, thereby increasing the amount of fixed charges (interest) taken as a deduction in determining federal income tax expense which allegedly reduced such expense, for ratemaking purposes, below the level actually incurred by appellant.

These questions must be determined under the Public Utility Regulatory Act, (hereinafter referred to as PURA or the Act) Tex.Rev.Civ.Stat.Ann. art. 1446c (1980).

The trial court affirmed the Commission's order in all respects and this Court affirms that judgment.

Appellant, a corporation chartered under the laws of the State of Delaware, holds a certificate of public convenience and necessity from the Commission to provide telecommunications service as a public utility to various designated areas throughout the State of Texas. It is also a wholly-owned subsidiary of GTE; that is, GTE owns 100 percent of appellant's common equity. The balance of appellant's securities,-preferred stock, first mortgage bonds, and debentures, are publicly held.

GTE is a holding company with numerous domestic and foreign subsidiaries engaged in diverse operations ranging from manufacturing of the familiar Sylvania light bulbs and flashcubes to the provision of telephone utility service. All components of GTE's capital structure-common equity, preferred stock, first mortgage bonds, and debentures, are publicly held.

Appellant complains of the Commission's use of the "double leverage" methodology used in lieu of appellant's own capital structure to calculate both the rate of return on invested capital and appellant's federal income tax expense. 1

Appellant provides telecommunication service to customers located in suburban areas around Houston and Dallas-Ft. Worth metroplexes, as well as smaller cities such as San Angelo, Texarkana and Georgetown. It contends it is the fastest growing telephone company in the State of Texas. In addition, appellant alleges a constant need to increase its investment in telephones, cables, and other physical plant necessary to meet growing demands for service from its business and residential customers. To meet these demands, appellant claims the need to seek hundreds of millions of dollars externally in the highly competitive securities market. Appellant contends, that as a result of the Commission's actions, it has been denied additional annual revenue totalling $10,940,948.


Appellant's first point of error is that the trial court erred in affirming the order of the PUC because, in determining (1) the appropriate rate of return on the value of appellant's invested capital, and (2) federal income tax expense, the Commission imputed a portion of the debt and preferred stock of GTE to appellant, and thereby acted in excess of its statutory authority under PURA. All further statutory references in this opinion shall be to PURA unless otherwise noted.

As stated therein at § 2, the legislature enacted PURA §§ 1-91 to create "a comprehensive regulatory system" for utilities operating within this State. Consistent with this legislative purpose, our Supreme Court has construed the Act as a whole. 2

Section 3(i)(1) defines the terms "affiliated interest" or "affiliate" as "any person or corporation owning or holding, directly or indirectly, five percent or more of the voting securities of a public utility." Subsection (i) (2) extends the definition to include any person or corporation in any chain of successive ownership of five percent or more of a utility's voting securities.

Appellant contends the Commission's broadest powers with respect to transactions with affiliates are set forth in PURA, § 41(c) wherein, it contends, the legislature specifically directed that transactions with affiliates be considered in determining a utility's net income for ratemaking purposes. This section of the Act provides in relevant part as follows:

(c) Net income. By "net income" is meant the total revenues of the public utility less all reasonable and necessary expenses as determined by the regulatory authority. The regulatory authority shall determine expenses and revenues in a manner consistent with the following:

(1) Transactions with Affiliated Interests. Payment to affiliated interests for costs of any services, or any property, right or thing, or for interest expense shall not be allowed either as capital cost or as expense except to the extent that the regulatory authority shall find such payment to be reasonable....

(2) Income Taxes. If the public utility is a member of an affiliated group that is eligible to file a consolidated income tax return, and if it is advantageous to the public utility to do so, income taxes shall be computed as though a consolidated return had been so filed and the utility had realized its fair share of the savings resulting from the consolidated return, unless it is shown to the satisfaction of the regulatory authority that it was reasonable to choose not to consolidate returns. The amounts of income taxes saved by a consolidated group of which a public utility is a member by reason of the elimination in the consolidated return of the intercompany profit on purchases by the public utility from an affiliate shall be applied to reduce the cost of the property or services so purchased....

Appellant further contends that beyond the ratemaking principles set forth in § 41(c), the scope of the Commission's jurisdiction over affiliates is defined by § 67. As provided therein, jurisdiction has been conferred on the Commission over affiliates "to the extent of access to all accounts and records of such affiliated interests relating to (affiliated) transactions."

Appellant argues that nowhere does the statute vest the Commission with authority to inquire into the affiliate's capital structure or the costs of its investment funds, or to use such information in determining a reasonable rate of return on the invested capital of jurisdictional utilities.

Appellant points out that an administrative agency, such as the Commission, is entirely a creature of the legislature. Appellant then contends that as such the Commission possesses only those powers specifically delegated to it. Railroad Commission v. City of Austin, 524 S.W.2d 262 (Tex.1975); Humble Oil and Refining Co. v. Railroad Commission, 128 S.W.2d 9 (Tex.1939); Commercial Standard Insurance Co. v. Board of Insurance Commissioners, 34 S.W.2d 343 (Tex.Civ.App.-Austin 1930, writ ref'd).

The substance of the Commission's authority with respect to the subject matter before us, according to appellant, is contained in § 41(c) set out above. There under subsection (1), the Commission is required to determine the reasonableness of affiliated transactions for ratemaking purposes. The legislature listed the categories of transactions subject to commission jurisdiction. Any transaction relating to services to the affiliate or sale, lease, or other transfer of property, rights, or things are to be reviewed. Even loans from the affiliate fall under the Commission's scrutiny.

Appellant next contends that one category is missing. That is the category of ownership. The legislature never granted the Commission any power in the PURA to determine or regulate where the utility's parent obtains its funds for investment in the common stock of the utility.

Under Sec. 41(c), subsection (2), the Commission is empowered to inquire into the tax savings which may be realized through the filing of a consolidated federal income tax return by a utility and its affiliates even if such a consolidated return is not filed. Upon a finding of such savings, the Commission is directed to apply them to reduce the price of products or services purchased by the utility from the affiliate and to apply the investment tax credit against federal income tax to reduce the rate base to the extent allowed by the Internal Revenue Service. No authority is conferred to reduce the utility's federal income tax expense to reflect the effects of debt in affiliates' capital structures.

Appellant analogizes this situation to the general rule that the express mention or enumeration of one person, thing, consequence, or class is equivalent to an express exclusion of all others. 3 Thus, in appellant's view, the Commission's jurisdiction over affiliates is limited to those powers specifically conferred.

We do not agree with appellant's argument. In determining the level of return to be earned by a utility, the Commission must consider the impact a utility's particular financial structure may have upon the cost of capital to that utility. In setting the level of return the company is entitled to earn, it is necessary to determine whether the company's status as a wholly-owned subsidiary of GTE, with no publicly traded common stock, has any special importance for return purposes. If...

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