General Tel. Co. v. Public Utilities Commission

• Decision Date: 31 May 1963
• Docket Number: No. 37280,37280
• Citation: 191 N.E.2d 341,174 Ohio St. 575
• Parties: , 23 O.O.2d 268 GENERAL TELEPHONE CO., Appellant, v. PUBLIC UTILITIES COMMISSION of Ohio, Appellee.
• Court: Ohio Supreme Court

Page 575

174 Ohio St. 575

191 N.E.2d 341, 23 O.O.2d 268

GENERAL TELEPHONE CO., Appellant, v. PUBLIC UTILITIES COMMISSION of Ohio, Appellee.

No. 37280.

Supreme Court of Ohio.

May 31, 1963.

Syllabus by the Court

In a proceeding for the establishment of rates for a public utility company, where the Public Utilities Commission of Ohio has determined the statutory rate base of the company, the annual fair rate of return to which the company is entitled, and the annual dollar return to which the company is entitled, the commission shall allow, as an item of expense for payment of federal income tax, that amount of dollars which the company is actually required to pay for income tax, under the federal income tax law, upon the annual dollar return which the commission has determined the company is entitled to receive. (City of Cleveland v. Public Utilities Commission, 164 Ohio St. 442, at pages 443 and 444, paragraphs numbered 1 through 6 of the per curiam opinion, approved and followed, 132 N.E.2d 216, at page 217.)

This case is before this court upon an appeal from an order of the Public Utilities Commission of Ohio establishing rates for telephone service.

The facts are stated in the opinion.

Power, Griffith, Jones & Bell, Columbus, for appellant.

William B. Saxbe, Atty. Gen., Andrew R. Sarisky and Jay C. Flowers, Columbus, for appellee.

O'NEILL, Judge.

The commission found the statutory rate base of the appellant company for this rate determination to be $59,827,440, and the appellant agrees that this is correct.

This is the dollar amount value as of a date certain of the reconstruction cost new less existing depreciation of the property of the public utility, used and useful, in rendering the public utility service for which rates are to be fixed. See paragraph numbered 1, page 443, of the per curiam opinion in City of Cleveland v. Public Utilities Commission, 164 Ohio St. 442, 132 N.E.2d 216, 217.

The commission found that the appellant was entitled to a rate of return upon the statutory rate base of 5.8%. See paragraph numbered 2, page 443, of the per curiam opinion in City of Cleveland v. Public Utilities Commission, supra.

The commission found, and it is agreed, that multiplying this 5.8% rate of return by the statutory rate base results in an annual dollar return of $3,469,992 to which the appellant is entitled. See paragraph numbered 3, page 443, of the per curiam opinion in City of Cleveland v. Public Utilities Commission, supra.

It is a simple matter then to determine the actual annual expenses of the company for wages, maintenance, taxes, etc., and calculate the rates required to produce the annual dollar return, plus the annual expenses. See paragraph numbered 4, page 443, of the per curiam opinion in City of Cleveland v. Public Utilities Commission, supra. This is in accord with the steps laid down for determination of rates by the Public Utilities Commission in City of Cleveland v. Public Utilities Commission, supra, in the per curiam opinion at pages 443 and 444 in paragraphs numbered 1 through 6, inclusive.

The error complained of here is that the commission allowed, as an item of expense for federal income taxes, $112,017 less than the amount the federal imcome tax law requires the appellant to pay upon the annual dollar return which the commission has found the appellant is entitled to receive.

The income tax which the company is required to pay to the federal government under the income tax law on its annual dollar return can be calculated mathematically according to the federal income tax law to an exact accurate amount.

However, instead of allowing this known exact and accurate expense for taxes to the appellant, the commission chose a different procedure.

At this point in the computation of allowable rates, the commission created a hypothetical public utility company. This was done by capitalizing the statutory rate base and thus converting the statutory rate base (i. e., the dollar-amount value of the public utility's property) into a capitalization rate base composed of fictitious amounts of debt and fictitious amounts of equity.

This is contrary to law (Sections 4909.04, 4909.05 and 4909.15, Revised Code).

This is contrary to the decisions of this court in a long line of cases in which the court has held, and repeatedly reaffirmed the proposition, that, for purposes of rate making, the statutory rate base of a public utility company is the dollar value of its property, used and useful, in rendering the public utility service, and that the value is to be found by a determination of the reconstruction cost new less existing depreciation of the property of the public utility. Lima Telephone & Telegraph Co. v. Public Utilities Commission, 98 Ohio St. 110, 120 N.E. 330; Lindsey v. Public Utilities Commission, 111 Ohio St. 6, 144 N.E. 729; East Ohio Gas Co. v. Public Utilities Commission, 133 Ohio St. 212, 12 N.E.2d 765; City of Marietta v. Public Utilities Commission, 148 Ohio St. 173, 74 N.E.2d 74; City of Cleveland v. Public Utilities Commission, supra (164 Ohio St. 442, 132 N.E.2d 216), per curiam opinion, page 443, paragraph numbered 1; and Ohio Edison Co. v. Public Utilities Commission, 173 Ohio St. 478, 184 N.E.2d 70, paragraph four of the syllabus.

It can be noted here that all counsel appearing before this court in the oral reargument of this and related public utility cases asserted the position that the 'hypothetical company concept' was either unsound regulatory practice or unconstitutional, unlawful and arbitrary, though for different reasons.

The result in this case of this creation of a 'hypothetical company' is to create a fictitious debt for the appellant and to create an increased obligation upon the appellant for the payment of $1,243,633 hypothetical interest upon this fictitious debt, when the interest actually paid by the appellant is $1,028,215.

It is apparent that the increased hypothetical interest obligation is $215,418 in excess of the amount which the appellant is actually required to pay. It is admitted that this procedure results in an expense allowance, for federal income tax payment of an amount which is $112,017 less than the appellant is actually required to pay the federal government under the income tax law on the annual dollar return which the commission has determined the appellant is entitled to receive.

The commission computed the expense item for income tax by taking the allowed annual dollar return of $3,469,992 and deducting from it hypothetical interest of $1,243,633, which left taxable income of $2,226,359.

This taxable income of $2,226,359 multiplied by the federal income tax rate of 52% gives a tax due of $1,157,706.68.

However, when the company goes to compute its tax the federal imcome tax law will not permit the deduction of hypothetical interest. The law requires that only the actual interest paid can be deducted.

Under the federal income tax law the tax must be computed by taking the allowed annual dollar return of $3,469,992 and deducting from it the actual interest paid of $1,028,215, which leaves a taxable income of $2,441,777. This multiplied by the 52% tax rate gives a tax which the company must pay of $1,269,724.04.

The commission allowed as expense for income tax $1,157,706.68. The company is required by law to pay $1,269,724.04. The commission allowed $112,017.36 less than the company is required to pay by the federal tax law. This is admitted by the commission.

The result of this is to compel the appellant to divert $112,017 of the annual dollar return which it is entitled to receive for the use of its property to pay the expense of federal income taxes. This means that the appellant actually has $112,017 less dollars for its annual dollar return than the commission has found it is entitled to receive, i. e., $3,357,975 instead of $3,469,992.

The commission found that the appellant was entitled to a rate of return of 5.8%. The amount of $3,357,975 is a 5.8% return on a rate base of $57,896,121. This is $1,931,319 less than the rate base ($59,827,440) which the commission found to be the statutory rate base in this case.

It is apparent that the creation of this 'hypothetical company' has as its ultimate purpose the redection of the statutory rate base, which is a circumvention of the law of Ohio. It should be noted that the rate base arrived at by the hypothetical-company procedure was not determined by finding the reconstruction cost new less existing depreciation of the property of the public utility company, used and useful, in rendering a public utility service, as required by the statutes of Ohio and the decisions of this court. It is $1,931,319 less than the statutory rate base and it is a figure which is unrelated to the capitalization of the actual company, to the book value of the actual company and to the statutory rate base of the actual company. This is arbitrary and contrary to law. Lima Telephone & Telegraph Co. v. Public Utilities Commission, supra; Lindsey v. Public Utilities Commission, supra; East Ohio Gas Co. v. Public Utilities Commission, supra; City of Marietta v. Public Utilities Commission, supra; City of Cleveland v. Public Utilities Commission, supra, per curiam opinion, 164 Ohio St. page 443, paragraph numbered 1; and Ohio Edison Co. v. Public Utilities Commission, supra, paragraph four of the syllabus.

If it is argued that the statutory rate base dollar amount is not reduced, then it must be conceded that an annual dollar return of $3,357,975 is a return of only 5.61% on a rate base of $59,827,440, where as the commission has held that the appellant is entitled to an annual fair rate of return of 5.8%. This reduction in the annual fair rate of return is arbitrary and contrary to law.

At first it was argued, in defense of this unusual procedure, that income tax was not an item of expense, but part of the cost of capital. This contention was diposed of in City of...