17 Pa. Commw. 333 | Pa. Commw. Ct. | 1975
Opinion by
This is a public utility rate case.
The appellant, The Bell Telephone Company of Pennsylvania (Bell), in December, 1972 and January, 1973
After lengthy hearings, the Commission entered its final order on December 21, 1973. The Commission found that the fair value of Bell’s property used and useful in public service at the end of 1972 to be $1,875,000,000 and that a fair rate of return which Bell should be allowed to earn on that fair value was 8%
Bell’s appeal from the Commission’s order raised only the propriety of this disallowance of $3,500,000 of the amount it is required to pay in Federal income taxes.
AT&T owns all or the majority of the voting stock of 21 operating telephone companies, including the appellant. AT&T is also an operating telephone company furnishing long distance interstate service by interconnecting areas served by other telephone companies, including many which it does not own. AT&T additionally owns all of the stock of Western Electric Company, which manufactures and supplies telephone equipment, and one-half of the stock of Bell Telephone Laboratories, the research facility for AT&T and its subsidiaries. Western Electric owns the remaining one-half of the stock of the Laboratories.
Bell’s general accountant testified without refutation either in the record or in the briefs filed by the Commission that Bell receives exactly the same tax deduction for its interest as it would if it filed a separate return, and that any benefits of consolidation contributed by Bell enure to the benefit of its ratepayers, including the principal advantage of filing a consolidated return, the deferral of taxes on Western Electric profits on sales of its products to Bell.
The Commission’s alternative reason for reducing Bell’s claimed expense for Federal income tax paid was the assumed support of Bell’s capital stock by AT&T’s debt, with the result, according to the Commission, that “interest [thereon] provides income tax credits to the parent that should be allocated to [Bell].” It is conceded by all parties that it is impossible to ascertain what amount, if any, of the proceeds of AT&T’s debt was employed in support of Bell’s capital. Part or all of this money could have been used in AT&T’s other operations independent of its operating subsidiaries. The Commission obviously proceeded on the basis that it may be inferred that since AT&T has debt and since it owns Bell’s stock, some of AT&T’s debt was employed “in support” of Bell’s capital. This is not a novel theory. It has been the subject for more than 20 years of attention by the National Association of Regulatory Commissioners (NARUC), whose Committee on Accounts and Statistics has developed procedures for allocating Federal income taxes among AT&T and its affiliates, including, apparent
The Superior Court consistently refused to allow hypothetical tax expenses. Pittsburgh v. Pa. P.U.C., 208 Pa. Superior Ct. 260, 222 A.2d 395 (1966); Penn Sheraton Hotel v Pa. P.U.C., 198 Pa. Superior Ct. 618, 184 A.2d 324 (1962); Riverton Consolidated Water Company v. Pa. P.U.C., 186 Pa. Superior Ct. 1, 140 A.2d 114 (1958); Pittsburgh v. Pa. P.U.C., 187 Pa. Superior Ct. 341, 144 A.2d 648 (1958); Pittsburgh v. Pa. P.U.C., 182 Pa. Superior Ct. 551, 128 A.2d 372 (1956). We see no more reason why hypothetical disallowances should be warranted.
This is not to say that if managerial discretion is exercised with the purpose and effect of arranging the capital structures of a parent and controlled subsidiaries of requiring the latters’ subscribers to pay higher rates
The Commission’s action in disallowing $3,500,000 of Federal income taxes paid by the respondent, The Bell Telephone Company of Pennsylvania, is reversed with direction to the Commission to add $3,500,000 to the presently allowed revenue deduction for income taxes and to adjust the amount of allowable operating revenues accordingly; the record will rest with this Court pending disposition of the appeals from the Commission’s order of other parties on other issues.
. Bell’s submissions suggested a fair value of $2,347,247,000 and a fair rate of return of 9.50 percent.
. The Commission calls this a rebate.
. Other parties have filed cross-appeals not consolidated with this appeal which remain pending before us.
. The deferred taxes are paid to the subsidiaries making purchases and credited to their plant accounts in reduction of original cost of plant investment, reducing annual depreciation and increasing Federal income taxes over the life of the plant. The net effect is to give the subsidiaries the immediate use of the money which otherwise would be paid by Western Electric in taxes.
. Regulations 1-5502-11 et seq., 1973 CCH Standard Tax Reports §4902.
. Which Bell pays directly to the Internal Revenue Service. Internal Revenue Code of 1954, §6302 (c), 26 U.S.C.A. §6302 (c).
. However, in Bell’s 1971 rate case, the Commission reduced the allowance for Federal income tax purposes hy $1,870,000, relying on the then current NARUC committee report. Pa. P.U.C. v. Bell Telephone Company of Pennsylvania, 45 Pa. P.U.C. 675 (1971). It thus overruled its earlier rejection of the NARUC method in Pa. P.U.C. v. Bell Telephone Company of Pennsylvania, 39 Pa. P.U.C. 649 (1962).