76 Pa. Commw. 353 | Pa. Commw. Ct. | 1983
Opinion by
Walter W. Cohen, the Consumer Advocate of Pennsylvania (Consumer Advocate) here appeals a final order of the Public Utility Commission (PUC) which established rates for the Pennsylvania Power Company (Power Company), an electric utility company serving portions of northwestern Pennsylvania. We affirm the order of the PUC.
The controversy in this case is focused on that part of the PUC order which allowed the Power Company to normalize deferred federal and state income taxes for ratemaking purposes.
The court shall hear the appeal without a jury on the record certified by the Commonwealth agency. After hearing, the court shall affirm the adjudication unless it shall find that the adjudication is in violation of the constitutional rights of the appellant, or is not in accordance with law, or that the provisions of Subchapter A of Chapter 5 (relating to practice and procedure of Commonwealth agencies) have been violated in the proceedings before the agency, or that any finding of fact made by the agency and necessary to support its adjudication is not supported by substantial evidence.
Before the Court, the Consumer Advocate argues that (1) the PUC’s approval of tax expense normalization is not in accordance with the law, (2) the PUC’s reasoning in permitting tax expense normalization in the Power Company’s ratemaking constitutes error as a matter of law, and (3) the PUC’s finding that the rates proposed by the Power Company were just, reasonable and in the public interest is not supported by substantial evidence. "We will address the arguments seriatim.
The Consumer Advocate also directs our attention to Pittsburgh v. Pennsylvania Public Utility Commission, 182 Pa. Superior Ct. 551, 128 A.2d 372 (1956). In that case the PUC had refused the utility company’s request to normalize its tax expense and the Superior Court affirmed. The Consumer Advocate would have us read that case to hold that normalization of taxes is not permitted. We cannot accept the Consumer Advocate’s interpretation of that case. We read it to hold merely that the PUC is not required to approve normalization of taxes but is free to exercise its discretion and expertise in determining the reasonableness of proposed rates and the claimed expenses which underlie them.
Next, the Consumer Advocate argues that the PUC’s reasons for approving the Power Company’s
We have in mind the fact that the majority of Federal and State regulatory commissions are now permitting normalization of taxes. We are also aware of the fact that the accounting profession, in the form of the Accounting Principles Board, favors tax normalization. . . .
In this proceeding, the Company has pointed out that in September 1980 Standard & Poors downgraded its first mortgage bond rating to BBB+, and again in April, 1981, downgraded it to BBB. The Company asserts that it cannot issue preferred stock because it cannot meet the 1.5 times coverage test required by its charter. The Company proposed several actions in order to improve what it characterized as its deteriorating financial condition. Two of these actions . . . are treated in other sections of this Order. The third action which the*361 Company requests is the allowance of its entire normalized tax claim.
As noted above, we believe that it is unnecessary to review all of the arguments regarding the issue of normalization versus flow-through. Suffice it to say that these arguments have once again been raised on the record in this proceeding and have been reviewed by the Commission. We conclude that it is in the public interest that this request should be granted in its entirety. We do not believe that the Company’s current customers will be unduly burdened by this finding, and, more importantly, we believe such action is most fair to future customers. In addition, the allowance of the Company’s claim should improve its financial position with attendant benefits, not only to its investors, but to its customers as well.
The Consumer Advocate urges that this is “end result” justification for ratemaking contrary to law and directs us to Keystone Water Co., White Deer District v. Pennsylvania Public Utility Commission, 477 Pa. 594, 385 A.2d 946 (1978) and West Penn Power Co. v. Pennsylvania Public Utility Commission, 33 Pa. Commonwealth Ct. 403, 381 A.2d 1337 (1978). We disagree with the Consumer Advocate’s characterization.
Finally, the Consumer Advocate argues that the PUC’s conclusion that normalization of the Power Company’s depreciation benefits and tax expense is in the public interest is not supported by substantial evidence. “Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Pennsylvania Public Utility Commission v. D’Agata National Trucking Co., 25 Pa. Commonwealth Ct. 365, 370, 360 A.2d 279, 282 (1976). The record in this cáse is replete with-evidence indicating that normalization both is and is
Order
Now, August 15, 1983, the Order of the Pennsylvania Public Utility Commission in the above referenced matter, docketed at No. B-811510 and dated January 22,1982 is hereby affirmed.
Proceedings in this case began on April 15, 1981 when Pennsylvania Power Company filed Supplement No. 15 to its Tariff Electric — Pa. PUC No. 33. Supplement No. 15 requested an increase in, total annual operating revenues of $32,735,000.00 based on a future test year ending December 31, 1981. By order adopted June 11, 1981, the PUC instituted a formal investigation of the lawfulness and reasonableness of the proposed rates and thereby suspended operation of the tariff supplement until January 14, 1982. The matter was assigned for hearing and six complaints against the proposed rate increase were filed by the Borough of Enon Valley, the Consumer Advocate, West Penn Asphalt Co., Inc., State Representative Ralph D. Pratt, Sharon Steel Company, and Liquid Air Corporation. The complaints were consolidated with the PUC’s investigation for hearing and disposition. After extensive hearings over fourteen days the Administrative Law Judge, on December 3, 1981, issued his recommended decision. Exceptions and Replies to Exceptions were timely filed by the Power Company, the PUC trial staff, and the Consumer Advocate.
26 U.S.C. §167 (1976 & Supp. III 1979).
The Power Company’s tax normalization claim consisted of the following elements: (a) normalization of the Asset Depreciation Range depreciation benefit, which is the difference between depreciation computed using the double-declining balance method together with straight-line rates, and that computed using the double-declining balance method together with the shorter asset depreciation range guidelines, applied to 1971-1980 vintage property; (b) normalization of the income tax effect of the difference between depreciation computed at book straight-line rates and that computed by use of the double-declining balance method, applied to assets
The Consumer Advocate does not contest the authority or propriety of the allowance of normalization for property placed in service after 1980, to which the provisions of the Economic Recovery Tax Act apply.
The Consumer Advocate urges that, the “actual taxes paid” doctrine aUows tax expenses only for actual taxes paid in the base year. We disagree. None of the cases cited involved actual tax expenses disallowed because they were incurred beyond the test year. The concern which gave rise to the “actual taxes paid” doctrine was that utilities claimed tax expenses which bore no relationship t,o actual tax liability.
Following the Superior Court decision in Pittsburgh, the utility company in that case abandoned accelerated depreciation and computed its depreciation deduction according to the straight-line method. The City of Pittsburgh sued claiming that the utility’s tax expense should be computed to reflect accelerated depreciation allowable under the Internal Revenue Code. The Superior Court, on the City’s appeal from the PUC, opined:
We do not believe, however, that it would be proper to reqtñre, as a matter of law, this utility or any other utility to use a particular method of depreciation in, computing the federal income tax allowance when the law permits the*360 use of any of several methods which ultimately allows only the deduction of depreciation over the life of the property. (Emphasis in original.)
Pittsburgh v. Pennsylvania Public Utility Commission, 187 Pa. Superior Ct. 341, 358-59, 144 A.2d 648, 658 (1958). The Superior Court also recognized that “[i]n no event will a utility be permitted to recover by annual allowances for depreciation a total amount in excess of the original cost. . . .” Id. at 356, 144 A.2d at 657.
The PUC Order runs forty-three pages and discusses no fewer than eighteen issues and numerous sub-issues.
In Keystone, the PUC had argued that it was “free to depart from adherence to the rate base method of utility rate adjudication wherever the end result (i.e., the revenue which the utility is permitted to earn) is deemed to be ‘just and reasonable.’ ” Keystone at 602, 385 A.2d at 950. Justice Pomeroy, writing in support, of affirmance, rejected the argument and noted:
Absent the legal standards implicit in the present rate base/rate of return model, a Commission order and judi*362 cial review thereof would be transformed into an uncertain groping for the elusive standards of “justness” and “reasonableness”. . . . While the judgment of the Commission is entitled to great weight, it should not be effectively conclusive upon a reviewing court We think it would become so if the ephemeral approach now advocated were to prevail.
Id. at 609-10, 385 A.2d at 954.
Keystone was an affirmance of a decision of the Commonwealth Court by an evenly divided Supreme Court. Many of the points in Justice Pomeroy’s opinion in, support of affirmance were later rejected by the Court in Pennsylvania, Public Utility Commission v. Pennsylvania Gas and Water Co., 492 Pa. 326, 424 A.2d 1213 (1980), cert. denied, 454 U.S. 824 (1982) In Pennsylvania Gas and Water, however, the Court did not expressly reject Justice Pomeroy’s disapproval of an “ephemeral approach.” The Court did stress, however:
There is ample authority for the proposition that the power to fix “just and reasonable” rates imports a flexibility in the exercise of a complicated regulatory function by a specialized decision-making body and that the term “just and reasonable” was not intended to confine the ambit of regulatory discretion to an absolute or mathematical formulation but rather to confer upon the regulatory body the power to make and apply policy concerning the appropriate balance between prices charged to utility customers and returns on capital to utility investors consonant with constitutional protections applicable to both.
492 Pa. at 337, 424 A.2d at 1219.
See UGI Corporation v. Pennsylvania Public Utility Commission, 49 Pa. Commonwealth Ct. 69, 410 A.2d 923 (1980).
See West Penn Power Co. v. Pennsylvania Public Utility Commission, 50 Pa. Commonwealth Ct. 164, 412 A.2d 903 (1980).
Notwithstanding the knowledge and expertise in such matters which have been developed in this Conrt, we do not, in this opinion, abrogate or weaken in any way the statutory rule that the findings of the PUC “shall be in sufficient detail to enable the court on appeal, to determine the controverted question presented by the proceeding, and whether proper weight was given to the evidence.” Section 703(e) of the Public Utility Code, 66 Pa. C. S. §703(e).