154 A.D.2d 31 | N.Y. App. Div. | 1990
OPINION OF THE COURT
In this CPLR article 78 proceeding we are again called upon to review aspects of the determination by respondent concerning the revised tariff filed in August 1987 by petitioner, National Fuel Gas Distribution Corporation (hereinafter NFG), in which NFG sought a revenue increase of $34.7 million (see, Matter of Multiple Intervenors v Public Serv. Commn., 154 AD2d 76 [decided herewith]). Respondent ultimately granted NFG a $14,899 million increase for the rate year ending July 31, 1989. Among the issues resolved in that rate proceeding were the treatment for ratemaking purposes of additional Federal income tax liability incurred by NFG as a result of the Federal Tax Reform Act of 1986 (hereinafter TRA-86; Pub L 99-514) in NFG’s fiscal year commencing October 1, 1987 and ending September 30, 1988 and succeeding fiscal years.
Under TRA-86, utilities such as NFG received the benefit of the general corporate Federal income tax rate reduction from 46% to 40% in 1987 and to 34% in 1988, and the resultant
The second pertinent change effected by TRA-86 concerned tax treatment of public utility bad debts. Prior to the passage of TRA-86, utilities were allowed to use the reserve method, based upon estimates of uncollectibles, to account for bad-debt expense for both income tax and ratemaking purposes. Under TRA-86, however, utilities may not use the reserve method and may only deduct actual bad-debt write-offs for tax purposes. Additionally, in the tax year following the effective date of TRA-86, existing bad-debt reserves must be included in taxable income. Again, this was a purposeful one-time tax
Prior to the instant proceeding, respondent had initiated sua sponte a proceeding to consider the impact upon utility accounting and rates of the changes effected by TRA-86, inviting input and comments from interested parties. As a result of that proceeding, respondent issued a general policy statement on July 7, 1987 (hereinafter the TRA-86 policy statement). Regarding treatment of unbilled revenues, the TRA-86 policy statement indicated that respondent would undertake further review and that a separate proceeding would be initiated to determine ratemaking treatment of unbilled revenues. As to bad-debt expense, the TRA-86 policy statement noted that some utilities had anticipated the changes resulting from TRA-86 by setting up reserves to cushion the tax on the bad-debt accounts, while others had passed through the prior deductions in either lower customer rates or higher corporate earnings. As to the latter group, respondent determined that they "may claim the increase in current tax expense in revenue requirements; however, recoupment of these outlays will depend on a demonstration that ratepayers have received the tax benefits of bad debt accruals in the past”.
In its determination of NFG’s rate proceeding, respondent rejected the utility’s proposed treatment, as an operating expense, of its increased income tax liability for unbilled revenues in the fiscal year ending September 30, 1988. Instead, respondent adopted its staff’s recommendation to match NFG’s 1988 fiscal year’s share of unbilled revenues of $1,782,000 with the $761,000 tax expense attributable to those revenues and adding the net balance ($1,021,000) to NFG’s 1988 revenues for the benefit of ratepayers in establishing NFG’s rates necessary to make up its annual rate of return. Upon review, NFG argues that the foregoing determination lacks a rational basis in failing to credit it for a legitimate,
Nor is it deniable that the addition of $1,021,000 of imputed revenues for NFG’s 1988 fiscal year represents a matching of more than a year of revenues against 12 months of expenses and does not reflect any enhancement of actual revenues NFG will receive from ratepayers. Thus, NFG correctly notes that, in the former respect, the determination violates a 1977 statement of policy by respondent requiring rates to be fixed on the basis of revenues and expenses for a single test year. Respondent’s essential justification for imputing the unbilled revenues attributable to the added tax liability for the rate year (and the next succeeding three years) is the statement in its brief that "[t]o include for ratemaking purposes only the tax expense, as NFG suggests, would skew the rates, leaving uncaptured on a permanent basis the income upon which the tax expense was based” (emphasis in original). However, in neither its decision nor in its brief on review has respondent explained why NFG’s reporting of billed revenues for the utility’s fiscal year ending September 30, 1988, and full reporting of actual revenues in succeeding fiscal years, will not accurately reflect NFG’s revenues upon which rates should be based, without the addition of unbilled revenues prior to October 1, 1988. This was precisely the point made in the unchallenged rebuttal testimony of NFG’s manager of corporate taxes and appears to us to refute respondent’s contention that failure to match additional tax liability with the unbilled revenue out of which it arose will "skew” NFG’s rates. In the absence of further articulation of a sound rationale for inclusion of the taxed unbilled revenues in the ratemaking equation, the determination in this regard must be annulled and the issue remitted to respondent for reconsideration.
Annulment is also required with respect to respondent’s disposition of NFG’s proposed inclusion for the rate year of its prorated tax liability of $461,000 on its prior bad-debt reserve.
Nor has respondent demonstrated any circumstance peculiar to NFG, among utilities who passed on the benefit of bad-debt deductions to ratepayers under the prior reserve method, that would disqualify NFG from the benefits of the TRA-86 policy statement. Without a sufficient explanation of why it departed from the TRA-86 policy statement in the instant case, or that respondent has, for some good reason, reconsidered the treatment of the tax on a utility’s prior debt reserve to add the additional requirement herein imposed on NFG before allowing the tax as a recoverable expense, respondent’s determination is arbitrary and capricious and must, therefore,
Casey, J. P., Weiss, Mercure and Harvey, JJ., concur.
Determination annulled, with costs, and matter remitted to respondent for further proceedings not inconsistent with this court’s decision.