54 Pa. Commw. 187 | Pa. Commw. Ct. | 1980
Opinion by
Western Pennsylvania Water Company
On June 30, 1977, Western filed a tariff supplement with the Commission providing for an 11.52% increase in Butler’s annual operating revenues, or a total increase of $249,861 over the $2,169,180 fully-adjusted base for the test year ending March 31, 1977. On September 14,1977, the operation of the tariff supplement was suspended for six months pending investigation into the fairness, reasonableness and lawfulness of the proposed rates.
After extensive evidentiary hearings before the Administrative Law Judge, the Commission entered its final order disallowing approximately 67% of a requested increase in annual revenues for Butler water service. The adjudication sets fair value and fair rate of return at $10,000,000 and 8% respectively, providing an $800,000 income available for return. Upon adding operating revenue deductions of $1,452,-650 to the return determination, the Commission directed Butler to file tariff revisions providing annual operating revenues of $2,252,650, an increase of $83,-470 over existing revenues but $166,391 less than proposed and $171,443 lower than the Administrative Law Judge’s recommendation.
Western’s attack specifically challenges the Commission ’s exclusion from operating expenses of a portion of Butler’s federal income tax deduction.
Western’s Butler District computed its federal income tax for the test year to be $286,225. Since Butler determines its claimed taxes as if it were a separate taxpayer, the 48% statutory federal income tax rate was applied to anticipated taxable income under present and proposed rates. However, Butler, along with 49 other affiliated interests, participated in the filing of a consolidated tax return with American and paid their taxes directly to the parent company. American then recalculated taxes on the basis of the consolidated group using its losses to lower the actual tax liability, but did not distribute the difference among the subsidiaries.
We cannot condone a plea which would allow a parent company to collect a “phantom tax.” In reality, it is never paid to the government, but retained by the company as profit and passed on to the rate payer by way of subsidiary-claimed non-existent tax expense. On review, we conclude that the Commission’s disallowance of Butler’s claimed tax expense, in the form of $16,911 share, is both proper and supported by competent evidence.
Western further argues that we must reverse the Commission’s federal income tax computation because “sound regulatory principles” require that rates be established on an individual utility basis. However, the question raised by Western here extends beyond a policy decision to the very principles of rate making.
The Commission determined that “where the fundamental principles of regulation adhere to the setting of utility rates on an individual entity basis, these principles must be tempered to prevent inequities; the inclusion of income tax expenses which were never incurred in respondent’s cost of service is one such situation.” The decision to balance economic theory with the equities of a particular case surely bears a reasonable relationship to the Commission’s regulatory duty to establish just and reasonable rates. In so doing, our Courts seek not “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 con
Affirmed.
Order
The Opinion and Order dated October 1, 1980, in the above captioned matter is hereby withdrawn, and the Pennsylvania Public Utility Commission order, adopted September 7, 1978, and entered December 11, 1978, is hereby affirmed.
Formed under the laws of Pennsylvania on June 2, 1972 and presently a subsidiary of the American Water Works Company, Inc.,
Formerly the Butler Water Company, Western’s Butler District provides water service to approximately 10,880 customers in the City of Butler, the Borough of East Butler, and portions of Butler, Center, Oakland, and Summit Townships, all located in Butler County.
Western duly withdrew its challenges on the Commission’s determination of fair value and fair rate of return.
This Opinion necessarily effectuates a withdrawal of this Court’s October 1, 1980 Opinion and Order.