Summary
In Cincinnati Gas Electric Co. v. Public Utilities Commission (1962), 173 Ohio St. 473, 184 N.E.2d 84, and Ohio Edison Co. v. Public Utilities Commission (1962), 173 Ohio St. 478, 184 N.E.2d 70, decided in July 1962, the utilities involved argued against the conclusion of the commission that, in determining the amount allowed to a utility for federal income tax, consideration should be given to the whole amount allowed to the utility for interest, instead of only to the lesser amount to be paid by the utility for interest.
Summary of this case from O.F. Gas Co. v. P.U.C.OOpinion
Nos. 36859 and 36860
Decided July 5, 1962.
Public utilities — Rates and charges for electric service determined, how — Determination of rate of return — Accelerated tax depreciation — Future federal income tax liability — Consideration of interest on debt and equity capital.
APPEALS from the Public Utilities Commission.
On April 21, 1958, the appellant, The Cincinnati Gas Electric Company, filed with the Public Utilities Commission of Ohio an application for an increase in certain of its existing rates and charges for its electric service in its area.
Two years later on April 15, 1960, the commission rendered findings and an order granting 70% of the requested increase.
The company was dissatisfied with the increase allowed and applied for a rehearing. This application was granted.
A rehearing was held with the result that on October 7, 1960, the commission, with one member dissenting, granted a still lower increase of 39% of that requested by the company. It was held that a fair rate of return would be 5.6% instead of the 6.25% asked by the company.
The company has perfected its appeals to this court from the commission's orders.
Messrs. Peck, Schaffer Williams, Mr. Walter E. Beckjord and Mr. Richard H. Rhein, for appellant.
Mr. Mark McElroy, attorney general, Mr. Andrew R. Sarisky, Mr. Herbert T. Maher and Mr. DeForest Mellon, for appellee.
Mr. C. Watson Hover, prosecuting attorney, and Mr. Robert O. Lilley, for interested party.
Six assignments of error are presented by the appellant for the consideration of this court.
The appellant's first and chief complaint involves the matter of accelerated tax depreciation. The company contends that for its future federal income tax liability it should be permitted to "normalize" these taxes for rate-making purposes. This would involve having the commission allow for federal income tax expense not only the tax actually paid but an additional amount of $141,827, equal to the difference between the actual tax and the tax that would have been paid if the company had claimed no more than so-called straight-line depreciation as a deduction from income for federal tax purposes. In other words, the company is contending that the allowance for federal income tax expense should be computed as if straight-line depreciation rather than so-called declining balance depreciation were used.
To the contrary the appellee insists that this does not constitute a "tax deferral" and that "normalization" is "in reality a word to describe the practice of calculating and paying income taxes on one basis while pretending for rate-making purposes that the liability for such taxes is greater than the amount which is paid or ever will be paid."
In its decision on this question the commission reached the following conclusion with which this court agrees:
"The record in this proceeding makes it clear that this company will continue to make new additions. Further, it indicates that new additions will be made at a rate far in excess of that necessary to offset lesser amounts of depreciation deductions taken for older assets. Our experience indicates that this will be true in general of utilities in this state. In these circumstances and in view of the convincing testimony of Dr. Eisner, we must reject the theory that a deferral of tax liability arises from the use of accelerated depreciation, and consequently must reject normalization of taxes for rate-making purposes; no such deferral exists and no such liability will arise. We will allow only the expense incurred, that is, the federal income tax actually paid by the company. It is our opinion that this treatment will benefit both the ratepayers and the utility.
"In reaching this result, we join a number of important and distinguished jurisdictions * * *.
"The company contends that this commission should determine that the intent of Congress relative to Section 167 was to make interest-free capital available to taxpayers such as the company as distinguished from their consumers. The company argues that to fail to so do is to fail to follow the laws of Ohio and of the United States, and the federal supremacy clause of Article VI of the Constitution of the United States.
"We have searched the Congressional Reports in an effort to determine the intent of Congress in enacting Section 167, and we cannot agree with the company's contention. Rather we find ourselves in agreement with the statement of the Supreme Judicial Court of Maine:
"`From our reading of Section 167 of the Code, supra, and the House and Senate Committee Reports thereon, to which the company has directed our attention, we are unable to find an intent on the part of Congress that the ratepayers of a regulated utility should provide an interest-free loan to the company through present payment of a deferred tax. We must not read more into the act than reasonably may there be found.'"
The appellant's next complaint relates to the effect of the decision of this court in the case of Ohio Fuel Gas Co. v. Public Utilities Commission, 171 Ohio St. 10, the syllabus of which reads as follows:
"Under Ohio statutes, in determining the rate of return to be allowed a public utility on its statutory rate base, consideration must be given to a corporation having a debt and an equity capital in a total amount substantially equal to the statutory rate base, and what is to be allowed for interest on the amount of such debt is what would be reasonably necessary to pay interest on that amount of debt even though what is so allowed for interest may be more or less than what is actually paid by such public utility on its existing indebtedness."
Concerning this the commission made the following comment:
"The commission, in the light of these pronouncements, has re-examined its finding of 5.5% as the fair rate of return to the applicant utility. Applicant's exhibit 37 shows the capital structure as of the date certain to be 50.6% debt, 10.7% preferred stock and 38.7% common equity. Applicant's exhibits 35 and 36 indicate that the composite costs of preferred and debt capital are 4.148% and 3.417% respectively. The rate on common equity proposed by applicant's rate of return witness was 8.5%. * * *
"In view of this, and taking into consideration the pronouncements of the court in the Findlay case, the adoption of the policy of allowing tax savings resulting from the use of accelerated depreciation to flow through to the consumer, and all of the evidence of record in this proceeding, the commission is of the opinion that a 5.6% rate of return to a utility `having a debt and an equity capital in a total amount substantially equal to the statutory rate base' is just and reasonable."
Similarly, the further complaints of the appellant are without merit. The commission's orders are not unreasonable or unlawful and must be affirmed. A study of the hundreds of pages in the extended record and briefs discloses that on each issue the commission's findings and orders are supported by the evidence and are in accord with constitutional and statutory requirements.
Orders affirmed.
WEYGANDT, C.J., ZIMMERMAN, TAFT, MATTHIAS and BELL, JJ., concur.
O'NEILL, J., dissents.
HERBERT, J., not participating.
I dissent from the majority opinion with regard to valuation depreciation. I rely upon the authority of City of Cincinnati v. Public Utilities Commission, 113 Ohio St. 259, 148 N.E. 817, paragraphs one, two and three of the syllabus, approved in City of Marietta v. Public Utilities Commission, 148 Ohio St. 173, 74 N.E.2d 74, paragraph one of the syllabus, and City of Cleveland v. Public Utilities Commission, 164 Ohio St. 442, 132 N.E.2d 216.
What until now has been considered the settled law on this question is set forth, as follows, in City of Cleveland v. Public Utilities Commission, supra, at page 448 in the per curiam opinion:
"* * * Under our statutes, the rate base is the reconstruction cost new of the utility's property, less actual observed depreciation." (Emphasis added.)
The commission contends that the statutory word, "existing," should be given a different meaning from that which the court, in its prior decisions, has given it.
Counsel for the commission, in answer to a question from the bench, stated that he recognized that the commission's position required the overruling of decisions of this court.
The methods of determining depreciation, used both by the company's engineer witnesses and some of the commission's engineer witnesses, have been approved by this court in the past. This independently secured and independently presented evidence showed the valuation depreciation to be, in the case of the commission engineer, 16.90 per cent, and, in the case of the company engineer, 15.3 per cent.
The commission ignored the evidence of the company and this evidence presented by its own engineer. It chose to accept the evidence of a commission engineer who arrived at the valuation depreciation of 25.36 per cent by his own method which has not previously been before this court. Admittedly, this method can not meet the test of observed depreciation, or actual depreciation, or existing depreciation unless those terms are given new and different meanings contra to prior decisions. This change in the method of determining valuation depreciation reduces the rate base by about twelve million dollars ($12,000,000).
For this court to sustain the commission in the use of this method of determining valuation depreciation without overruling the cases which have decided this point of law injects confusion, contradiction and speculation into the rate-making process.