Appeal from the Order of the Pennsylvania Public Utility Commission in case of In Re: Pennsylvania Public Utility Commission, Township of Butler, Armco Steel Corporation v. Western Pennsylvania Water Company, Butler District, No. R-77090464.
Alan L. Reed, with him, Thomas P. Gadsden, of counsel, Morgan, Lewis & Bockius, for petitioner.
John A. Levin, Assistant Counsel, with him, Steven A. McClaren, Deputy Chief Counsel, and George M. Kashi, Chief Counsel, for respondent.
President Judge Crumlish and Judges Wilkinson, Jr., Mencer, Rogers, Blatt, Craig and Williams, Jr. Judge MacPhail did not participate. Opinion by President Judge Crumlish. Judge Williams, Jr., concurs in the result only.
[ 54 Pa. Commw. Page 188]
Western Pennsylvania Water Company*fn1 (Western) in its petition seeks review of a final order by the Pennsylvania Public Utility Commission (Commission) disallowing $16,911 of operating expenses
[ 54 Pa. Commw. Page 189]
claimed for the Butler District*fn2 (Butler), one of the company's operating districts. We affirm.
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.*fn3
[ 54 Pa. Commw. Page 190]
One of the generally accepted rate-making principles is that utilities are permitted to set rates which will recover those operating expenses reasonably necessary to provide service to customers, while earning a fair rate of return on the investment in plant used and useful in providing adequate utility service. City of Pittsburgh v. Pennsylvania Public Utility Commission, 42 Pa. Commonwealth Ct. 242, 247, 400 A.2d 672, 674 (1979). Of course, this cost of service includes a reasonable allowance for federal income taxes. See The Peoples Natural Gas Co. v. Pennsylvania Public Utility Commission, 47 Pa. Commonwealth Ct. 512, 409 A.2d 446 (1979). However, this Court has held that the Commission may properly exclude a portion of a utility's tax expense where there is evidence that the utility has not been afforded its fair share of benefits from filing a consolidated tax return with a parent corporation, Bell Telephone Co. v. Pennsylvania Public Utility Commission, 47 Pa. Commonwealth Ct. 614, ...