Appeal from the Order of the Pennsylvania Public Utility Commission in the case of Pennsylvania Public Utility Commission v. Big Run Telephone Company, No. R-80061239.
John H. Isom, with him W. Russell Hoerner, of counsel: Morgan, Lewis & Bockius, for petitioner.
Bohdan R. Pankiw, Assistant Counsel, with him Steven A. McClaren, Deputy Chief Counsel, and Joseph J. Malatesta, Jr., Chief Counsel, for respondent.
Daniel Clearfield, with him Norman James Kennard, Assistant Consumer Advocate, and Walter W. Cohen, Consumer Advocate, for intervenor.
President Judge Crumlish, Jr. and Judges Rogers, Williams, Jr., MacPhail and Doyle. Opinion by Judge Doyle. Judge Mencer did not participate in the decision in this case.
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Big Run Telephone Company (Big Run), a wholly owned subsidiary of Citizen's Utility Company (Citizen's), appeals here from an order of the Pennsylvania Public Utility Commission (P.U.C.) which, inter alia,*fn1 disallowed a portion of a proposed rate increase. We affirm.
Big Run, a small public utility furnishing telephone service to approximately 923 customers in Jefferson and Indiana counties, filed a tariff supplement
[ 68 Pa. Commw. Page 298]
with the P.U.C. on July 27, 1980, proposing certain modifications in its rates which would have increased its annual revenues by $104,829, an increase of approximately 34%. In computing the tax expense portion of this proposed rate increase, Big Run, whose capital structure was in fact entirely devoid of long term debt, utilized a hypothetical interest expense of $22,268. It arrived at this figure by allocating to itself a portion of its parent's (Citizen's) actual interest expense on the basis of the ratio of its net worth to Citizen's consolidated net worth.
Following the filing of this tariff supplement complaints were filed by both the Borough of Big Run and the Office of the Consumer Advocate and in an order dated August 28, 1980, the P.U.C. subsequently initiated an investigation into the lawfulness and reasonableness of Big Run's existing and proposed rates. After conducting nine days of extensive hearings, the issuance of an Administrative Law Judge's recommended decision, and the filing of exceptions to that decision, the P.U.C. issued a final order, dated April 3, 1981, permitting Big Run to increase its annual revenues by $71,841, an amount $32,988 less than that requested. In its decision, the P.U.C. concluded, inter alia, that Big Run had abused its managerial discretion by maintaining a capital structure composed entirely of equity, and assigned Big Run a hypothetical capital structure composed of 53% debt and 47% equity*fn2 for the purpose of computing a hypothetical interest expense $32,896 in excess of the figure proposed by Big Run. This adjustment, in turn, reduced Big Run's allowable tax expense, and hence decreased
[ 68 Pa. Commw. Page 299]
allowable revenues,*fn3 by $16,372. The ...