decided: August 15, 1983.
WALTER W. COHEN, CONSUMER ADVOCATE, PETITIONER
PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT. PENNSYLVANIA POWER COMPANY, INTERVENOR
Appeal from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. Pennsylvania Power Company, No. R-811510C006.
Daniel Clearfield, Assistant Consumer Advocate, with him Walter W. Cohen, Consumer Advocate, for petitioner.
Julian S. Suffian, Assistant Counsel, with him Steven A. McClaren, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.
Alan L. Reed, with him Thomas P. Gadsen and Margaret B. Dardess and of counsel: James R. Edgerly, General Counsel, and Stephen L. Feld, Morgan, Lewis & Bockius, for intervenor, Pennsylvania Power Company.
Albert D. Brandon, for Amicus Curia, Ralph D. Pratt.
President Judge Crumlish, Jr. and Judges Williams, Jr., Craig, MacPhail and Doyle. Opinion by Judge Doyle.
[ 76 Pa. Commw. Page 355]
Walter W. Cohen, the Consumer Advocate of Pennsylvania (Consumer Advocate) here appeals a final order of the Public Utility Commission (PUC) which established rates for the Pennsylvania Power Company (Power Company), an electric utility company serving portions of northwestern Pennsylvania. We affirm the order of the PUC.
The controversy in this case is focused on that part of the PUC order which allowed the Power Company to normalize deferred federal and state income taxes for ratemaking purposes.*fn1 Under the Internal
[ 76 Pa. Commw. Page 356]
Revenue Code a corporation may accelerate the depreciation of its capital assets, claiming greater depreciation deductions in the early years of an asset's life and lesser depreciation deductions in later years, as an alternative to straight-line depreciation, in which the depreciation deduction is the same in each year of an asset's life.*fn2 When accelerated depreciation is employed, the greater depreciation deductions in the early years reduces the taxpayer's taxable income, resulting in a lower tax expense than if straight-line depreciation had been used. Later in the asset's life, the deduction is less, resulting in a greater tax expense than if straight-line depreciation had been used. The total depreciation over the entire useful life of the asset remains the same. The normalization permitted by the PUC order allowed the Power Company to compute its tax expense chargeable to ratepayers as though its assets were depreciated according to the straight-line method when, in fact, for tax purposes, the Power Company used accelerated depreciation.*fn3
[ 76 Pa. Commw. Page 357]
Our scope of review is limited by Section 704 of the Administrative Agency Law, 2 Pa. C.S. § 704, which provides, in pertinent part:
The court shall hear the appeal without a jury on the record certified by the Commonwealth agency. After hearing, the court shall affirm the adjudication unless it shall find that the adjudication is in violation of the constitutional rights of the appellant, or is not in accordance with law, or that the provisions of Subchapter A of Chapter 5 (relating to practice and procedure of Commonwealth agencies) have been violated in the proceedings before the agency, or that any finding of fact made by the agency and necessary to support its adjudication is not supported by substantial evidence.
Before the Court, the Consumer Advocate argues that (1) the PUC's approval of tax expense normalization is not in accordance with the law, (2) the PUC's reasoning in permitting tax expense normalization in the Power Company's ratemaking constitutes error as a matter of law, and (3) the PUC's finding that the rates proposed by the Power Company were just, reasonable and in the public interest is not supported by substantial evidence. We will address the arguments seriatim.
[ 76 Pa. Commw. Page 358]
First, the Consumer Advocate argues that normalization of tax expenses for ratemaking purposes violates the "actual taxes paid" doctrine which prohibits a utility from charging its ratepayers any "phantom tax" not actually paid. See Western Pennsylvania Water Co. v. Pennsylvania Public Utility Commission, 54 Pa. Commonwealth Ct. 187, 422 A.2d 906 (1980). In advancing this argument, reliance is placed on a number of cases which include: Riverton Consolidated Water Co. v. Pennsylvania Public Utility Commission, 186 Pa. Superior Ct. 1, 140 A.2d 114 (1958); Chambersburg Gas Co. v. Public Service Commission, 116 Pa. Superior Ct. 196, 176 A. 794 (1935); and Western Pennsylvania Water. Reliance on these cases is misplaced, however. In each, the utility had shared in taxes paid according to a consolidated return filed with its parent company, but had computed its tax expense for ratemaking purposes as though it had filed and paid taxes as an individual corporation. The result was a claimed tax expense greater than the utility's actual tax liability under the consolidated return. The PUC and the Courts found rates based on this tax expense to be unreasonable because the tax expense claimed bore no relationship whatsoever to the actual tax liability of the utility. In the case sub judice the tax expense claimed does bear a relationship to the actual tax liability of the Power Company. The total tax effect of depreciation, over the useful life of a capital asset, is the same regardless of which method of depreciation is used. Normalization simply eliminates the distortion of the tax effect in the short run caused by accelerated depreciation and distributes evenly the total tax effect of the depreciation. Consequently while the tax expense claimed here is not equal to the actual tax liability
[ 76 Pa. Commw. Page 359]
normalization claim constitute error as a matter of law. In a lengthy and comprehensive Order, in which normalization of taxes was but a single issue,*fn6 the PUC declined to review in detail all the arguments proffered and discussed on the issue of normalization reasoning that those familiar with public utility regulations would be familiar with the arguments. The PUC stated:
We have in mind the fact that the majority of Federal and State regulatory commissions are now permitting normalization of taxes. We are also aware of the fact that the accounting profession, in the form of the Accounting Principles Board, favors tax normalization. . . .
In this proceeding, the Company has pointed out that in September 1980 Standard & Poors downgraded its first mortgage bond rating to BBB, and again in April, 1981, downgraded it to BBB. The Company asserts that it cannot issue preferred stock because it cannot meet the 1.5 times coverage test required by its charter. The Company proposed several actions in order to improve what it characterized as its deteriorating financial condition. Two of these actions . . . are treated in other sections of this Order. The third action which the
[ 76 Pa. Commw. Page 361]
Company requests is the allowance of its entire normalized tax claim.
As noted above, we believe that it is unnecessary to review all of the arguments regarding the issue of normalization versus flow-through. Suffice it to say that these arguments have once again been raised on the record in this proceeding and have been reviewed by the Commission. We conclude that it is in the public interest that this request should be granted in its entirety. We do not believe that the Company's current customers will be unduly burdened by this finding, and, more importantly, we believe such action is most fair to future customers. In addition, the allowance of the Company's claim should improve its financial position with attendant benefits, not only to its investors, but to its customers as well.
The Consumer Advocate urges that this is "end result" justification for ratemaking contrary to law and directs us to Keystone Water Co., White Deer District v. Pennsylvania Public Utility Commission, 477 Pa. 594, 385 A.2d 946 (1978) and West Penn Power Co. v. Pennsylvania Public Utility Commission, 33 Pa. Commonwealth Ct. 403, 381 A.2d 1337 (1978). We disagree with the Consumer Advocate's characterization.*fn7 The analysis undertaken by the PUC in the
[ 76 Pa. Commw. Page 362]
instant case, while somewhat cursory, is not the "ephemeral approach" expressly disapproved by the Supreme Court in Keystone.*fn8 The Order notes that normalization will improve the Power Company's credit rating, benefiting ratepayers as well as stockholders. In addition, the Order points out that normalization removes the burden on future ratepayers inherent in accelerated depreciation without unduly burdening present rate payers. What the Order does not include specifically is a readily apparent statement that the benefit to future ratepayers without
[ 76 Pa. Commw. Page 363]
burdening present ratepayers results from the equalization of the depreciation benefit over the useful life of capital assets. In light of the PUC's broad discretion in ratemaking matters,*fn9 its expertise in determining the benefits and costs associated with various accounting policies,*fn10 and our own familiarity with and general understanding of the effects of asset depreciation and other tax accounting practices, we do not find the treatment of the normalization issue in the PUC's Order to be conclusory as urged by the Consumer Advocate. The Order assumes a level of general understanding not beyond that possessed by the Court,*fn11 and proceeds to findings and conclusions based on that understanding.
Finally, the Consumer Advocate argues that the PUC's conclusion that normalization of the Power Company's depreciation benefits and tax expense is in the public interest is not supported by substantial evidence. "Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Pennsylvania Public Utility Commission v. D'Agata National Trucking Co., 25 Pa. Commonwealth Ct. 365, 370, 360 A.2d 279, 282 (1976). The record in this case is replete with evidence indicating that normalization both is and is
[ 76 Pa. Commw. Page 364]
not in the public interest. The PUC found the evidence favoring normalization to be more persuasive. Even where the independent judgment of this Court would be to the contrary, we would not disturb the decision of the PUC. McCort v. Pennsylvania Public Utility Commission, 15 Pa. Commonwealth Ct. 355, 327 A.2d 407 (1974). The Order of the PUC is amply supported by substantial evidence in the record.
Now, August 15, 1983, the Order of the Pennsylvania Public Utility Commission in the above referenced matter, docketed at No. R-811510 and dated January 22, 1982 is hereby affirmed.