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decided: June 21, 1984.


Appeals from the Orders of the Pennsylvania Public Utility Commission in the cases of Pennsylvania Public Utility Commission, No. R-811819; Business Users' Group, No. R-811819C001; Consumer Education and Protective Assn., No. R-811819C002; City of Pittsburgh and Mayor Richard S. Caliguiri, No. R-811819C003; Walter W. Cohen, Consumer Advocate, No. R-811819C004; Federal Executive Agencies, No. R-811819C005; Frank K. Jones, No. R-811819C006; Pennsylvania Alliance for Jobs and Energy et al., No. R-811819C007; Modern Communications Corp. et al., No. R-811819C008; William J. Green and City of Philadelphia, No. 811819C009; The Hospital Association of Pennsylvania, No. R-811819C010; Al and Janet Lander, No. R-811819C011; Elizabeth Munro Kapner, No. R-811819C012; Pennsylvania Alarm Association, No. R-811819C013; State Representative Ralph D. Pratt, No. R-811819C014; and Hazleton Taxpayers Association, No. R-811819C015 v. The Bell Telephone Company of Pennsylvania, dated September 3, 1982 and March 8, 1983.


Gerard J. St. John, with him, Irving R. Segal, Schnader, Harrison, Segal & Lewis, Daniel J. Whelan and William L. Leonard, for petitioner, The Bell Telephone Company of Pennsylvania.

Craig R. Burgraff, Associate Consumer Advocate, with him, David M. Barasch, Acting Consumer Advocate, for petitioner, Consumer Advocate Walter W. Cohen.

Bohdan R. Pankiw, Assistant Counsel, with him, John A. Levin, Assistant Counsel, Albert W. Johnson, III, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

President Judge Crumlish, Jr. and Judges Williams, Jr., Craig, MacPhail, Doyle, Barry and Colins. Opinion by Judge Craig. Judge Rogers did not participate in the decision of this case.

Author: Craig

[ 83 Pa. Commw. Page 333]

In these consolidated utility ratemaking cases Bell Telephone Company of Pennsylvania (Bell) and the Office of the Consumer Advocate of Pennsylvania (OCA) each have appealed respective aspects of orders of the Pennsylvania Public Utility Commission (PUC) dated September 3, 1982 and March 8, 1983.

On December 15, 1981, Bell filed tariff revisions seeking an increase of $426,000,000 in intrastate operating

[ 83 Pa. Commw. Page 334]

    revenues based on a test year ending September 30, 1982. The PUC suspended the rates, conducted an investigation and held evidentiary hearings during which Bell reduced its revenue requirement claim to $396,800,000.

On August 6, 1982, an Administrative Law Judge issued a recommended decision proposing allowance of $320,000,000. The PUC entered a Summary Form Opinion and Order on September 3, 1982, concluding that Bell had demonstrated a need for additional revenue of $255,600,000. The PUC set forth its rationale for that conclusion in the Long Form Opinion and Order issued on March 8, 1983.

Bell's appeal claims that the PUC erred in (1) using a calculated interest expense (deduction) in estimating Bell's income tax expense for the test year, resulting in a disallowance of $2,363,000 of tax expense; (2) disallowing $2,614,000 of Bell's Business Information Systems (BIS) expenses claimed for costs relating to computer programs developed by an affiliate but not used by Bell; and (3) requiring Bell to amortize payments to the affiliate for research and development of BIS programs, rather than to treat them as current expenses.

OCA's appeal argues that the PUC erred in (1) allowing Bell to use remaining life depreciation for ratemaking purposes; and (2) allowing Bell to normalize income tax benefits resulting from accelerated depreciation, rather than flowing-through those benefits to ratepayers.

In rate cases, our scope of review is limited to a determination of whether the commission violated constitutional rights, committed an error of law, or made findings which are not supported by substantial evidence. Big Run Telephone Co. v. Pennsylvania Utility Commission, 68 Pa. Commonwealth Ct. 296, 449 A.2d 86 (1982).

[ 83 Pa. Commw. Page 335]

    judgment based upon a variety of factors. Tax expenses, however, are actual expenses which the utility must be permitted to recover in order to assure that the prescribed rates will produce the determined fair return.

Id. at 620, 408 A.2d at 921.

By using AT&T's capital structure to determine a fair rate of return, Bell does not build into its rates an interest expense commensurate with AT&T's outstanding debt. Therefore, consistency does not demand that AT&T's capital structure be used to compute the interest expense deduction from Bell's income taxes for the test year. The expense and deduction calculations must surely be ...

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