Appeal from the Opinion and Order of the Commonwealth Court of Pennsylvania at No. 197 Commonwealth Docket 1983 entered November 29, 1983, modified December 19, 1983, which reversed an Order of the Pennsylvania Public Utility Commission at Docket No. R-821899, entered December 22, 1982. CITE: Pa. Commw. ,
Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ.
In this rate case appeal, UGI Corporation -- Gas Utility Division (UGI) and the Public Utility Commission (Commission) seek review of an order of the Commonwealth Court which reversed the Commission's approval of UGI's calculation of federal and state income taxes for rate-making purposes. The Commission's ruling permitted UGI to calculate its federal and state income taxes on the basis of a separate return even though UGI did not file a separate return but joined in a tax-saving consolidated return filed by its corporate parent. On appeal, the Commonwealth Court disapproved of the separate-return calculations used by UGI and concluded that tax calculations which fail to account for the tax benefits realized by participation in a consolidated return cannot be sanctioned. We agree, and therefore, affirm.
On March 31, 1982, UGI filed with the Commission, tariff revisions proposing rate increases which would generate an additional $30,719,803 in annual revenues. The commission
initiated an investigation to determine the lawfulness and reasonableness of the proposed rates. The revised rates were suspended by operation of law until December 31, 1982.*fn1
The Office of Consumer Advocate (OCA) was one of several parties who filed a complaint challenging the proposed rates.*fn2 Among the various issues raised in the proceedings, the OCA contested the income tax expenses claimed by UGI.*fn3 The OCA argued that UGI filed its tax return as part of a consolidated tax group comprised of its parent company and several other subsidiaries.*fn4 Under this voluntary arrangement, UGI's tax liability was less than it would have been had a separate return been filed. It follows then, the OCA argued, that taxes calculated on the basis of a separate return cannot be allowed and, for rate-making purposes, UGI must be required to figure its tax liability on the basis of the consolidated return actually filed. In considering the income tax issue raised by the OCA, the Commission summarized as follows:
The Company has developed current and deferred income tax expense totaling $19,433,239 ($16,407,960 Federal and $3,025,279 State) which includes current taxes payable, deferred taxes normalizing liberalized depreciation, and the deferral and amortization of investment tax credits. (UGI Ex. 9, III-A-17(6), revised July 1, 1982.)
The OCA urges that the requested allowance for state and federal income taxes of $19,433,239 be adjusted by the application of a consolidated effective income tax rate
of 27.77% to the OCA pro forma return on rate base to yield a tax allowance of $10,538,091. (OCA St. 4, Sch. 67, revised). OCA further urges that the tax allowance be reduced by $402,520, to reflect the five year amortization of accumulated deferred state income taxes, and $42,594, which reflects a three year amortization of the difference between accumulated deferred income taxes collected at 48% and those collected at 46%. (OSA St. 4, Sch. 72, revised.) The total OCA allowance for state and federal income taxes would be $10,092,977. (OCA St. 4, Sch. 67, revised.)
Slip opinion, pps. 39, 40.
The Commission dismissed the OCA's arguments saying that only consolidated tax savings that are generated by chronic loss companies*fn5 should be flowed through to the ratepayers. In this case the Commission found that no chronic loss company was involved in the UGI consolidated return. The Commission held, therefore, that for rate-making purposes, UGI's tax calculations on a separate return basis were reasonable. The Commission approved the income tax expense figure for the test year ending December 31, 1982 at $19,433,239, the sum which was calculated and submitted as if UGI filed a separate return. The ...