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decided: April 15, 1987.


Appeals from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. The Bell Telephone Company of Pennsylvania, No. R-832316.


Daniel J. Whelan, with him, William L. Leonard, Daniel E. Monagle, J. Lindsay Johnston, and David N. Kleppinger, for petitioner/intervenor, The Bell Telephone Company of Pennsylvania.

Daniel Clearfield, Assistant Consumer Advocate, with him, Kathleen Cook, Legal Assistant, David M. Barasch, Consumer Advocate, and H. Kay Dailey, Assistant Consumer Advocate, for respondent.

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

President Judge Crumlish, Jr., Judges Craig, MacPhail, Barry and Colins. Opinion by President Judge Crumlish, Jr.

Author: Crumlish

[ 105 Pa. Commw. Page 288]

Bell Telephone Company of Pennsylvania (Bell) and the Office of Consumer Advocate (OCA) cross appeal a Pennsylvania Public Utility Commission (PUC) order granting Bell a rate increase of $198,471,000. Bell and the OCA have intervened on behalf of the PUC in each other's respective actions. We affirm in part and vacate and remand in part.

[ 105 Pa. Commw. Page 289]

On March 29, 1983, Bell filed revisions to Tariffs-Pa. PUC No. 1, 1A, 1D, 2C, 180A, 182, 182A, 185B, 185C, 295, 298 and 300 and filed a new Tariff-Pa. PUC No. 301 calculated to produce additional annual intrastate operating revenues of approximately $382,000,000 based upon the estimated level of operations for the future test year ending December 31, 1983. The PUC suspended the proposed tariffs until December 28, 1983, instituted an investigation and considered several formal complaints. Public hearings were held, after which Administrative Law Judge Nemec (ALJ) issued a recommended decision proposing an allowance of $96,500,000 of the additional revenue requested. Ruling upon exceptions to the ALJ's recommended decision, the PUC issued a short form order on December 29, 1983, in which it concluded that Bell had proven a need for additional annual revenues of $207,600,000. On January 5, 1984, certain corrections were adopted to reduce the rate increase to $198,471,000. The PUC entered a long form order on November 21, 1984, modifying in part and superseding in part the short form order. Bell and the OCA appeal this order.

Our scope of review of a PUC order in a rate case is limited to determining whether the Commission violated constitutional rights, committed an error of law, or made findings of fact that are not supported by substantial evidence. Green v. Pennsylvania Public Utility Commission, 81 Pa. Commonwealth Ct. 55, 473 A.2d 209 (1984), aff'd sub nom. Barasch v. Pennsylvania Public Utility Commission, 507 Pa. 430, 490 A.2d 806 (1985).

The bulk of the issues presented in this case arise from the Modification of Final Judgment, approved by the United States District Court for the District of Columbia in United States v. American Telephone and Telegraph Co., 552 F. Supp. 131 (1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983),

[ 105 Pa. Commw. Page 290]

    which, in part, sanctioned the divestiture by American Telephone and Telegraph Company (AT&T) of the Bell Operating Companies. This momentous decision has spawned an abundance of administrative and judicial activity, including the instant litigation. We note at the outset the historical significance of the preceding events and approach with circumspection the issues before us.

In this appeal, Bell contends that the PUC improperly disallowed its income tax expense proposal and certain previously approved amortization expenses. The OCA's primary challenge involves the PUC's allowance of a $143.7 million "public policy" revenue increase. The OCA also alleges error as to the PUC's rejection of certain wage proposals, equipment expense proposals and tax deferrals.


No. 279 C.D. 1984

Income Tax Expense Allowance

Bell challenges the PUC's disallowance of $2,404,000 of Bell's proposed income tax expense for the test year ending December 31, 1983. Bell argues that the PUC has impermissibly created a hypothetical interest expense derived from an estimated capital structure rather than using Bell's "actual" test year income tax expense. Bell relies upon several decisions of this Court which held that the use of "hypothetical" rather than "actual" test year interest expense for the purpose of calculating federal income tax expense is improper absent evidence that management had abused its discretion in arranging capital structure. Bell Telephone Co. of Pennsylvania v. Pennsylvania ...

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