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decided: June 19, 1987.


Appeal 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-842779 through No. R-842779C024, dated October 24, 1985.


Thomas L. Welch, with him, Julie A. Conover, William L. Leonard, Judith N. Dean, J. Lindsay Johnston, Daniel E. Monagle, and Richard D. Spiegelman, for petitioner.

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

H. Kay Dailey, Assistant Consumer Advocate, with her, Debra M. Kriete and Daniel Clearfield, Assistant Consumer Advocates, David M. Barasch, Consumer Advocate, and Edward J. Riehl and William S. Reyner, for intervenor, David M. Barasch, Consumer Advocate.

President Judge Crumlish, Jr., Judges Craig, MacPhail, Doyle, Barry, Colins, and Palladino. Opinion by Judge Craig. Concurring & Dissenting Opinion by Judge MacPhail. Judge Palladino joins in this dissent.

Author: Craig

[ 107 Pa. Commw. Page 36]

The Pennsylvania Public Utility Commission, by its order of October 24, 1985, granted an increase in the annual revenues of the Bell Telephone Company of Pennsylvania amounting to $32.6 million. The Bell Telephone Company has appealed. The Consumer Advocate is an intervenor.

On January 22, 1985, Bell had filed tariff revisions designed to produce approximately $325 million in additional annual intrastate operating revenues. The commission timely suspended the proposed rates until October 23, 1985, and instituted an investigation as to their lawfulness.

Following a pre-hearing conference, ten public input hearings and twenty-three formal evidentiary hearings (during which time Bell reduced its additional revenue

[ 107 Pa. Commw. Page 37]

    requirement claim to $237.4 million), the Administrative Law Judge issued a recommended decision proposing an allowance of an additional $47.3 million, out of the $237.4 million additional revenue request.

On October 24, 1985, the commission issued its opinion and order, concluding that Bell had demonstrated a need for additional annual revenues of $32.6 million.

On appeal here, Bell challenges the following four aspects of the commission's opinion and order: (1) the commission's decision to decrease Bell's rate base by approximately $37 million, with a reduction of Bell's allowed annual revenues by $9.4 million, based on a calculation of the value of Bell's station connections depreciation reserve, commonly referred to as the inside wire account, as of a date six months beyond the end of the test year; (2) the commission's disallowance of employee and pensioner discounts on telephone service, reflected as a $5 million dollar reduction in Bell's allowed annual revenues; (3) the commission's determination requiring Bell to use the flow-through method of accounting, rather than the normalization method of accounting, to calculate its income tax expense, reflected as a $28.9 million reduction in Bell's allowed annual revenues; and (4) the commission's decision to require Bell to amortize certain accumulated deferred tax balances over a five-year period, reflected as a $26.7 million decrease in its allowed annual revenues.

In rate cases, this court's 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. Bell Telephone Company of Pennsylvania v. Pennsylvania Public Utility Commission, 83 Pa. Commonwealth Ct. 331, 478 A.2d 921 (1984).

[ 107 Pa. Commw. Page 38]

    return to the utility company. Further, the fundamental purpose of the test year is to provide a basis for making the most accurate forecast of a utility's rate base, revenues and expenses in the near future when the prescribed rates are to be in effect and to the extent that revenues and expenses for the test year do not accurately indicate future revenue and cost trends the Commission has the duty to make adjustments.

Bell argues that the commission's decision to value the inside wire account on March 31, 1986, instead of March 31, 1985, had the effect of denying Bell an opportunity to earn a return on its inside wire account for those twelve months. Although Bell acknowledges that the commission has the discretion to make post test year adjustments, Green v. Pennsylvania Public Utility Commission, 81 Pa. Commonwealth Ct. 55, 473 A.2d 209 (1984), Bell contends, in its brief, that such discretion "does not permit the Commission to single out one cost element for the sole purpose of reducing revenue requirements by choosing to value certain kinds of property at a date outside of the test year." Bell's inside wire account is considered a "dying account" because its value is steadily declining and will attain zero value in 1992. Bell contends that the value of other elements of the rate base would be increasing over the same period of time that the wire account is decreasing, apparently to make the point that the offsetting effect negates the need for, or validity of, special treatment of the wire account.

Contrary to Bell's contentions, the commission did not single out the inside wire accounts as the only property whose valuation date was beyond the end of the test year. Bell itself chose that March 31, 1986 valuation date for two other dying accounts -- ...

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