Opinion ID: 396140
Heading Depth: 3
Heading Rank: 1

Heading: Columbia's Capital Distribution

Text: 36 Almost half of the consolidated tax benefits stem from the relationship between the parent company and the subsidiaries, whereby the parent borrows money at high rates and lends it at low rates, resulting in a balance sheet loss. This loss reduces Columbia's consolidated tax liability. There is no principled basis for giving Columbia, and denying the ratepayers, the benefit of this tax savings. No policy of the Natural Gas Act would be furthered by allowing Columbia to keep the benefits of this bookkeeping device. FERC does not contest this point. 37 The Commission claims that the stand-alone tax liability reflects a reduction in the subsidiaries' taxable income resulting from the deduction of the parent's cost of capital, the real cost, as an expense. Alternatively, the book cost (calculated at the lower rate at which the parent lent to the affiliate) could have been used as a deduction, which would have resulted in a larger stand-alone tax liability than that reflected in the rate order. FERC explains that the calculation of stand-alone tax liability passes through the benefits of the parent's capital distribution losses to the ratepayers. The Commission concluded that the reduction in stand-alone taxable income results in an income tax exactly equal to that calculated by using a higher taxable income (arrived at by deducting the affiliates' book interest expense) and then subtracting the tax benefit of the losses attributable to the affiliates' use of the parent's capital. 38 The City of Charlottesville challenges the Commission's conclusion that ratepayers receive the tax benefit of this capital distribution plan. Petitioner alleges that the rate base of each affiliate is calculated using the parent's capital costs. Accordingly, with an increased rate base, there is an increase in income which must be recouped from ratepayers, which diminishes the prior adjustment to taxable income. Under this analysis, the tax benefit is passed-through to ratepayers in the tax cost component of the affiliates' rates but is concurrently recouped by the Company through higher affiliate rates premised on a rate base reflecting the parent's higher cost of capital. 39 An evaluation of Petitioner's claim requires an examination of the interaction between the tax calculation and other portions of the ratemaking formula not briefed to the Court. The record before the Court is incomplete on the relationship between the tax costs and capital costs included in the rate base. On remand, the Commission should consider whether the capital distribution tax benefits are in fact passed-through to ratepayers or whether the pass-through is vitiated by rates premised on a rate base which is inflated by the parent's cost of capital.