Opinion ID: 1918402
Heading Depth: 1
Heading Rank: 4

Heading: Accumulated Deferred Income Taxes

Text: As its fourth assignment of error, the Company claims that the Commission wrongfully excluded from the Company's revenue requirement $10.184 million of accumulated deferred income taxes associated with net operating losses and alternative minimum tax carryforwards. Typically, a utility collects revenues sufficient to pay all of its income taxes as a normal expense in the utility's revenue requirement. For tax purposes, but not for ratemaking purposes, the Internal Revenue Code permits the utility to accelerate and deduct depreciation on a new asset and thereby delay payment of part of the taxes until later years. For example, a new facility with a life span of twenty years, for tax purposes, may be depreciated over five years. Thus, the utility may retain as an expense substantial taxes that it will not pay in a given year by being allowed to deduct accelerated depreciation on the new asset. The resultant tax savings do not flow through to ratepayers, but rather are available for the utility to invest. [12] See generally Charles F. Phillips, Jr., The Regulation of Public Utilities Theory and Practice 283-87 (3d ed.1993). This benefit is recorded on the utility's books as a deferred tax credit and deducted from the utility's rate base because the utility is not entitled to a return on this cost-free capital. Thus, while a new facility increases rate base by the amount invested, accelerated tax depreciation reduces rate base by the amount of cost-free capital resulting from accelerated tax deductions. If, however, the utility's accelerated tax deductions exceed its revenues, thereby creating a net operating loss (NOL), then the utility will not receive the benefit of the accelerated tax deductions to their full extent. The part of the deductions which exceed the utility's revenues will go unused. Essentially, NOLs represent tax deductions that did not in the given year produce cost-free capital. Nonetheless, NOLs may be recorded on the utility's books as deferred tax debits, and carried forward to future years when they can produce cost-free capital for the utility. Thus, NOLs are added to the rate base because they represent an asset, a future benefit. [13] The benefit will be realized in the form of reduced tax liability when the NOL carryforward is used to offset future taxable income on a subsequent tax return. Over the years, the Company has carried forward substantial NOLs resulting from accelerated tax deductions. Specifically, the River Bend Phase-in Plan and plant additions during the period from 1986 to the time of this rate case all contributed to NOLs. In the instant rate order, the Commission allocated all of the NOLs to the deregulated portion of River Bend. [14] Thus, under the Commission's rate order, the NOLs do not increase the Company's rate base. The Company asserts, on the other hand, that the NOLs should be allocated pro rata between the regulated and deregulated portions of River Bend and thus increase the Company's revenue requirement by $7.8 million in this case. Similar to NOLs, the alternative minimum tax (AMT) may also prevent the use of certain tax deductions which may then be carried forward for use in a future tax year. The AMT postpones the full tax benefit of certain types of deductions (including accelerated depreciation) in tax years in which a taxpayer otherwise would pay less than a certain amount of minimum income tax. Like NOLs, deductions not utilized because of the AMT increase rate base because they do not produce cost-free capital and because they are assets, or future benefits for the Company. According to the Company, the crux of the AMT issue is also whether the Commission properly allocated deductions not utilized because of the AMT between the deregulated and regulated portions of River Bend. As the Commission did with respect to NOLs, the Commission attributed all of the AMT carryforwards to the deregulated portion of River Bend. The Company asserts that this allocation method, rather than a pro rata allocation, unfairly reduces its revenue requirement by $2.35 million. In the rate order following the first earnings review, the Commission excluded the AMT and NOL carryforwards from the Company's rate base. The Company appealed parts of the rate order, but did not raise as an assignment of error the Commission's treatment of the NOL and AMT carryforwards. See Gulf States Utils. Co., 676 So.2d 571. Nonetheless, the Company reraised the issue in the second earnings review, this case, by including the NOL and AMT carryforwards in its annual revenue-requirement filing. The Company asserts that the Commission's previous rate order following the first year earnings review does not have the effect of res judicata, and thus the Commission should consider the issue anew. Moreover, the Company asserts that because all of the Company's tax deductions are subtracted from all revenue to calculate the Company's net taxable income or loss, the Commission cannot possibly identify which tax deductions created the NOL and AMT carryforwards. Because the carryforwards cannot be specifically traced to either the deregulated or the regulated portion of River Bend, the Company argues, then a pro rata allocation is appropriate. The Company alternatively argues that even if the Commission properly attributed all of the NOLs to the deregulated portion of River Bend, then it follows that none of the deferred tax debits related to AMT may be attributed to the deregulated portion of River Bend. The Company reasons that if certain tax deductions were not going to produce current tax benefits because the deregulated portion of River Bend produced NOLs, then the AMT could not have deprived the Company of those same tax benefits a second time. The Commission disagrees with the Company's contentions. In its rate order, the Commission stated that [i]t is perfectly possible to ... examine the supporting figures to see which operations [regulated or deregulated] created the general entry, and that Gulf States presented no statute, regulation, or court opinion that would preclude looking at the actual source of the NOL or AMT. L.P.S.C. Order No. U-21485 at 7-8. Additionally, the Commission observed that the Company did not raise the issue on appeal from the rate order following the first earnings review: In Order U-19904-C the Commission determined that the deregulated portion of River Bend has not generated positive taxable income and that the regulated operations have generated sufficient taxable income not only to overcome all tax deductible expenses attributable to the regulated portion of River Bend but also to reduce a portion of the tax losses attributable to the deregulated portion of River Bend. Since it was the losses attributable to the deregulated portion of River Bend that prevented the realization of the asset deferred taxes, the rate payers should not have to pay for the lost benefits. Rate payers especially should not have to pay a return on monies they have already paid the Company in advance for normalized taxes. Id. Although the Company couches the issue as whether NOL and AMT carryforwards were properly excluded from the Company's revenue requirement, we find that the broader issue is whether the Commission acted in an arbitrary or capricious manner in failing to reconsider its position in the first earnings review. See Gulf States Utils. Co., 676 So.2d at 578-79 (holding that the Commission was not arbitrary and capricious in failing to reconsider its position on recognizing the accrual method of accounting for OPEBs because, in part, the utility failed to present new arguments not presented in the previous rate order, which the utility did not appeal). To permit a utility, based upon substantially the same evidence, circumstances and arguments, to relitigate in subsequent base rate proceedings the determinations of previous rate orders until the utility is satisfied with the result would allow the Company to prevail regardless of the merits by merely outlasting the Commission. A review of Order No. U-19904-C, the order following the first earnings review, shows that the Commission extensively considered arguments and testimony substantially similar, if not identical, to those now presented by the Commission Staff and the Company in the instant case. In that previous order, the Commission relied upon the testimony of its consultant, Mr. Kollen, and found that it was possible to determine whether the deregulated or regulated portions caused the NOL and AMT carryforwards even though the Company did not file separate tax returns for each portion, and that, in fact, all of those carryforwards at issue were traceable to the deregulated portion of River Bend. L.P.S.C. Order U-19904-C at 23. The Commission noted that Mr. Kollen's computations demonstrate that the deregulated disallowed portion of River Bend has never generated positive net taxable income. Thus, the net operating losses are only as low as they are because the positive net income of the regulated Gulf States. Id. For the same reasons, the Commission found that AMT carryforwards are solely the result of the disallowed/deregulated River Bend adjustments. Id. at 21. In reaching these conclusions, the Commission rejected the testimony of the Company's expert, Mr. Warren, finding that Mr. Warren's testimony does not undercut Mr. Kollen's findings. Id. at 24. In the instant proceeding, the Commission again considered substantially the same testimony of Messrs. Kollen and Warren as presented in the first earnings review. In both proceedings, the Commission relied upon, and the Company attacked, a chart produced by Mr. Kollen calculating income and loss and tax effects for the deregulated portion of River Bend. The gist of the experts' recommendations and the parties' arguments has not changed in the instant proceeding. [15] Mr. Kollen continues to aver disallowance of the asset deferred taxes for the same reasons given in the earlier proceeding. Dir. Test. Mr. Kollen at 131, L.P.S.C. (12/19/95). Mr. Kollen testified that: The tax NOLs were not created proportionately by the allowed/regulated and disallowed/deregulated portions of River Bend. The remaining tax NOLs were created disproportionately and totally by the disallowed/deregulated portions of River Bend. The fact of the matter is that the disallowed/deregulated portion of River Bend has never generated positive taxable income. Id. In neither proceeding did Mr. Warren dispute the actual computations used by Mr. Kollen. Instead, Mr. Warren testified that, other than reviewing excerpts from GSU tax returns to which I refer, I have not checked or otherwise confirmed the numbers Mr. Kollen used. Cross Exam. Mr. Warren at 936, L.P.S.C. (1/17/96). Not only did the Company fail to adequately refute Mr. Kollen's numbers and calculations in both proceedings, the Company further failed, in both proceedings, to produce any calculations and numbers attempting to justify a pro rata allocation of the NOLs and AMT. The Company, instead, merely theorizes that the carryforwards should be allocated pro rata between the deregulated and regulated asset plans, arguing that causation is indeterminable because the Company does not file a tax return with respect to a single asset or group of assets owned by the Company. However, we know of no such authority precluding such a causation analysis, and the Company cites no authority other than the testimony of its own expert, whose view was confuted by Mr. Kollen's computations. Additionally, even the Company's expert testified that no Internal Revenue Service rules or regulations preclude such a causation analysis for ratemaking purposes. Cross Exam. Mr. Warren at 944, L.P.S.C. (1/17/96). The Company further failed to adequately support its alternative argument that, even if the Commission properly attributed the NOLs to the deregulated portion of River Bend, then none of the AMT carryforwards may be attributed to the deregulated portion of River Bend. Mr. Kollen testified that the Company's conclusions are erroneous. The proper test, according to Mr. Kollen, is whether the Company, in the absence of the disallowed/deregulated asset situation, would have an AltMin deferred tax asset in the test year based upon the cumulative payments of the AltMin tax in the test year and prior years. According to Mr. Kollen, it is clear that the disallowed/deregulated asset mathematically would generate the AltMin tax. The Company's expert, on the other hand, provided no calculations to support his attack on Mr. Kollen's calculations and conclusion. In brief and in oral argument, the Company's counsel noted the daunting complexity of this issue. We find that the Company has failed to present adequate evidence in the record to warrant this Court's overturning the Commission's order on this very complex area of tax/regulatory law. The Commission is an expert within its own specialized field, Dixie Elec. Membership Corp., 441 So.2d at 1210, and courts should be reluctant to substitute their views for those of the expert body charged with the legislative function of ratemaking, Gulf States Utils. Co., 676 So.2d 571. Mr. Kollen affirmatively reurges his findings from the first earnings review that the NOL and AMT carryforwards can be ascribed to the deregulated asset plan, and these carryforwards should not be included in rate base. Based on the record, which contains insufficient support for the Company's pro rata allocation and which has essentially been reviewed twice by the Commission, we find that the Commission did not act arbitrarily or capriciously by not reconsidering its previous ruling to exclude from rate base the NOL and AMT carryforwards discussed hereinabove based upon its determination that the carryforwards were caused by the deregulated portion of River Bend.