Opinion ID: 2303572
Heading Depth: 1
Heading Rank: 5

Heading: Federal Income Tax Allowances

Text: The Council complains that the Commission accepted without comment or discussion Narragansett's calculations as to its actual federal tax liability. It asserts that in at least two areas, one dealing with interest expense, and the other concerning taxes due municipalities, the Commission erred and that these errors resulted in a $680,000 overstatement of the utility's tax liability. As we noted earlier, the Commission allocated as part of Narragansett's cost of service a sum for federal income taxes. The Council objects to the amount of this sum which is attributable to interest expense because of what it describes as an improper allocation of interest expense between plant in service and construction work in progress. The amount of interest deduction in dispute is $280,000. The disputed municipal taxes were in the amount of $400,000. We shall dispose of the municipal taxes by pointing out that at the hearing before the Commission the $400,000 adjustment was removed as an item of the cost of service and therefore was not included in Narragansett's calculations. Therefore, the issue is not viable. It is a rudimentary principle that the only taxes allowed as operating expenses are those that the utility is required to pay and actually pays. F.P.C. v. United States Gas Pipe Line Co., 386 U.S. 237, 87 S.Ct. 1003, 18 L.Ed.2d 18 (1967). The difference among the experts as to the inclusion of the $280,000 comes because Narragansett's expert applied a weighted cost rate of debt capital to the total rate base. The effect of this approach was to exclude from its computation the interest on the utility's short-term obligations which were issued to finance the construction work then in progress. Narragansett's rationale for this exclusion was its long-standing position that short-term debt is not a part of its permanent capital structure. Some substantiation for that position can be found. See, 1 Priest, ch. 5, supra. On the other hand, the Council's witness in his calculation considers all interest expenses as eligible deductions from taxable income. Since the utility is allowed to capitalize allowances for funds earmarked for construction and thereby be allowed a depreciation factor on its federal income tax returns, this area should be a two-way street. The rate payer should also receive the benefit of lower charges by the utility's inclusion of the short-term interest expense. Just as the United States Gas Pipe Line Co. rule requires the inclusion of the taxes actually paid as operating expenses, so, too, should the interest paid on the short-term obligations be included within that category. We see no reasonable basis for the Commission's exclusion of the $280,000. We shall now consider the contentions espoused by Narragansett.