Opinion ID: 2363714
Heading Depth: 3
Heading Rank: 3

Heading: Federal Income Tax Expense

Text: The final expense item challenged by the company raises a question not previously before the commission in the context of a New England tariff filing. The company contends that the commission acted arbitrarily when it adopted an adjustment designed to reflect supposed tax savings related to the company's participation in a consolidated federal income tax return filed by the American Telephone and Telegraph Company (AT&T). The company has, for the past several years, joined the many other Bell System operating companies that, along with Western Electric, participate in AT&T's consolidated return. Certain tax advantages flow to AT&T as a result of that consolidated return, the most obvious being that the tax liability of the system as a whole is less than what it would be if the affiliated companies each filed a separate return. This situation exists in large part because AT&T itself issues a significant portion of the debt capital raised to finance system operations, with the result that the accompanying interest expense deductions are available to AT&T in the computation of its tax liability. There seems to be no dispute that, because of the system's internal accounting practices, AT&T itself retains the tax benefits resulting from the interest expense and does not utilize the savings so as to credit its operating companies, such as New England, directly. See also Mountain States Telephone & Telegraph Co. v. Public Utilities Commission, Colo., 576 P.2d 544, 550 (1978); Chesapeake & Potomac Telephone Co. v. Public Service Commission, 230 Md. 395, 411-12, 187 A.2d 475, 484 (1963). The company's position is essentially that the commission must for ratemaking purposes proceed as if there were no overall tax savings whatsoever; it argues that to use as a cost of service anything but what the company would pay in taxes if it filed a separate return is no less than to claim as a tax deduction the interest expense of another corporation. Hartikka, on the other hand, argued that, absent an adjustment to reflect an operating company's proportionate share of the total savings and thereby to lower that company's stated tax liability, the Bell System as a whole would earn revenues including provisions for federal income taxes greater than the taxes actually payable   . See also FPC v. United Gas Pipe Line Co., 386 U.S. 237, 244, 87 S.Ct. 1003, 1007, 18 L.Ed.2d 18, 24 (1967). The commission agreed with Hartikka's assessment of the problem and accepted as the solution a tax adjustment recommended by an accounting committee of the National Association of Railroad and Utility Commissioners (NARUC). Hartikka explained that the NARUC adjustment, which takes into consideration the fact that the company is not wholly owned by AT&T, allocates total system debt among the operating companies in proportion to their relative average capital obligations associated with AT&T ownership. The difference between the allocated debt and the debt of each company constitutes the AT&T debt allocated to that company, which in turn determines the amount of interest expense allocated. Using this formula, Hartikka concluded that the company's share of the AT&T tax savings applicable to its intrastate operations totalled $139,332 for 1975 and $238,073 for 1976, or $196,931 for the test year. The effect of the decreased tax liability recognized by the commission was to increase the company's pro forma intrastate earnings by $144,000. We have stated in the past that, when reviewing a decision of the commission, our concern is not with the method used to attain a particular result but with the fairness and reasonableness of the end result itself. Narragansett Electric Co. v. Harsch, 117 R.I. 395, 418, 368 A.2d 1194, 1208 (1977), citing FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287-88, 88 L.Ed. 333, 344-45 (1944). In this case we find nothing to indicate that the commission's action was unjustified. Indeed, keeping in mind that the determination of what is fair and reasonable requires a balancing of investor and consumer interests, FPC v. Hope Natural Gas Co., 320 U.S. at 603, 64 S.Ct. at 288, 88 L.Ed. at 345, we agree with one commentator's statement that in general [i]t seems difficult to resist the    argument that a Bell subsidiary's ratepayers should not be called upon to meet tax outlays greater than the subsidiary's allocated proportion of the system's tax liability   . 1 Priest, Principles of Public Utility Regulation 58 (1969). The commission utilized the NARUC tax adjustment in order to ensure that recovery not be allowed for an overall tax expense never in fact incurred. Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 396, 322 A.2d 17, 23 (1974), citing FPC v. United Gas Pipe Line Co., 386 U.S. 237, 244, 87 S.Ct. 1003, 1007, 18 L.Ed.2d 18, 24 (1967). Contrary both to the suggestion of the company and to the view of the minority of jurisdictions to consider this problem, e. g., Re Diamond State Telephone Co., 1 Storey 532-33, 51 Del. 525, 532-33, 149 A.2d 324, 328-29 (1959); General Telephone Co. v. Public Utilities Commission, 174 Ohio St. 575, 577-80, 191 N.E.2d 341, 343-44 (1963), we do not feel that adoption of the NARUC formula either improperly ignores the separate corporate identities of New England and AT&T or in any impermissible way invades the conceded prerogatives of New England's management to achieve what it considers its maximum prudent debt ratio. Indeed, if there has been any limited disregard of separate corporate identities, it is unquestionably because AT&T and New England themselves have chosen to disregard their separateness for income tax purposes. The NARUC adjustment recognizes only that it is the commission's responsibility to determine the company's allowable tax expense and that its duty cannot be discharged properly if the commission is bound by figures that would appear on a separate return that the company in fact did not file. See Chesapeake & Potomac Telephone Co. v. Public Service Commission, 230 Md. 395, 413, 187 A.2d 475, 485 (1963); United Inter-Mountain Telephone Co. v. Public Service Commission, Tenn., 555 S.W.2d 389, 393 (1977). We hold that the commission did not abuse its discretion by disallowing a claimed federal income tax expense that was greater than the company's proportionate share of the consolidated tax liability.