Opinion ID: 2217179
Heading Depth: 1
Heading Rank: 3

Heading: determination of afudc

Text: The last rate base issue we deal with is the disposition of such AFUDC as company did capitalize and include in their computations of rate base. As previously noted, capitalization in this instance means to determine a rate representing the estimated cost of capital calculated from the weighted costs of the various capital components, i. e., common equity, stocks, bonds, etc., which rate is then multiplied by the investment in construction work, thus arriving at the AFUDC to be capitalized. The PUC staff and cities both disagreed with company's calculation. The disagreement came as to the treatment of income tax deductions for construction-related interest expense. One of two alternative methods is used in the industry: normalized treatment or flow-through treatment. The selection of method dictates how the income tax deduction is handled. Under the normalized treatment the cost-of-debt component in the AFUDC rate is calculated net-of-tax deduction for interest. This is a lower rate which in effect passes the benefit of the tax deduction to ratepayers over the life of the newly constructed property. The alternative, flow-through treatment, uses the interest deduction in calculating the income tax expense included in the cost of services thereby reducing that component, leaving AFUDC to be calculated on a gross basis. The benefit from the interest deduction is flowed through to current ratepayers and is not available for deferral for the benefit of future ratepayers. The method selected by the PUC was normalized treatment. Cities disputed the validity of company's computation of net-of-tax rate as arbitrary and argued that the rate used was a gross rate. Staff urged that a net-of-tax rate results in a disservice to the ratepayers and recalculated the AFUDC rate at a gross rate calling for a flow-through treatment. The PUC decided to reject company's computation as not a net-of-tax rate and then also rejected the recommendation of its own staff and adopted cities' view. In its findings of fact the PUC stated that company had not proven its AFUDC computation was net-of-tax and went on apparently to treat it as a gross rate. However, no findings of fact or conclusions of law were made to that end. This dispute was again a battle of the experts. In fact, what should have been a routine accounting exercise of determining the various costs of capital invested turned into a donnybrook with company saying `tis and cities saying  'taint. Staff apparently took off in a third direction, suggesting that gross base should be used, but nevertheless asserting that company's proposed rate was not net-of-tax. Each side can point to inconsistencies in the expert testimony of the other. The rehearing decision fails to shed any light on the problem. The PUC merely adopted cities' argument. It is not for this court to weigh the evidence. We must rely on the PUC's expertise. We cannot say that on this issue they were arbitrary or capricious; nor do we agree with company's contention that contradictions in the record render the evidence unsubstantial. This is true only where there is clear evidence on the other side. Universal Camera Corp. v. Labor Bd., 340 U.S. 474, 71 S.Ct. 456, 95 L.Ed. 456 (1951). In this case evidence on both sides was contradictory. We hold, therefore, that there appears to be substantial evidence on the whole record to support the PUC's decision.