Opinion ID: 2082946
Heading Depth: 1
Heading Rank: 2

Heading: Reduction of Depreciation Expense

Text: Citizens argues, as grounds for cross-relief, that the Commission also erred in reducing the amount of its tax depreciation expense for the 1983 test year. Citizens makes two distinct arguments in support of this view. Citizens believes that the decision is an unwarranted departure from the Commission's established practice of permitting public utilities to retain tax benefits derived from contract plant and from other assets that are not included in rate base. Citizens also argues that the Commission's decision conflicts with certain Federal tax guidelines on depreciation benefits. Citizens asks that this part of the order be reversed outright or, in the alternative, that the cause be remanded so that the Commission may reconsider the issue. The Commission explained in its order that it did not believe that ratepayers should pay in their rates a Federal income tax expense, computed for ratemaking purposes, that was greater than the amount of Federal income taxes actually attributable to Citizens' operations. Accordingly, the Commission reduced the company's tax depreciation expense by $403,432, the amount of the tax benefits the company otherwise would have enjoyed for the 1983 test year. In support of that reasoning the Commission cites Monarch Gas Co. v. Illinois Commerce Comm'n (1977), 51 Ill. App.3d 892. In that case the appellate court upheld a Commission decision denying any income tax expense for ratemaking purposes to a public utility that did not pay Federal income taxes because it was organized as a subchapter S corporation under the Internal Revenue Code. Relying on Federal Power Comm'n v. United Gas Pipe Line Co. (1967), 386 U.S. 237, 18 L.Ed.2d 18, 89 S.Ct. 1003, and City of Alton v. Commerce Comm'n (1960), 19 Ill.2d 76, the appellate court in Monarch Gas concluded that the tax provisions producing the economic benefit to the utility did not also determine the ratemaking treatment of the benefit. We agree that in this case the Commission was within its statutory authority in denying Citizens an expense for ratemaking purposes that it did not actually incur. Citizens contends, however, that the Commission's decision requiring the company to pass on to ratepayers the tax benefits derived from contract plant, an asset not included in the company's rate base, is inconsistent with the Commission's long-standing practice of permitting public utilities to retain for their own use tax benefits resulting from assets that are not included in rate base. In support of this argument Citizens asserts that the Commission has applied that same treatment to a category known as plant financed by customer advances, which, like contract plant, is not included in a public utility's rate base. The Commission unfortunately has failed to respond to Citizens' contention in this regard. Therefore, we are denied an explanation by the Commission why its treatment of tax benefits resulting from contract plant should now differ from its treatment of tax benefits resulting from other assets that are not included in rate base. But Citizens has not suggested any reason that would forbid the Commission to treat tax benefits associated with contract plant differently from tax benefits associated with advanced plant. Therefore, we do not agree with Citizens that the Commission could not adopt a different view regarding the tax benefits resulting from contract plant. Citizens also argues that the decision reducing the income tax expense for the 1983 test year may cause the company problems under certain normalization requirements of the Federal income tax laws. According to Citizens, the Internal Revenue Code requires it to use the same depreciation method in computing, for ratemaking purposes, both its depreciation expense and its income tax expense. This insures that the tax benefits resulting from the company's use of accelerated depreciation for tax purposes do not flow through to the ratepayers by way of a reduction in the company's rates. If flow-through occurs, the company may lose the right to claim, for income tax purposes, accelerated depreciation on its property. Thus, Citizens contends that the Commission's denial of the tax benefits for test year 1983 may jeopardize the company's right to claim accelerated depreciation deductions for Federal income tax purposes. Moreover, the company asserts that the Commission has a policy of acting in conformity with normalization requirements established by the Internal Revenue Service. The result in this case, the company fears, may be the loss of the very tax benefit the Commission is ordering the company to pass on to its ratepayers. We agree with the Commission that the company's normalization argument has been waived. The argument should have been presented to the Commission in the first instance, and Citizens' failure to include the issue in its application for rehearing with the Commission precludes the company from raising it now, on judicial review. (Ill. Rev. Stat. 1983, ch. 111 2/3, par. 71; see Independent Voters of Illinois v. Illinois Commerce Comm'n (1987), 117 Ill.2d 90, 100-01.) The basis for the Commission's decision with respect to the denial of tax benefits for the 1983 test year was clear. As we indicated earlier, in determining that Citizens had not waived consideration of its retroactive-ratemaking argument, the Commission's order was primarily a justification for its treatment of the 1983 test year benefits. The Commission believed that the ratepayers should not have to bear a tax expense greater than the amount actually attributable to the company's operations. Thus, the basis for the Commission's decision on this point was apparent, and if Citizens believed that the Commission's decision was inconsistent with certain Federal income tax requirements, Citizens should have voiced that concern to the Commission. Instead, Citizens failed to include this issue in its application for rehearing filed with the Commission. Moreover, we do not agree with Citizens that the normalization argument did not become available until after the Commission rendered its decision in this case. Citizens correctly observes that the private letter ruling it now cites in support of its argument was not issued by the Internal Revenue Service until July 29, 1986, after the case had left the Commission's control. But the private letter ruling, which was issued to a different taxpayer, and which has no precedential effect, was an interpretation of existing tax provisions and regulations, and Citizens makes no claim that the provisions and regulations were not in existence at the time the instant controversy arose. For the reasons stated, the judgment of the appellate court is affirmed. Judgment affirmed. JUSTICE STAMOS took no part in the consideration or decision of this case.