Opinion ID: 2454404
Heading Depth: 2
Heading Rank: 2

Heading: Disallowed Expenses

Text: The PUC and GTE argue that the PUC was not required to include the income tax deductions actually taken by GTE for expenses disallowed by section 41(c)(3) when determining GTE's federal income tax liability. We agree. First, the PUC has neither the power nor the discretion to consider expenses disallowed under section 41(c)(3) for ratemaking purposes. Although the legislature granted the PUC broad powers and discretion in regulating public utilities including the ratemaking process, the legislature specifically limited the PUC's powers and discretion concerning disallowed expenses. Section 41(c)(3) states that the PUC shall not consider for ratemaking purposes the following expenses ... which include lobbying expenses and any expenditure found by the regulatory authority to be unreasonable, unnecessary, or not in the public interest.... The language of section 41(c)(3) is clear and unequivocal. Second, the actual taxes incurred language of Public Util. Comm'n v. Houston Lighting & Power Co . cannot be applied literally when determining the income tax liability in a ratemaking case. For example, a literal application of the actual taxes incurred language would require that expenses incurred in providing interstate and unregulated services be included in the determination of income tax liability. In addition, as discussed above, tax expenses will always be a hypothetical amount because the components which produce the calculation of income tax have been adjusted from the test year amounts. Third, Public Util. Comm'n v. Houston Lighting & Power Co . considered only the costs related to a nuclear power project which costs were found to be imprudent. No disallowed operating expenses were addressed and no indication was given that this court considered whether the general statements concerning the actual taxes incurred would under all circumstances require the PUC to include all expenses when determining the income tax liability in a ratemaking case. In fact, Public Util. Comm'n v. Houston Lighting & Power Co . did not address or even consider the current version of section 41(c)(3) [16] or statutorily disallowed expenses. Consequently, we conclude that the PUC was not required to include the income tax deductions actually taken by GTE for expenses disallowed by section 41(c)(3) when determining GTE's federal income tax liability. To the extent that they conflict with this opinion, we disapprove Southern Union Gas v. Railroad Comm'n of Texas, 701 S.W.2d 277 (Tex.App.Austin 1985, writ ref'd n.r.e.) and City of Somerville v. Public Util. Comm'n, 865 S.W.2d 557 (Tex.App. Austin 1993, no writ).