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

Heading: The Unamortized Investment Tax Credit

Text: As the result of federal legislation granting a so-called investment credit, the federal income taxes for which Narragansett became actually liable were reduced on and after January 1, 1962 by a sum equal to three per cent of the amount it invested in certain newly acquired depreciable equipment that formed part of its plant. Revenue Act of 1962, 26 U.S.C. § 38, 76 Stat. 962. Narragansett took advantage of this congressional action and has recorded the tax credit in a separate account which it has amortized over the depreciable life of the property to which the credit applies. At the time of the hearing, the test-year balance in this account totaled $747,000. In computing its cost of services, Narragansett included an assessment for federal income tax expense that exceeded $3,500,000. Narragansett's computations did not include any reduction for $747,000. The Commission approved Narragansett's income tax calculations. The Council argues here, as it did before the Commission, that the tax credit should be treated as a flow through item and thereby reduce its tax expense by the $747,000. Narragansett contends that the Commission's normalization treatment of the credit was warranted. Flow through and normalization are part of the ratefixer's everyday jargon. Under normalization the utility used the allowable liberalized depreciation to its advantage by taking the difference between taxes actually paid and the higher taxes reflected for ratemaking purposes as a cost of service and setting up the difference in its records as a deferred tax account. This account is then used as a source to supply a specific amount of depreciation over a specified period of time. It is obvious that the establishment of such an account obligates the utility to acquire funds to maintain that account. A principal source of these funds is the rates charged the consumer. However, when the flow-through technique is employed, the full benefit of the tax credit is immediately bestowed upon the customer. Farris & Sampson, Public Utilities  Regulation, Management & Ownership, 113-14 (1973). In embracing the normalization approach, the Commission referred to findings it had made in an earlier proceeding entitled In Re: Tariff Filing Made by the New England Telephone & Telegraph Company on April 16, 1971, Docket No. 1092 (1973), where in pertinent part it ruled: We are convinced that the method we have used which results in a sharing of the benefits of the Investment Tax Credit by giving the consumer the benefit of the annual amortization and the Company the benefit of the use of the funds derived from the credit is a fair and reasonable approach to the treatment of this item. The Commission also made reference to the intent of Congress in enacting a 1964 amendment [1] to the 1962 Revenue Act. By this amendment, federal regulatory bodies were prohibited from deducting the unamortized revenue from a utility's rate base. The prohibition, however, did not specifically bar deduction by a state regulatory body. See, City of Pittsburgh v. Pennsylvania Public Utility Comm'n, 208 Pa. Super. 260, 222 A.2d 395 (1966). The Commission further noted that similar tax credits, such as the Job Development Credit, i.e., the Work Incentive Program, 26 U.S.C. § 46, as amended by Pub. L. No. 92-178, § 107(a)(1), 85 Stat. 507 (1971), are available to a public utility only if the federal or state regulatory body does not reduce the rate base by the amount of unamortized tax credit. The Commission appears to have been striving for consistency in the treatment of the rate base for the purposes of both federal and state computations. With the tax investment credit being included in the rate base on the state level, the rate base figure will be one and the same for both federal and state purposes. [2] In rejecting the approach advocated by the Council, the Commission has put a public utility operating in Rhode Island in conformity with those operating under federal regulations and at the same time permits the Rhode Island utility to take advantage of other available tax credits. The Commission balanced the obvious benefit to the consumer by a one-shot advantage of decreasing the rate base by some $747,000 for one year, against giving the consumer a long-term benefit that will extend over a number of years while at the same time giving the utility the use of the unamortized funds which will hopefully be used to generate further income and thereby reduce the cost of service. Flow through increases the revenue only for the test period but creates a revenue gap for the years that follow. It is a short-range approach to the problem, while the long-term normalization affords greater hope for stabilization of rates in the future. We acknowledge that in January 1963, the Commission's predecessor had specifically directed Narragansett to reduce its rate base by the entire amount of its then unamortized tax credit. We need only say that today's administrators are not bound by any prior administrative orders as to what shall be included in the rate base. See, Narragansett Electric Co. v. Kennelly, 88 R.I. 56, 143 A.2d 709 (1958). The treatment to be given a tax credit is a matter within the discretion of the Commission. New England Tel. & Tel. Co. v. Department of Public Utilities, Mass., 275 N.E.2d 493 (1971). However, we see nothing in this record that indicates that the Commission's sanction of the utility's treatment of its tax credit was arbitrary or unreasonable.