Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 7

Heading: treatment of the tax benefit resulting from wgl's filing of a consolidated tax return

Text: WGL and its subsidiaries take advantage of an Internal Revenue Code provision that permits affiliated companies to file a consolidated income tax return. I.R.C. § 1501. By so doing, losses sustained by unprofitable affiliates can be used to offset the taxable income of the profitable companies during a given year. The net result is that the group incurs a lower tax liability for the year than it would have if each affiliate had filed an individual tax return. For the test year, WGL filed a consolidated return with three of its subsidiaries, none of which is directly regulated by the Commission. One of these companies is the Crab Run Gas Company (Crab Run), a gas exploration and production subsidiary, which is wholly owned by WGL. Crab Run is a recent addition to WGL's corporate family, and, like most gas exploration outfits, it has operated at a net loss during the first few years of its existence. In an earlier proceeding, the Commission decreed that the costs of keeping Crab Run afloat should be borne entirely by WGL's stockholders; thus, for ratemaking purposes the Company's investment in Crab Run was not to be reflected in WGL's rate base, nor were subsequent operating losses incurred by Crab Run to be included in WGL's cost of service. See Formal Case No. 610, Order No. 5685, Jan. 23, 1975, at 15. This would be fair to WGL's stockholders, the Commission said, because if Crab Run eventually were successful, its profits from the sale of gas would inure to the direct benefit of the parent company's stockholders, rather than its ratepayers. Id. By including the operating losses of Crab Run in its consolidated tax return, WGL's District of Columbia operations realized a test-year income tax savings of $96,000 (compared with the amount of tax the Company would have paid had it filed an individual return). Order 6060, at 5. The Commission stated, The new rates do include a component [$3.9 million] for Federal Income Taxes. This is the factual basis needed for implementing our approval of the principle that ratepayers should share in consolidated tax savings. Id. The Commission determined that the shareholders and ratepayers of WGL should share equally in this consolidated tax savings; accordingly, the Company's cost of service was reduced by one-half of the tax savings, or $48,000. WGL contends that because the stockholders have been required to bear all of the risk associated with Crab Run's operations, it was arbitrary and unreasonable for the Commission to allow the ratepayers to share in the consolidated tax savings. Not only was this unfair, WGL argues, but it also was contrary to the Commission's promise in Order No. 5685, supra, to assign all future profits from Crab Run to the benefit of the investors. Initially, we note that there is a difference between profits from the sale of Crab Run gas (as discussed by the Commission in Order No. 5685), and profits realized from tax savings generated by consolidating Crab Run's and WGL's tax returns. Therefore, WGL's allegation that the Commission has purloined the benefits that it promised to the stockholders in Order No. 5685 is not wholly valid. Moreover, the Supreme Court has explicitly sanctioned the ratemaking principle at issue here. In Federal Power Commission v. United Gas Pipe Line Co., 386 U.S. 237, 87 S.Ct. 1003, 18 L.Ed.2d 18 (1967), the Court held that it was neither unreasonable nor unlawful for the FPC to reduce a utility's revenue requirements by the full amount of a consolidated tax savings. [61] In United, as here, it was fairly clear that the ratepayers receiving the consolidated tax benefits had not funded the nonjurisdictional affiliate whose losses had made the savings possible. Nevertheless, the Court found that it was reasonable for the FPC to adjust the regulated utility's cost of service to reflect that company's pro rata share of taxes actually paid, rather than allow the company's shareholders to receive a permanent windfall tax savings based on a hypothetical tax expense. See id. 386 U.S. at 243-45, 87 S.Ct. at 1007-08. Accord, e.g., Florida Gas Transmission Co. v. Federal Power Commission, 391 F.2d 114 (5th Cir. 1968); Mechanic Falls Water Co. v. Public Utilities Commission, 381 A.2d 1080, 1091-95 (Me.1977); Michaelson v. New England Telephone and Telegraph Co., 404 A.2d 799, 809-10 (R.I.1979); In re The Chesapeake and Potomac Telephone Co., 4 P.U.R.4th 1, 36-39 (D.C.P.S.C.1974). [62] The Commission acted within the scope of its authority and in accordance with accepted principles of utility ratemaking in allocating to the ratepayers a portion of the tax savings realized by the Company from the filing of consolidated tax returns. We affirm the Commission's ruling on this issue.