Opinion ID: 1961637
Heading Depth: 1
Heading Rank: 6

Heading: expense adjustments and disallowances

Text: Proper ratemaking for NET requires separating property attributable to intrastate service from that attributable to interstate service to insure that NET's Maine test-year income-and-expense statement reflects only the cost of intrastate service and that NET is compensated for the expenses of such service. The recovery of interstate service costs is regulated by the Federal Communications Commission (FCC). NET complains that the Commission improperly allocated to the interstate jurisdiction certain costs that have been traditionally allocated to the intrastate jurisdiction. The allocations complained of, which involve foreign exchange (FX) service minutes of use and certain administrative adjustments, resulted in a downward adjustment of $1,301,400 in NET's expenses account and a concomitant downward adjustment of $842,000 in the Maine rate base. 1. Foreign Exchange (FX) Minutes of Use. FX service allows a customer located in city A to obtain local-business-line service in distant city B by paying a set monthly charge for a dedicated private line. The FX customer can then place calls to and receive calls from the city B exchange without incurring any toll charges. Whenever the FX service involves exchanges in different states, regulatory jurisdiction is divided between the FCC and the interested state commissions. In the present case, NET assigned the costs associated with interstate FX lines wholly to the interstate jurisdiction but assigned the costs associated with FX minutes of use [21] even in interstate FX serviceentirely to the intrastate jurisdiction. Believing the latter allocation by NET to be improper, the Commission staff argued that correct assignment of the costs associated with interstate FX minutes of use would place those costs within the interstate jurisdiction. The Commission agreed with the staff and accepted the calculations of staff witness Allen Buckalew, reducing NET's expenses and rate base for calculating Maine rates. NET contends that the Commission's allocation of interstate FX minutes of use to interstate jurisdiction was error, arguing that the federal government has preempted the field of federal-state separation of telephone plant used for both interstate and intrastate services so that the Commission is without authority to regulate in this area. Alternatively, NET contends that the Commission's refusal to allocate FX usage to the intrastate jurisdiction creates a hiatus between the federal and Maine jurisdictions: since the FCC allocates all FX minutes of use to the intrastate jurisdiction, some portion of plant and expenses would not be included in either jurisdiction under the Maine Commission's ruling. By creating that hiatus, NET argues that the Commission acted unreasonably, arbitrarily, and in disregard of the goal of uniformity in the separations field. We do not decide whether Congress by statute or the FCC by regulation has preempted the field of federal-state separation of joint telephone plant, for we hold that it was unreasonable for the Commission, in this case, to allocate costs associated with interstate FX minutes of use to the interstate jurisdiction contrary to the present practice of the FCC. We reach that conclusion after careful examination of the federal statutory scheme and the interrelationship between federal and state regulation of telephone plant used jointly for both interstate and intrastate communications. The provisions of the Communications Act of 1934, which define the FCC's authority with respect to the communications industry, apply to all interstate and foreign communication by wire or radio. 47 U.S.C. § 152(a) (1976). [22] In general, jurisdiction over intrastate communication service by wire or radio remains in the states. 47 U.S.C. §§ 152(b) & 221(b) (1976 & Supp. 1980). [23] Under the Act, the FCC is empowered to classify the property of carriers engaged in wire telephone communication and to determine what property of said carrier shall be considered as used in interstate or foreign telephone toll service. 47 U.S.C. § 221(c) (1976). [24] This classification is to be made only after a hearing and upon notice to the carrier and the regulatory commission of any state where the carrier's property is located. Id. Separation of telephone plant used in common for both interstate and intrastate services is thus an integral part of FCC ratemaking and control over interstate communications. Similarly, 35 M.R.S.A. § 51 (1978) imposes on the Commission the duty and responsibility of setting just and reasonable rates for utility service rendered within the State of Maine. In so doing, the Commission must fix a reasonable value upon all the utility's property used or required to be used in its service to the public within the State. 35 M.R.S.A. § 52 (1978). Because NET is engaged in furnishing both interstate and intrastate communication service, the Commission must separate, for valuation purposes, property used in connection with furnishing intrastate service from that used in connection with furnishing interstate service. Failure by the Commission to make properly such jurisdictional separations may constitute reversible error. See City of Calais v. Calais Water & Power Co., 157 Me. 467, 174 A.2d 36 (1961); New England Tel. & Tel. Co. v. Public Util. Comm'n, 148 Me. 374, 94 A.2d 801 (1953). As the state and federal statutory schemes reveal, both the FCC and the Commission must engage in making jurisdictional separations for the purpose of ratemaking. If each agency acts wholly independently of the other in the separations process, the result will be conflicting decisions on whether particular property falls within the interstate or intrastate jurisdictional sphere. Accordingly, the FCC, state utility commissions and the affected telephone carriers have endeavored to achieve a uniform method for making jurisdictional separations. The result of their endeavor is the Separations Manual, jointly issued in 1971 by the FCC and the National Association of Regulatory Utility Commissioners (NARUC). The Separations Manual is intended to provide an outline of uniform separations procedures; i.e., procedures for separating telephone property costs, revenues, expenses, taxes and reserves between state and interstate jurisdictions. Separations Manual §§ 11.11 & 11.12. The FCC has incorporated by reference the Separations Manual as Part 67 of its rules and regulations, 47 C.F.R. § 67.1 (1981), and the Maine Commission concedes that it is normally guided by the Separations Manual in its separations determinations. The attainment of uniformity in the area of jurisdictional separations is important. Otherwise a hiatus between jurisdictions will develop, creating a situation where certain costs of plant and expenses associated with that plant will not be included in either jurisdiction, with the possible consequence that a telephone carrier may be deprived of a fair rate of return when interstate and intrastate jurisdictions are both taken into account. In this case, the Commission assigned the costs associated with interstate FX minutes of use to the interstate jurisdiction on the theory that it was applying the actual-use standard enunciated in Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255 (1930). According to that standard, the Commission's prime consideration should be the actual use to which the telephone plant is put. The Commission claims to have relied on that standard, which has been accepted by this Court as a guiding principle in the making of separations determinations. See New England Tel. & Tel. Co. v. Public Util. Comm'n, 148 Me. 374, 389, 94 A.2d 801, 808-09 (1953). It claims also that its allocation of FX minutes of use to the interstate jurisdiction is not in conflict with the Manual. However, the Commission's application of the actual-use standard in this case is more apparent than real and its allocation of the costs in question to the interstate jurisdiction runs counter to FCC practice and the understanding of FCC and NARUC in adopting the procedures set forth in the Manual. The method by which the Commission made its allocation was a method prescribed in the Manual for allocating the costs associated with non-traffic-sensitive (NTS) plant in WATS and MTS services, which are different from FX and CCSA services. [25] In doing so, the Commission took an approach that was not contemplated by the FCC and NARUC when they promulgated the Manual. The current separations procedures in the Manual were developed on the theory that the plant costs associated with FX and CCSA minutes of use would continue to be counted as intrastate rather than interstate. In re Hawaiian Tel. Co., 87 F.C. C.2d 864, 872 (1981). It is true that there is an element of arbitrariness in the FCC treatment of plant costs of interstate FX private-line service, for such costs have both interstate and intrastate components. For precisely the same reason, however, the Commission's treatment of NET in the present case, allocating those costs entirely to the interstate jurisdiction, is also open to criticism for arbitrariness. Although the FCC's treatment does not reflect precisely the actual use to which telephone plant is put when interstate FX service is rendered, it does accommodate an intricate balancing of factors, including certain trade-offs, in the complicated field of telecommunications regulation. [26] Although, as the Commission points out, the FCC is in the process of reviewing the propriety of assigning openend private-line services wholly to the intrastate jurisdiction, it is doing so largely because of complaints that under existing procedures certain allocation factors ( see note 25 supra ) are resulting in excessive allocations to the interstate jurisdiction. In re Amendment of Part 67, 78 F.C.C.2d 837, 840 (1980). [27] See also In re Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, 89 F.C.C.2d 1, 3-4 (1982). In the present case, the Commission's allocation of FX plant costs to the interstate jurisdiction, contrary to the FCC's practice, disregards the balancing arrangements under which the FCC-NARUC plan has been administered. Regardless of whether the Commission is bound by federal action in allocating NET's interstate FX minutes of use, it should defer to the practice currently followed by the FCC in carrying out the understandings embodied in the Separations Manual. Considering the importance of uniformity in the federal and state regulation of telecommunications, the desirability of according comity to FCC practice in this matter, and fairness in the treatment of NET, we believe that the Commission acted unreasonably in allocating the costs in question to the interstate jurisdiction. 2. Administrative Adjustments. Although the Separations Manual specifies which factors are to be used in making separations determinations, it does not describe the precise method of measuring those factors. The mechanics of making such measurements are considered an administrative matter determined by the telephone carriers themselves. In re New England Tel. & Tel. Co., 42 P.U.R.4th 182, 220 (Me.P.U.C.1981). In this case, NET's parent company, AT&T, had presented to NARUC for consideration several administrative adjustments affecting the measurement of separations factors. Those proposed adjustments concerned calendar-day-usage studies, current composite-station ratios (CSR), Ozark-formula SPF calculations, and simplification of land-and-buildings separations. The Bell operating companies, such as NET, delayed implementation of those proposed administrative adjustments, however, pending the approval of several related substantive changes by the Federal-State Communications Joint Board in the Separations Manual. Noting that NET had recently implemented other administrative changes in the separations process, the Commission imputed to NET the revenue impact of the four contemplated but as yet unimplemented administrative adjustments. The Commission agreed with the staff that NET should not be permitted to employ selectively improvements in cost-measurement techniques. On appeal NET claims that no other state commission has ever unilaterally ordered an operating telephone company to make any of the four proposed administrative adjustments. It argues that the proposed administrative adjustment in the interstate-intrastate apportionment of costs for land and buildings requires a change in the Separations Manual and thus cannot be carried out without FCC approval. NET further argues that for the Commission unilaterally to order NET to implement the four proposed adjustments before the Federal-State Communications Joint Board completes its separations study contravenes the important goal of uniformity in the implementation of separations procedures. NET contends that because of the complexity of the separations process any action on these administrative adjustments should be deferred until the Joint Board, which is currently considering the effect of these and other proposed changes, completes its study. See In re Amendment of Part 67, 78 F.C. C.2d 837 (1980); In re Reservation Telephone Cooperative, No. E-81-5 (F.C.C. July 17, 1981). It was unreasonable for the Commission, in this case, to attribute to NET the revenue impact of the four proposed administrative adjustments. The Commission admits that determining which cost-measurement methods to use is primarily an administrative decision for NET to make. The four proposed adjustments have not yet been implemented by NET and are currently the subject of study and debate by NARUC and the Joint Board. In the circumstances, the Commission should not have imputed to NET the revenue impact of the four proposed changes. As we noted in discussing the Commission's allocation of interstate FX minutes of use to the interstate jurisdiction, the Commission should be chary of acting unilaterally in the separations field. Appropriate resolution of the separations problem is a polycentric task involving many interdependent variables. In this field the treatment in isolation of particular types of administrative measurements of costs may be unsound. It is uncertain at present what effect proposed substantive changes in the Separations Manual may have on the administrative adjustments that NET is considering. Recently, for example, the FCC, accepting a recommendation of the Joint Board, ordered an interim SPF (subscriber plant factor) freeze at 1981 levels in order to limit the magnifying effect, in determining interstate allocations, of the SPF formula on interstate subscriber-line usage. [28] In re Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, 89 F.C.C.2d 1, 3 (1982). Also, the FCC has recognized the importance of having the informed, collective, expert opinion of the Joint Board on calendar-day usage, the subject of one of the four adjustments in this case. In re Reservation Telephone Cooperative, supra. It was unreasonable for the Commission to impute to NET the revenue impact of the four inchoate administrative adjustments described above, in view of the fact that they are under study by the Joint Board as part of a systematic reexamination of separations by the FCC and NARUC.
NET challenges the Commission's acceptance of the staff's position that under comprehensive inter-period allocation principles, the taxes paid by NET on amounts credited to a deferred tax reserve should themselves be deferred. The ostensible purpose of this so-called full normalization adjustment is to prevent current ratepayers from being charged for taxes due on additional revenues raised by NET to generate the reserve for deferred taxes. The concept of normalization was described in the 1978 NET Case as follows: Normalization occurs when a utility uses an accelerated depreciation method for income tax purposes, but calculates its tax expense for ratemaking purposes as if it had taken straightline depreciation. Thus, in the early years of an asset's life, the utility collects more from its ratepayers than it actually pays in taxes. This excess amount is then usually credited to a reserve account for deferred taxes. 390 A.2d at 18 n. 4. Under the normalization method of accounting utilized by NET, ratepayers are charged as if NET were taking straightline rather than accelerated depreciation. The revenues that result from this difference constitute taxable income to NET. Current ratepayers are assessed for taxes which are due because of the company's use of accelerated depreciation and yet must pay, as a current expense, the tax due on the revenues raised to generate the reserve for deferred taxes. The Commission's so-called full normalization adjustment seeks to associate the benefits to future ratepayers, resulting from the existence of the deferred-tax reserve, with the costs of accumulating that reserve by requiring that the taxes paid on the amounts credited to deferred taxes themselves be deferred in determining the company's test-year income and expenses. Adopting an adjustment proposed by staff witness John W. Wilson, an economist, the Commission's proposal would charge the income tax expense associated with the accumulation of revenue in the deferred tax reserve as an expense to the future ratepayer who is benefited by the existence of that reserve. [29] This deferred charge has been denominated an allowance for taxes on deferred credits (AFTDC). Use of this formula in the present rate case would result in a revenue reduction of $4,058,000, with an AFTDC of $1,897,000. Because current ratepayers benefit to some degree from the deferred tax reserve's exclusion from rate base, the Commission would also include AFTDC in rate base thereby reimbursing NET for the carrying charges it incurs on that figure. NET claims that the Commission's full normalization adjustment is really not normalization accounting but a partial flow-through of monies in NET's deferred tax reserve to current earnings. [30] As such, NET argues that full normalization does not comply with I.R.C. § 167( l ), and therefore jeopardizes its ability to take accelerated depreciation. The Commission denies that full normalization results in a partial flow-through and doubts that it violates I.R.C. § 167( l ). But because of the possibility that full normalization may run afoul of section 167( l ), the Commission decided not to implement its proposal at this time and will defer action until the next rate hearing. In the interim, however, the Commission advised NET to seek a revenue ruling from the Internal Revenue Service on whether use of full normalization would jeopardize its ability to take accelerated depreciation. Because it has deferred finally ruling on the propriety of implementing its full normalization adjustment until the next NET rate hearing, the Commission argues that the ripeness doctrine should preclude review at this time. The doctrine of ripeness is intended to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties. Abbott Laboratories v. Gardner, 387 U.S. 136, 148-49, 87 S.Ct. 1507, 1515, 18 L.Ed.2d 681 (1967). Whenever ripeness is at issue, the inquiry of the Court should focus on the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration. Id. at 149, 87 S.Ct. at 1515. See also Maine Water Co. v. Public Util. Comm'n, Me., 388 A.2d 493, 498-99 (1978). On whether a particular issue is fit for judicial decision, two cases decided since Abbott Laboratories are instructive. In Maine Water Co. v. Public Util. Comm'n, supra , we declined to review the contention of the water company for lack of ripeness. The Commission had allowed the company all its expenses associated with prosecuting its rate case but announced that expenses associated with superfluous relitigation would not be allowed in the future. On appeal the company contended that such a prospective ruling was erroneous under 35 M.R.S.A. § 303. This Court found the Commission's prospective ruling to be a policy statement of what it intended to do in the future. Because that policy statement was still tentative and under meaningful refinement, did not raise a purely legal issue and imposed no undue hardship on the parties, the Court held that the ruling was not yet ripe for review. Id. at 499. In contrast, in Lewiston, Greene & Monmouth Tel. Co. v. New England Tel. & Tel. Co., Me., 299 A.2d 895 (1973), the Court found that the Commission's order revealed an avowed commitment by the Commission to effectuate its own plan in accordance with controlling principles, formulas and computations meticulously prescribed in the Order. Id. at 908. The Commission had ordered NET to undertake traffic measurements and cost studies and computations for the purpose of developing data for an announced plan of the Commission. Since the order imposed an immediate financial burden on NET and concretely established the rights and obligations of NET, the Court held that the Commission's ruling was ripe for judicial review. As these cases illustrate, an important factor in determining ripeness is whether the particular ruling at issue is a tentative policy statement of future intent or expresses concretely the rights and obligations of the parties. In the present case, the Commission's ruling with respect to full normalization has not yet been ordered into effect. In fact, it may never be implemented if the Internal Revenue Service rules that such normalization accounting will jeopardize NET's ability to take accelerated depreciation. As such, the Commission's ruling is closely analogous to its ruling in Maine Water Co. It is a tentative expression of future intent, not yet concretely affecting NET. It is true that the Commission has expressed its opinion that full normalization accounting will not jeopardize NET's ability to use accelerated depreciation under section 167( l ). But, as the Commission acknowledges, it is not the final arbiter of the propriety of accounting methods under federal tax laws. That the IRS has superior qualifications for deciding on the effect of full normalization under section 167( l ) is beyond question. The Commission acted reasonably in cautiously refusing to implement its full normalization adjustment until NET has had an opportunity to seek an IRS ruling. Under Abbott Laboratories, the extent of hardship on the affected party is a further consideration in deciding whether lack of ripeness should preclude resolution of an issue. NET will not suffer any heavy financial burden as a result of the Commission's refusal to rule on this issue. Nor will our refusal to review the Commission's decision place any undue burden on NET. There is no merit in NET's argument that we should review the Commission's expression of opinion on full normalization at this time so that NET will not be forced to recover, by the normal review process, losses incurred as a result of some hypothetical invalid Commission order. It is a matter of speculation what the future adverse financial consequences, if any, would be to NET if the Commission should later implement its full normalization adjustment and we should thereafter reverse that decision. The only concrete burden NET has been asked to bear at this time is that of seeking a revenue ruling from the IRS. Accordingly, it would be premature now for this Court to render an opinion on the reasonableness of the Commission's expression of opinion. A decision by the IRS may have the effect of settling this issue before the next rate increase is filed by NET. Therefore, because the Commission's decision has not yet been formalized and its effects felt in a concrete way by the challenging part[y], we decline to address NET's contention. [31] Abbott Laboratories, 387 U.S. at 148-49, 87 S.Ct. at 1515.
An important component of NET's operating expenses chargeable to ratepayers is its income tax expense. In calculating taxable income, NET deducts its interest payments from gross income. On the theory of compensating fully for the effect of the parent-subsidiary relationship of AT&T and NET, the Commission adopted an interest-allocation adjustment which it has denoted interest synchronization. To accomplish that adjustment, the Commission calculated the income tax interest deduction corresponding to the amount and cost rate of NET capital structure debt. (See pt. III(A) of this opinion). Next, a portion of AT&T's interest deduction was allocated to NET, since a portion of NET's equity is financed by AT&T debt on which interest is paid. [32] The Commission's application of this adjustment to the present case resulted in an additional $2,091,000 of deductible interest attributable to NET over its claimed $8,537,000 interest expense. As a result, the Commission reduced NET's income tax expense by $1,040,000, thereby reducing the revenue requirement by $2,225,000. NET apparently does not contest the basic theory behind the Commission's interest-synchronization adjustment, a theory this Court recognized and upheld in the 1978 NET Case, 390 A.2d at 30. Instead, NET challenges the Commission's application of the adjustment in two specific respects: first, that the Commission's inclusion in rate base of plant financed through job development investment tax credit (JDITC) when calculating NET's interest deduction for income tax purposes results in overstating that interest expense and thereby renders NET ineligible for the tax credit because of I.R.C. § 46(f); second, that the Commission failed to consider pertinent differences between Maine and federal income tax law in applying interest synchronization to the state income tax. 1. The Commission's Treatment of JDITC. In 1971, Congress enacted provisions for an investment tax credit. [33] I.R.C. §§ 38, 46. One purpose of the credit is to stimulate investment in new plant and equipment by providing as a credit against tax liability a statutory percentage of the investment in qualifying property during the tax year. [34] In determining the allowable deduction for interest expense, the Commission multiplied rate base by the combined weighted costs of debt to NET and AT&T. In effect, by doing so, the Commission treated the tax-credit funds, which were obtained interest-free, as if they had been partially obtained from debt instruments in the same proportion as debt is present in the doubly leveraged capital structure of NET. That is so because of the presence of JDITC-financed plant in NET's rate base. NET asserts that the Commission's methodology results in a violation of I.R.C. § 46(f) that will render NET unable to take the investment tax credit. Since JDITC plant has no associated interest cost, NET claims that the Commission violated I.R.C. § 46(f)(2)(A) & (B), set forth in text below, by failing to recognize that NET's rate base includes interest-free JDITC-financed plant. [35] This failure, NET argues, will cause it to lose its eligibility for JDITC. The Commission contends that inclusion of JDITC-financed plant in rate base is permissible under I.R.C. § 46(f)(2) and that such treatment is consistent with the language and legislative history of section 46 and with the applicable treasury regulations. Accordingly, it argues that NET's eligibility for investment tax credit is unaffected. In enacting section 46 of the Internal Revenue Code, Congress placed certain limitations on the use of JDITC when that credit is amortized, as here, over the life of the associated investment. See Treas.Reg. § 1.46-6(a)(3) (1979). [36] Section 46(f) of the Code was designed to prevent regulatory agencies from defeating the credit's intended purposestimulation of investmentby flowing through to ratepayers the entire savings which result from the credit. See H.R.Rep.No.533, 92d Cong., 1st Sess., reprinted in [1971] U.S.Code Cong. & Ad. News 1825, 1839; S.Rep.No.437, 92d Cong., 1st Sess., reprinted in [1971] U.S.Code Cong. & Ad.News 1918, 1943. Section 46(f)(2) thus specifically provides that no credit shall be allowed in two circumstances: (A) Cost of service reduction. If the taxpayer's cost of service for ratemaking purposes or in its regulated books of account is reduced by more than a ratable portion of the credit allowable by section 38 (determined without regard to this subsection), or (B) Rate base reduction. If the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the credit allowable by section 38 (determined without regard to this subsection). Hence, subdivisions 2(A) and 2(B) permit a limited flow through to consumers of the benefits accrued through use of the credit. [37] As long as cost of service is not reduced by more than a ratable portion of the credit and as long as rate base is not reduced by any of the credit, the utility remains eligible for the credit. See Public Service Co. of New Mexico v. Federal Energy Regulatory Commission, 653 F.2d 681, 684-85 (D.C.Cir. 1981). As explained above, the Commission's methodology for calculating the interest expense treats the entire rate base, which includes JDITC, as though it were financed conventionally in the same proportions as the capital structure. NET contends that such treatment runs afoul of the proscription in subsection 46(f)(2)(B) that rate base not be reduced by reason of the credit. In support of its argument, NET relies on certain language in the Senate and House Reports which accompanied the Revenue Act of 1971 and in Treas.Reg. § 1.46-6(b)(3)(ii) (1979), one of the regulations implementing section 46(f). The Senate Report states in pertinent part: In determining whether or to what extent a credit has been used to reduce the rate base, reference is to be made to any accounting treatment that can affect the company's permitted profit on investment by treating the credit in any way other than as though it had been contributed by the company's common shareholders. For example, if the `cost of capital' rate assigned to the credit is less than that assigned to common shareholders' investment, that would be treated as, in effect, a rate base adjustment. S.Rep.No.437, 92d Cong., 1st Sess., reprinted in [1971] U.S.Code Cong. & Ad.News 1918, 1946. [38] Section 1.46-6(b)(3)(ii) (1979) of the treasury regulations explains in different terms what is meant by a rate base reduction: In determining whether, or to what extent, a credit has been used to reduce rate base, reference shall be made to any accounting treatment that affects rate base. In addition, in those cases in which the rate of return is based on the taxpayer's cost of capital, reference shall be made to any accounting treatment that affects the permitted return on investment by treating the credit in any way other than as though it were capital supplied by common shareholders to which a `cost of capital' rate is assigned that is not less than the taxpayer's overall cost of capital rate (determined without regard to the credit). What is the overall cost of capital rate depends upon the practice of the regulatory body. Thus, for example, an overall cost of capital rate may be a rate determined on the basis of an average, or weighted average, of the costs of capital provided by common shareholders, preferred shareholders and creditors. (Emphasis added.) The Senate Report (as well as somewhat similar language in the House Report) can be read as suggesting that all JDITC must be treated as if it were attributable to common equity. However, the emphasized provision of the treasury regulation quoted above merely requires that the cost-of-capital rate assigned to JDITC be not less than the utility's overall cost-of-capital rate determined without regard to the credit. According to the regulation, the overall cost of capital may be determined on the basis of a weighted average of the various costs of capital supplied by shareholders and creditors, implying that JDITC may be properly treated as though it were ordinary capital consisting of both common equity and leveraged investment or debt. After recognizing the apparent inconsistency between the treasury regulations and the quoted passages in the legislative reports, the Courts of Appeals for the Eighth Circuit and the District of Columbia have held that treating JDITC as if it were ordinary capital did not operate as a prohibited rate base adjustment under I.R.C. § 46(f)(2)(B). Union Electric Co. v. Federal Energy Regulatory Commission, 668 F.2d 389 (8th Cir. 1981); NEPCO Municipal Rate Committee v. Federal Energy Regulatory Commission, 668 F.2d 1327 (D.C.Cir.1981); Public Service Co. of New Mexico v. Federal Regulatory Commission, 653 F.2d 681, 687 (D.C.Cir.1981). We agree. Independent review of the legislative history and of IRS regulations interpreting section 46(f)(2) convinces us that the cited federal decisions are correct. The legislative history of the Revenue Act of 1971 shows that Congress intended that both investors and consumers of regulated utilities should share the benefits of the tax credit. The House Report states: In restoring the investment credit for public utility property of regulated companies, the committee has given careful consideration to the impact of this credit on ratemaking decisions. Although there are many different ways of treating the credit for ratemaking purposes, your committee, in general, believes that it is appropriate to divide the benefits of the credit between the customers of the regulated industries and the investors in the regulated industries. H.R.Rep.No.533, 92d Cong., 1st Sess. 24, reprinted in [1971] U.S.Code Cong. & Ad. News 1825, 1839. To the same effect is S.Rep.No.437, 92d Cong., 1st Sess. 36, reprinted in [1971] U.S.Code Cong. & Ad. News 1918, 1945. To hold that Congress intended that JDITC be treated exclusively as if it were common equity supplied by shareholders would be inconsistent with one of the dominant themes of the legislative history, namely, that the benefits of the tax credit be shared by both investors and consumers. Under the Commission's interest-synchronization method, both the shareholders and the ratepayers benefit from the credit. The utility gets interest-free capital and the ratepayers receive lower rates as a result of the interest deduction and concomitant lower cost of service. [39] The Commission's position is that if JDITC were treated as if it were common equity, the revenue requirement of NET would be thereby artificially inflated and the ratepayers would derive no benefit from the JDITC. NET challenges the Commission's assumption that, in the absence of JDITC, the capital otherwise supplied by the credit would be replaced by a balanced combination of equity and debt. Implicit in NET's argument is the assumption that if JDITC did not exist it would be replaced entirely by equity capital supplied by common shareholders. When confronted with a case involving similar divergent assumptions regarding capital acquisition, the Court of Appeals for the District of Columbia decided as follows: As a matter of economic theory, the competing theories advanced by FERC [the Federal Energy Regulatory Commission] and [the utility] raise questions that are undoubtedly complex. The question before this court, however, is not. The function of this court is not to speculate on the manner in which a utility would finance investment in a world devoid of the investment tax credit. Since no issue of statutory interpretation is presented, the question before this court is simply whether the factual assumption relied on by the Commission in applying the statute is arbitrary, capricious, or an abuse of discretion. We hold that it is not. The assumption of capital acquisition relied on by FERC is supported by reasonable economic theory. Textbook economics suggests that an enterprise is likely to establish a target capital structure, and make individual financing decisions that are consistent with the maintenance of that target. See E. Brigham, Financial Management Theory and Practice 512 (2d ed. 1979). If this is true, then, in the absence of ADITC, additional capital needed to finance the investment property would be generated from all capital suppliers, in approximately the same proportion as previously existing in the capital structure. Since existing proportions of debt and equity in all likelihood reflect an established target capital structure, it is reasonable to assume that, in order to maintain that target, the ADITC portion of the rate base would be financed with similar proportions of debt and equity. 653 F.2d at 689-90 (footnote omitted). The Commission's assumption that, in the absence of JDITC, NET would finance its plant by ordinary means with a combination of equity and debt in the same proportion as it exists in the capital structure is reasonable. The Commission's treatment of JDITC in this case is not inconsistent, therefore, with the intended purpose of section 46(f). That the treasury regulations are intended to permit JDITC to be treated like ordinary capital in the determination of the interest expense tax deduction is clear from the following prefatory comments accompanying the 1979 amendments to Treas.Reg. § 1.46-6: Section 1.46-6 (originally proposed as § 1.46-5) implements section 46(f). That provision lists the circumstances for disallowing an investment tax credit. Public comments suggested that the definition of `rate base reduction' contained in § 1.46-6(b)(3) of the proposed regulations was inconsistent with the legislative history of section 46(f). The Committee reports accompanying section 105 of the Revenue Act of 1971 indicated that investment tax credits must be treated as capital contributed by the common shareholders of regulated companies and must be assigned the same cost of capital rate as all other capital provided by common shareholders. The proposed regulations merely required that a credit be assigned a cost of capital rate not less than the company's overall rate of return. The committee reports also state that the limitations of section 46(f) were intended to achieve two goals: a sharing of benefits between consumers and investors and a limitation on Federal revenue losses. Under certain circumstances, the common shareholder equity rule would deny consumers any of the benefits of a credit and could force ratemaking authorities to set rates higher than the rates that would have been established had no credit been available. Under such circumstances, Federal revenue losses would not be merely limited to the amount of the credit, but would be reduced to an amount less than the credit. Congress did not intend to force consumers to subsidize the cost of the investment tax credit. T.D. 7602, approved Mar. 15, 1979, 44 Fed. Reg. 17666, 17666-67 (March 23, 1979). Treasury regulations that implement the congressional mandate in some reasonable manner are entitled to considerable deference, since Congress has delegated to the Secretary of the Treasury, not to this Court, the task `of administering the tax laws of the Nation.' Commissioner v. Portland Cement Co., 450 U.S. 156, 169, 101 S.Ct. 1037, 1045, 67 L.Ed.2d 140 (1981) (quoting from United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 449, 19 L.Ed.2d 537 (1967) and United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973)). The treasury's explanation and interpretation of section 46(f) afford a reasonable basis for the provisions of section 1.46-6(b)(3)(ii) of its regulations, and those provisions must therefore be deemed controlling. The Commission's treatment of JDITC in this case does not result in a prohibited rate base reduction under I.R.C. § 46(f)(2)(B). NET contends that the Commission's treatment of JDITC also violates I.R.C. § 46(f)(2)(A) (set forth in text above) by impermissibly reducing cost of service by more than a ratable portion of the credit. The treasury regulations define cost of service as the amount required by a utility to provide goods and services, including expenses of operation and maintenance, depreciation, taxes and interest. Treas.Reg. § 1.46-6(b)(2)(i) (1979). NET claims that cost of service is reduced because the Commission, in effect, imputes an interest expense to interest-free JDITC. As in its argument with respect to section 46(f)(2)(B), discussed above, NET assumes implicitly that, in the absence of JDITC, the capital otherwise supplied by the tax credit would be contributed exclusively by common shareholders. Any other treatment, NET argues, will result in a more-than-ratable reduction in cost of service in violation of section 46(f)(2)(A). The Commission assumes that cost of service would remain exactly the same if JDITC did not exist on the ground that NET would finance its plant by ordinary means, including a combination of debt and equity in the same proportion as in the capital structure. Under the Commission's theory, no change in the percentage of debt would occur, and therefore no change would occur in the tax liability used to compute cost of service. Accordingly, the Commission reasons that cost of service remains unaffected by the inclusion of JDITC in the determination of NET's interest deduction in computing its federal income tax obligation. The difference between the positions stems ultimately from the contrary assumptions of the parties regarding capital acquisition in the absence of JDITC. On appeal, our function as a reviewing court is limited to determining whether the Commission's method is reasonable and supported by evidence. As we held above with respect to section 46(f)(2)(B), the Commission's assumption of balanced capital acquisition in the absence of the tax credit is not arbitrary, capricious or an abuse of discretion. Under the Commission's theory, ratepayers bear the same cost of service, excluding the ratable reduction permitted by the statute, as they would pay in the absence of JDITC. See Public Service Co. of New Mexico, 653 F.2d at 691-92. Accordingly, we affirm the Commission's conclusion that its treatment of JDITC did not impermissibly reduce cost of service in violation of I.R.C. § 46(f)(2)(A). The Court of Appeals for the District of Columbia reached the same result in NEPCO Municipal Rate Committee, 668 F.2d 1327, at 1338. In sum, we hold that the Commission's treatment of JDITC does not violate the provisions of either subsection A or subsection B of I.R.C. § 46(f)(2). The Commission's treatment of JDITC in its interest-synchronization adjustment is reasonable and results in a sharing of the benefits of the credit by both investors and ratepayers; it does not impermissibly overstate the interest expense deduction in a way that would deprive NET of a right to investment tax credit. 2. Effect of Interest Synchronization Adjustment on Maine State Income Taxes. On appeal, NET contends that because the Commission multiplied the weighted cost of AT&T debt in NET's capital structure by rate base in computing the interest allocation [40] it treats some AT&T interest, in effect, as deductible for purposes of the State of Maine income tax. Arguing that it is not so deductible under 36 M.R.S.A. §§ 5102(8) & 5211(8) (1978 & Supp.1981-1982), NET urges the Court to remand on this issue. In its brief, the Commission admits that its calculations failed to consider adequately the differences in federal and state income tax laws; in effect, it does not contest NET's argument. Consequently, the case must be remanded to the Commission for reconsideration of this issue.
Under its license contract with AT&T, NET is charged with a share of the cost of defending the antitrust suit by the Department of Justice (DOJ) against AT&T, Western Electric and Bell Telephone Laboratories, the named defendants in that action. NET included the $197,250 expense in its test-year cost of service. The Commission disallowed the expense, reasoning that defense of the suit primarily benefited shareholders, not ratepayers, and that NET had failed to prove any specific justification for the expense as required by an earlier order. See New England Tel. & Tel. Co., Re: Proposed Increase in Rates, F.C. # 2213 (Me. P.U.C. June 10, 1977). In its 1977 order, the Commission allowed as a ratemaking expense NET's $2,000 share of the cost of defending the DOJ suit, but stated that in future rate cases the expense would not automatically be allowed without specific justification. NET contends that the Commission erred in requiring it to justify specifically the reasonableness of the DOJ suit expense. NET further contends that the decision whether to allow the DOJ suit expense should not hinge on its ability to show that the defense of the suit primarily benefits ratepayers. According to NET, there exists a presumption of management prudence requiring the Commission to allow all actual expenses unless it clearly appears that they are excessive or unwarranted or incurred in bad faith, citing Central Maine Power Co. v. Public Util. Comm'n, 153 Me. 228, 244, 136 A.2d 726, 736 (1957). NET asserts that the DOJ suit expense should have been allowed because it is a prudent expense, unavoidable under the circumstances and beneficial to both shareholders and ratepayers. The Commission defends its position by arguing that NET failed to satisfy the burden of proof imposed by 35 M.R.S.A. §§ 69 & 307 (1978 & Supp.1981-1982) and by the prior Commission order. Under sections 69 and 307, NET must demonstrate the justness and reasonableness of the DOJ suit expenses for ratemaking purposes. See Casco Bay Lines v. Public Util. Comm'n, Me., 390 A.2d 483, 493 (1978). NET presented two witnesses who testified about the costs of the DOJ antitrust suit; however, neither witness gave testimony compelling the conclusion that it was just and reasonable to charge Maine ratepayers with those costs. From the lack of evidence in the record the Commission could rationally decide that NET had not satisfied its burden of proof, and this Court has no basis for disturbing that decision on appeal. [41] See Central Maine Power Co. v. Public Util. Comm'n, Me., 433 A.2d 331, 341 (1981). The Commission did not treat its 1977 order as imposing a higher standard of proof than sections 69 and 307 already require. In effect, the order merely placed NET on notice that thereafter it would be required to establish specifically the justness and reasonableness of the DOJ-defense expense, and nothing in the record indicates that the Commission treated its earlier order as creating a higher standard of proof than the statute provides.
NET included $413,065 in test-year expenses for the development of centralized data processing services known as Business Information Systems (BIS). Under its license contract with AT&T, New England Telephone and other Bell operating companies share in the cost of research and development of new systems. The Commission disallowed NET's $99,433 share of the cost of four of the many BIS projects; namely, those known by the acronyms BISCUS, BOSS, COPS, and DIR/ECT. Years ago, when the Commission approved the BIS cost-sharing agreement in a 1967 order, it stated that it reserves the right to investigate and pass upon the reasonableness of all charges relating to such contract. . . . In re Proposed Agreement Between Bell Telephone Laboratories, New England Tel. & Tel. Co. and Operating Companies, F. No. 13,523 (Me. P.U.C. July 1, 1967). Making reference to that reservation and to a similar one made in a 1977 order approving BIS expenses, the Commission found, after investigation, that the four BIS projects designated above could not be reasonably charged to Maine rate-payers and disallowed them. The Commission reasoned that none of the four projects is currently in service in Maine and that, although conceivably some of the expenses associated with the four projects could be amortized and charged to Maine ratepayers, NET had failed to prove the justness of such treatment. NET claims it provided sufficient evidence of the reasonableness of the BIS costs and that the Commission's decision is therefore wrong. NET's witness, John Hann, testified to the effect that all BIS projects are for research and development and are beneficial to Maine ratepayers, that the four in question have not yet been implemented in Maine, and that future improvements in NET service gained as a result of BIS research will benefit Maine ratepayers as well as other Bell System customers. NET asserts that this is sufficient evidence of the reasonableness of all costs of BIS projects, including the four in question, especially since the propriety of BIS research and development is a management decision. The determination whether a particular expense is reasonable or just for purposes of ratemaking is often difficult. The Commission must weigh the evidence and use its expertise in evaluating that evidence. Because the Commission has been delegated the primary task of determining whether a utility has met its burden of proof and justified a particular expense, this Court reviews that decision only for abuse of discretion. If the decision is reasonable and the findings are supported by substantial evidence, this Court does not interfere with the result. See 1978 NET Case, 390 A.2d at 59-60. Moreover, the Commission may accept or reject all or part of the testimony of any witness. Here, the Commission could have rationally believed that Hann's testimony fell short of proving that the four BIS projects in question benefit Maine ratepayers now or will benefit them in the reasonably near future. Scrutiny of the record in this case does not reveal anything that would justify this Court in overturning the Commission's conclusion that NET did not satisfy its burden of proving that the justness and reasonableness of NET's rates required the expenses of the four BIS projects in question to be included.