Opinion ID: 2332363
Heading Depth: 1
Heading Rank: 6

Heading: pre-1971 investment tax credits

Text: Federal income tax law provides tax creditsa reduction in actual taxes paid for certain kinds of capital investment. New England accumulates these credits in a separate account and then amortizes them over the life of the investment giving rise to the credit. In this case the Commission deducted from New England's rate base $875,000 of pre-1971 investment credits remaining unamortized in 1976. New England argues that the deduction was erroneous in that it contravened federal tax policy and ratemaking principles. We find no error in the Commission's actions with respect to the pre-1971 investment tax credits. The investment tax credit was introduced in 1962 as §§ 38 and 46-48 of the Internal Revenue Code of 1954, 26 U.S.C.A. (Pub.L. 87-834 § 2(a)(b), 76 Stat. 960 (1962)). Under those provisions, public utilities were granted a tax credit of 3% of their investment in certain newly acquired assets. Accordingly, New England was entitled to a reduction in taxes in the amount of such investment tax credits. New England did not use these tax savings to reduce its tax expense for the purposes of establishing rates, that is, it did not pass the tax savings on to its ratepayers. [35] Instead, New England chose to normalize the investment tax credits by determining its tax expense for ratemaking purposes, as if it had received no such credits. In accounting for these tax savings, New England accumulated the tax credits in a separate account and amortized them over the useful life of the investment giving rise to them. The annual amortization amount was then credited to New England's annual earnings, thereby reducing its revenue requirements for that year. Although the investment tax credit was terminated in 1969 (Pub.L. 91-172 § 703, 83 Stat. 660 (1969)), $875,000 of such credits remained unamortized in 1976. The Commission's decree reduced New England's rate base in that amount. (The investment tax credit was reinstituted in 1971 as the Job Development Investment Credit. (26 U.S.C.A. §§ 38, 46-8, Pub.L. 92-178 § 101, 85 Stat. 498 (1971)). The Commission treated the unamortized pre-1971 investment tax credits as consumer supplied capital, on which New England's investors were entitled to no return. The ratepayers had supplied revenues to compensate New England for tax payments which were not actually made to the federal government, but were accumulated in a separate account. The Commission adopted Mr. Louiselle's testimony that these accumulated tax credits represent funds which have been provided by ratepayers, not investors. We conclude that the Company is not entitled to be allowed to earn a return on such consumer contributed capital . . . . We therefore reduce rate base by the amount of accumulated pre-1971 investment tax credits. Re New England Telephone and Telegraph, ___ P.U.R. 4th ___, ___ (Me.Pub. Util.Comm.1977). New England raises a number of objections to the Commission's deduction of unamortized pre-1971 investment tax credits from its rate base. We find these objections unpersuasive. New England argues that the Commission's actions of reducing its rate base prevents it from earning a fair rate of return on all of its property devoted to public service. However, as the Commission emphasizes, New England's investors are entitled to a return upon only that capital which has been supplied by the investors. Accordingly, New England is entitled to no return on capital supplied by consumers through their rate payments for a tax expense not actually paid to the federal government. We hold that this determination is properly within the discretion of the Commission and is entirely reasonable under the law and the facts of this case. New England also argues that the Commission's decision is contrary to the policy of Congress in enacting the investment tax credit. [36] The Commission agrees that federal tax law prohibits federal regulatory agencies from deducting these credits generated since 1964 and denies post-1971 tax credits where such credits are deducted by a federal or state regulatory agency from rate base. However, federal law is silent concerning state regulatory action with respect to pre-1971 investment tax credits. Whatever may be the federal policy and expectations with respect to other than pre-1971 investment tax credits, it does not control the Commission's actions in this case. Congress has apparently left the treatment of pre-1971 investment tax credits to the individual states. Therefore, the Commission could properly exercise its discretion and deduct such tax credits from New England's rate base. Finally, New England argues that the Commission's decision in this case is an improper deviation from its treatment of New England's pre-1971 investment tax credits in prior cases. The Commission is not bound by its treatment of rate base items in prior cases. Ratemaking is a legislative function and the Commission has the authority and duty to make an independent determination of the justness and reasonableness of rates in each case. As long as the Commission satisfies the requirements of legality and reasonableness, it may utilize a different ratemaking approach in a subsequent case. We conclude that the Commission's exclusion of the unamortized portion of the pre-1971 investment tax credits from New England's rate base was reasonable and justified. The cases cited by New England [37] demonstrate only that this is a decision which lies within the discretion of the Commission. We hold that the Commission properly exercised its discretion with respect to this issue and find no error therein.