Opinion ID: 1720472
Heading Depth: 1
Heading Rank: 4

Heading: Treatment of Investment Tax Credit

Text: The cities deducted from rate base a total of $362,922 in the form of an accumulated three percent investment tax credit. The company contends that it should have been permitted to normalize the tax credits by amortizing them over the life of the property the investment in which gave rise to the credits. The company argues that the purpose of the investment credit was to serve as an incentive to investment in new plant and that therefore the tax credit should be utilized to benefit the investors who provide the funds for such investments. Under the company's rationale, ratepayers are not entitled to benefit because they receive a pro rata portion of the tax credit over the life of the property which gave rise to the credit and which was constructed with investor supplied funds. The effect of the cities' treatment of the accumulated investment tax credit is to flow through to the present ratepayers the benefits accruing from the tax savings resulting from the tax credit against the company's income tax liability. These concepts were discussed by the Rhode Island Supreme Court in the second Rhode Island Consumers' Council v. Smith case, supra: `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). . . . . . . . . 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. Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 389, 322 A.2d 17, 20. The Rhode Island court went on to conclude that the commission's approval of the utility's normalization of the tax credit was a matter within the commission's discretion and was not arbitrary or unreasonable. Other courts have upheld the decisions of regulatory agencies that had the effect of reducing a utility's rate base by the amount of the unamortized portion of the investment tax credit. See, e. g., New England Telephone & Tel. Co. v. Dept. of Public Utilities, supra; City of Pittsburgh v. Pennsylvania Public Utilities Com'n, 208 Pa.Super. 260, 222 A.2d 395; Williams v. Washington Metropolitan Area Transit Com'n, 134 U.S.App.D.C. 342, 378-83, 415 F.2d 922, 958-63; Pacific Telephone & Tel. Co. v. Public Utilities Com'n, supra, 62 Cal.2d at 634, 44 Cal.Rptr. at 1, 401 P.2d at 375-77. The company points to the fact that in 1964 Congress amended the investment tax credit law by providing that federal regulatory agencies should in effect use the normalization approach contended for by the company in the instant case. See Historical Note to 26 U.S.C.A. § 38; Pub.L. No. 88-272, Title II, § 203(e), February 26, 1964, 78 Stat. 35. We conclude that in electing to adopt the approach followed by other jurisdictions rather than permitting the company to amortize or normalize the investment tax credit, the cities did not act arbitrarily, capriciously or unreasonably, although it would appear that the treatment of the tax credit proposed by the company might well result in greater equity to investors and ratepayers. See, e. g., Public Service Co. of New Hampshire v. State, 113 N.H. 497, 311 A.2d 513; Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 322 A.2d 17.