Opinion ID: 1106788
Heading Depth: 1
Heading Rank: 7

Heading: Refusal to Deduct Income Tax Payment.

Text: The Company complains of the addition in the previously quoted table of the sum of $770,633 to the actual net operating income, contending that since this amount was actually paid in income taxes it is entitled to this deduction. Whether this item should be considered or not depends of course on whether the 45% debt ratio formula is accepted as reasonable. Since this $770,633 represents federal taxes that will be saved should the Company convert its debt ratio from 24.7% to 45%, the Commission was correct in refusing to deduct it from the actual net operating income in the application of its formula. Furthermore, if a 5% cost of debt capital is adopted instead of a 4% cost, the Commission would be justified in increasing the amount of the income tax saving to the subscribers, which according to the record amounts to 52% of the amount of interest paid. However, the Company should be given a reasonable time to adjust its debt ratio to the new formula, should it so desire. Two of the expert witnesses testified that a period of approximately five years will be required to accomplish this end. Not only must $37,000,000 be raised immediately for this purpose, but other millions both in debt capital and equity capital must be for expansion. The Commission has in effect made its new formula retroactive. We do not believe this is just and reasonable.