Court Opinion

ID: 4946774
Source: CourtListenerOpinion
Date Created: 2021-09-24 12:25:27.221753+00
Date Added: 2024-06-11T13:59:33.219318
License: Public Domain

Although I am in general agreement with the opinion of the majority, I am constrained to point out my disagreement with one aspect of the opinion.
In this case the commission imputed a hypothetical rate of interest to tax credits given the company pursuant to provisions of the Internal Revenue Code. These tax credits are generated by investments made by the company in capital equipment and were designed by Congress as a means of stimulating investment and employment. In considering the propriety of imputing a similar hypothetical rate of interest to job-development investment credits in the case of New England Telephone Telegraph Co. v.Public Utilities Commission, R.I., 459 A.2d 1381 (1983), we determined both that such an action might imperil the continuing availability of such credits and that no competent legal evidence existed to support the assignment of a hypothetical rate of interest to such funds that are concededly supplied interest free. Id., 459 A.2d at 1385. The majority takes the position that there is evidence in the instant case to support such a determination.
It should be recognized that the legislative history of 26 U.S.C.A. § 46(f) (West 1983) reflects the principle that regulatory agencies should not defeat the tax credits' intended purpose by requiring a utility to pass through to ratepayers the savings resulting from the credit. See H.Rep. No. 533, 92dCong., 1st Sess., reprinted in 1971 U.S. Code Cong. Ad. News 1825, 1839. The investment tax credit operates to reduce federal income taxes by allowing credits for amounts that a utility invests in new plant and equipment. For those investments, the utility takes a credit known as an Accumulated Deferred Investment Tax Credit (ADITC), the amount of which is measured by a statutory percentage of the investment in new qualifying facilities during the tax year. As previously indicated, the objective of the credit is to stimulate utility companies' investment in new plants and equipment, thereby increasing employment, productivity, and general economic activity. SeeNEPCO Municipal Rate Committee v. Federal Energy RegulatoryCommission, 668 F.2d 1327, 1335 (D.C. Cir. 1981).
Section 46(f)(2) disallows the credit under the following 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
[1] "(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)."
In addition to the statute, the Internal Revenue Service has issued regulations in implementation of § 46(f). This regulation attempts to explain in more detail that which constitutes a reduction of rate base and consequently may cause the credit to be disallowed. The pertinent regulation, Treas.Reg. § 1.46-6(b)(3)(ii) (1979), states:
 "(ii) 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)." (Emphasis added.)
That regulation has been rather uniformly interpreted to require that these unamortized *Page 1388 
credits be included in the rate base for purposes of calculating a rate of return and that the regulatory agency must apply a rate of return to such credit not less than the overall rate of return assigned to the rate base. See PublicService Co. of New Mexico v. Federal Energy RegulatoryCommission, 653 F.2d 681, 687-88 (D.C. Cir. 1981).
After oral argument had been completed in the instant case, the Attorney General cited to us a number of cases in which a federal court had allowed a hypothetical rate of interest to be applied to investment tax credits for the purpose of reducing the allowable income tax deduction accorded to the utility. This results in diminishing the company's allowed expenses and, consequently, diminishing its revenue requirements. This process is rationalized by suggesting that this result causes a sharing of the tax credit advantage between the utility and the ratepayers. See, e.g., NEPCO Municipal Rate Committee v. FederalEnergy Regulatory Commission, 668 F.2d at 1377-38; UnionElectric Co. v. Federal Energy Regulatory Commission, 668 F.2d 389, 393-95 (8th Cir. 1981). The Supreme Judicial Court of Maine has followed this hypothetical imputation of interest in NewEngland Telephone Telegraph Co. v. Public UtilitiesCommission, 448 A.2d 272, 304-09 (Me. 1982). The Court of Appeals of North Carolina has strongly disagreed with this position in State Utilities Commission v. Carolina Telephone Telegraph Co., 61 N.C. App. 42, 300 S.E.2d 395 (1983). The North Carolina Court of Appeals suggests that the interpretation of the federal courts ignores the requirement of the IRS regulation that no accounting treatment should be given to such credits in any way other than as though they were "`capital supplied by common shareholders.'" Id., 300 S.E.2d at 400-01. Viewing these credits as capital supplied by common shareholders would, of course, preclude an assignment to such capital of a hypothetical interest rate as though it constituted borrowed funds. Although I believe that the North Carolina Court of Appeals has given a well-reasoned opinion in the interpretation of Treas.Reg. § 1.46-6(b)(3)(ii), I cannot fault the majority for being persuaded that interpretations by federal courts of appeal of United States Treasury Regulations are entitled to great weight.
My examination of the evidence in this case does not enlighten me concerning the "ratable" sharing of the tax credits by the utility and the ratepayers save by virtue of the most general intuitive assertions. The principal witness who testified on behalf of the division in favor of ascribing hypothetical interest to ADITC was James A. Rothschild. When asked for his rationale to persuade the commission to depart from its prior decision on this precise issue in docket No. 1499, the witness did no more than quote from the opinion of the Circuit Court of Appeals for the District of Columbia in NEPCO Municipal RateCommittee v. Federal Energy Regulatory Commission, supra.
Indeed, he included in his quotation the nub of that court's opinion:
 "FERC assumes that the company would, absent the credit, have acquired financing by using a combination of debt and equity in the same proportion they bear in present capitalization (less tax credit funds). That assumption creates an `alternative utility' that might have evolved in the absence of tax credit funds. The capital structure so created is speculative but permissible, in view of the impossibility of determining exactly what financing, and consequent interest payment, the utility might have arranged absent the investment tax credit." 688 F.2d at 1337-38. (Emphasis added.)
I am constrained to conclude that speculative assumptions, whether those of the witness or those of another agency, do not constitute competent evidence. I am of the opinion that both the FERC and the local regulatory agency in adopting this posture are essentially diluting the thrust of the congressional intent in providing these credits in the first instance. The sounder *Page 1389 
policy would be to allow the utility the deduction for its actual apportioned income tax liability. The most rational way to reach this determination is to allow the utility to deduct the interest that it actually pays rather than to create speculative hypotheses.
In light of the fact that we made a definite determination on this issue in New England Telephone Telegraph Co. v. PublicUtilities Commission, R.I., 459 A.2d 1381 (1983), less than a year ago, and further in light of the fact that the commission itself took a similar position in respect to this very utility in docket No. 1499 (even though it may not be bound thereby), and further in light of the speculative assumptions upon which this hypothetical structure is purportedly based, I suggest that consistency demands that the Commission be precluded from overstating the company's interest deduction by $908,000, and thereby understating its actual federal income tax expense by $773,000. I would return to the rudimentary principal enunciated in Rhode Island Consumers' Council v. Smith, 113 R.I. 384, 396,322 A.2d 17, 23-24 (1974), that a utility should be allowed to deduct only those taxes that it actually pays, and I suggest that the converse is equally true that a utility should be allowed to deduct its actual taxes rather than a lesser hypothetical sum.
For the reasons given, I respectfully dissent from this portion of the majority opinion.
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