Court Opinion

ID: 6756101
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:27:11.899189+00
Date Added: 2024-06-11T16:02:26.487998
License: Public Domain

Locheb, J.,
dissenting. This court has held previously that the only federal income tax expense which should be considered for rate-making purposes is that of taxes actually paid. Cincinnati Gas & Electric Co. v. Pub. Util. Comm. (1962), 173 Ohio St. 473; Ohio Edison Co. v. Pub. Util. Comm. (1962), 173 Ohio St. 478. However, the majority’s decision affirming the commission’s inclusion of Ohio Bell’s normalized tax expense figure in the rate-making process explicitly abrogates this statement of law.
Through the utilization of accelerated depreciation, instead of straight-line depreciation, Ohio Bell increased its tax deduction. An increased tax deduction reduces the tax burden of the utility and correspondingly the revenue that must be acquired from its consumers. At least, this was the prior law of Ohio. By affirming the use of normalization, the majority approves the accounting legerdemain that turns a tax savings into an actual tax expense for the rate-making calculations. Simply stated, this means that Ohio Bell is being reimbursed by its ratepayers for over 45 million dollars of taxes, which Ohio Bell has not paid to the United States Treasury.
Normalization of this tax benefit creates a windfall for the utilities to the detriment of the ratepayers. Contrary assertions aside, the use of accelerated depreciation results in an actual tax savings, not a deferral or postponement of payment.
“Batemakers have discovered that if the total enterprise is either expanding or stable, the use of accelerated depreciation does not merely defer taxes, but eliminates them entirely. (See FPG v. Memphis Light, Gas & Water Div. (1972), 411 U. S. 458, 460; Note, The Effect on Public-Utility Rate Making of Liberalised Tax Depreciation under Section 167 (1956), 69 Harv. L. Rev. 1096, 1102.)” Los Angeles v. Pub. Util. Comm. (1975), 15 Cal. 3d 680, 686, 542 P. 2d 1371.
Furthermore, in Cincinnati Gas & Electric Co. v. Pub. Util. Comm., supra, at page 474, this court, citing with approval from the commission’s decision, laid to rest this very contention:
<«<••• [Tj^]e must reject the theory that a deferral of *31tax liability arises from the use of accelerated depreciation, and consequently must reject normalization of taxes for rate-making purposes; no such deferral exists and no such liability will arise. We will allow only the expense incurred, that is, the federal income tax actually paid by the company. It is our opinion that this treatment will benefit both the ratepayers and the utility.’ ”
Thus, the tax will never catch up and the result is, for the test year alone, a net tax savings of over $45,000,000 for Ohio Bell. Ironically, while the normalization of this tax benefit is allegedly justified as preventing this phantom tax expense from being imposed upon future ratepayers, normalization forces current ratepayers to finance benefits only to be enjoyed by future consumers. The mandating of normalization is synonymous with the compelling of present consumers to make interest-free loans to Ohio Bell with repayment in futuro.
Ohio Bell presented to the commission and this court a fait accompli. In 1970, Ohio Bell began using accelerated depreciation. Internal Revenue Code Section 167 (Z), effective 1969, requires a public utility using accelerated depreciation to normalize. Ohio Bell argued that adherence to the law in Ohio would result in the detrimental loss of this tax savings, while normalization would directly benefit the utility and, perhaps, indirectly benefit future ratepayers. Thus, the fait accompli: either change the law in order that we may benefit or no one will benefit. However, the impact of Ohio Bell’s argument is lessened by the unanswered question of why Ohio Bell did not use accelerated depreciation before 1970. From 1954 to 1970, when the tax benefit derived from accelerated depreciation' could have been passed on to the ratepayers, Ohio Bell maintained straight-line depreciation and thus paid untold millions of dollars of similar possible tax savings to the United States Treasury. Ohio Bell stresses the inequity of continued adherence to the interdiction espoused in Cincinnati Gas & Electric Co. v. Pub. Util. Comm., supra (173 Ohio St. 473), because it would deny them the very benefits their actions previously denied the ratepayers.
A necessary addendum to the consideration of the in*32stant cause is an understanding of the rate-making process in Ohio. The utility’s rates are dependent upon two factors: the rate of return and the reimbursement of expenditures. Cleveland v. Pub. Util. Comm. (1956), 164 Ohio St. 442. However, the first factor is misleading, because the rate of return is applied to a hypothetical company, whose statutory rate base is greater than the actual amount of debt and capital stock of the subject utility. The statutory rate base is only an estimate of what it would cost to reproduce a given utility’s property minus depreciation. The reproduction cost considered in the rate base will now almost always, because of inflation, be greater than the actual amount of the capital of the utility. The net effect, after many years of operation by Ohio Bell and changes in cost during those years, is that the statutory rate base would have only a remote relationship to the net investment in Ohio Bell. The rate of return is, therefore, misleading, because it is not earned on the lower actual investment, but on the inflated statutory rate base of a hypothetical company.
Presently, Ohio Bell earns a return on money not invested. The approval of normalization could well be a superfluous and pernicious sequel to the existing fairy tale of utility ratemaking in Ohio. The cast of characters will include the hypothetical company and the phantom expense. However, even the most benign fairy tale may contain a subliminal horror story. The advantages of normalization for Ohio Bell are readily apparent; the advantages for the ratepayers are a mere apparition; and the dangers for the ratepayers remain undisclosed.
In the end, our only alternative may be the approval of normalization. Still, our imprimatur should not be impressed upon this aberration until we have at least a modicum of information upon which we may effectively exercise our judicial function.
I would remand this cause to the commission to conduct the thorough study, now absent, considering all the lawful alternatives in the calculation of this federal tax expense in light of Internal Revenue Code Section 167 (Z), the anomalies of the Ohio rate-making process and the in*33terests of the ratepayers, pursuant to the commission’s statutory duty to insure the reasonableness of a utility’s rates.* I, therefore, respectfully dissent from the majority’s affirmance of the commission’s order.
Celebrezze, J., concurs in the foregoing dissenting opinion.

The California Supreme Court, in a similar controversy involving normalization, remanded the cause to its commission with instructions to find a lawful alternative to the adverse effects upon the ratepayer of normalization. Los Angeles V. Pub. Util. Comm. (1975), 15 Cal. 3d 680, 542 P. 2d 1371.