Court Opinion

ID: 3492562
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:00:48.019613+00
Date Added: 2024-06-11T13:52:27.454695
License: Public Domain

This is an appeal in the nature of certiorari from an order of the Michigan *Page 709 
public service commission dismissing a petition by the city of Detroit asking for a reduction in the electric rates of the Detroit Edison Company.
In October, 1942, the city of Detroit filed a petition with the Michigan public service commission asking that the commission issue an order directed to the Detroit Edison Company to show cause why the company should not file a new schedule of rates effective during November and December, 1942, which will effectuate a net income for the accounting year of 1942 of not more than $12,000,000 and file a reduced schedule of rates effective January 1, 1943, under which the company would reduce its existing rates about 25 per cent.
Soon after the above petition was filed, the cities of Dearborn, Highland Park and Hamtramck, the Michigan Manufacturers' Association, the City Ice  Fuel Company, and the office of price administration of the United States government were permitted to intervene.
The petition filed by the city of Detroit alleges that the Detroit Edison Company will fall into the excess profits tax bracket as defined by the 1942 income tax law to the extent of approximately $8,000,000 and will be required to pay 90 per cent. of this amount as excess profits taxes; that such excess income has been derived under the present rates and schedules of the Detroit Edison Company; and that such rates and schedules are unreasonable and excessive.
The office of price administration intervened "so that rate increases will be disapproved and rate reductions effected, consistently with the act of October 2, 1942, and other applicable Federal, State or municipal law, in order to keep down the cost of living and effectuate the stabilization program." *Page 710 
The other interveners stressed their special circumstances, but all sought a reduction in rates. The commission conducted a general rate hearing. There was extensive evidence as to the nature, cost and value of the assets of the Detroit Edison Company, its income and its expenses and the rate of return to which it is entitled. The Detroit Edison Company presented evidence that its proper rate base was more than $330,000,000. The city of Detroit recommended a rate base of $271,576,000. The commission did not decide upon the amount of the rate base, but for the purpose of its decision assumed an amount less than that claimed by the city of Detroit.
On July 17, 1943, the commission entered an order of which the following is pertinent to the issue involved in this cause:
"Under the laws of the State of Michigan, a regulated utility is entitled to earn a fair return upon the present value of the property devoted by it to public service. Money that has been lawfully spent in rendering service constitutes no part of such a return. The dollar paid out for taxes is no more available as income and return than a dollar spent for labor or any other legitimate expense.
"We have repeatedly stressed the fact that we are a statutory body and possess only the powers conferred upon us by statute. We know of no statute giving us the power to forbid a company the right to charge as an operating expense any tax lawfully incurred by it. Likewise we know of no statute giving us the power to forbid such a company the right to so charge any part of the tax so incurred to operating expenses.
"We therefore find that all taxes are a proper operating charge and they will be so considered in determining the income of the company in this case. *Page 711 
"Such being our opinion in determining whether or not the earnings of the Detroit Edison Company are excessive, we consider such earnings as are available to the company after the payment of income taxes."
The city of Detroit, city of Hamtramck and the price administrator appeal from this order. The city of Detroit contends that the Michigan public service commission, in determining a fair rate of return for a utility, should compute such return completely independent of, and prior to, the application of the excess profits tax rate; and that so-called "war taxes" as distinguished from normal income and other normal levies should not be chargeable as an operating cost.
The price administrator urges that the commission has the statutory power and duty to disallow improper operating expenses including war income and excess profits taxes in determining reasonable rates; that the increased income tax rates since 1939 and the excess profits tax are not operating expenses within the usual meaning of that term and should be disregarded in computing net revenue available for return; and that the allowance of war taxes as an operating expense would be inflationary.
The City Ice  Fuel Company urges that the commission should be instructed to fix rates after a just balancing of consumer as well as investor interests with any and all pragmatic adjustments necessary in view of abnormal war times and conditions.
The Detroit Edison Company urges that the law of Michigan does not empower the commission to forbid an electric company to charge as an operating expense any tax lawfully incurred; and that any tax including income taxes paid the Federal government is a proper element of the cost of operation. *Page 712 
It is to be noted that there is no question raised in this appeal as to the rate base or the reasonable rate of return and these issues are not before the court. The only question we have for decision may be stated as follows: Does the Michigan public service commission have discretionary power to exclude excess profits taxes from operating expenses in determining the rates?
In deciding this question it is necessary to examine the act creating the commission. The Michigan public service commission was created by Act No. 3, Pub. Acts 1939 (Comp. Laws Supp. 1940, § 11017-1 et seq., Stat. Ann. 1943 Cum. Supp. § 22.13 [1] etseq.).
Section 4 of the act provides:
"All the rights, powers, and duties vested by law in said Michigan public utilities commission, and in the Michigan railroad commission and transferred to the Michigan public utilities commission, shall be deemed to be transferred to and vested in the Michigan public service commission hereby created, and shall hereafter be exercised and performed by said commission. * * * Said Michigan public service commission shall have and exercise all rights and privileges and the jurisdiction in all respects as has been conferred by law and exercised by the Michigan public utility commission under the laws of this State. * * * Any order or decree of the Michigan public service commission shall be subject to review in the manner now provided by law for reviewing orders and decrees of the Michigan railroad commission or the Michigan public utilities commission.
Section 6 of the act reads as follows:
"The Michigan public service commission is hereby vested with complete power and jurisdiction to regulate all public utilities in the State except *Page 713 
any municipally-owned utility and except as otherwise restricted by law. It is hereby vested with power and jurisdiction to regulate all rates, fares, fees, charges, services, rules, conditions of service and all other matters pertaining to the formation, operation, or direction of such public utilities. It is further granted the power and jurisdiction to hear and pass upon all matters pertaining to or necessary or incident to such regulation of all public utilities, including electric light and power companies, whether private, corporate or cooperative."
The powers of the present commission to regulate charges for electricity are granted by Act No. 106, § 7, Pub. Acts 1909, as last amended by Act No. 108, Pub. Acts 1923 (2 Comp. Laws 1929, § 11099 [Stat. Ann. § 22.157]), which provides:
"In determining the proper price, the commission shall consider and give due weight to all lawful elements properly to be considered to enable it to determine the just and reasonable price to be fixed for supplying electricity, including cost, reasonable return on the fair value of all property used in the service, depreciation, obsolescence, risks of business, value of service to the consumer, the connected load, the hours of the day when used and the quantity used each month."
This being an appeal in the nature of certiorari, we consider questions of law only and will not review questions of fact or weigh the evidence except to determine whether there is an entire absence of evidence or proof on some material fact. The power or authority of the Michigan public service commission to exclude excess profits taxes in determining rates is a question of law.
In Michigan Public Utilities Commission v. Michigan StateTelephone Co., 228 Mich. 658 (P.U.R. 1925 C, 158), we held that the following were proper *Page 714 
elements entering into the determination of a just rate (syllabus):
"The chief elements of just compensation to defendant telephone company are: (a) Operating expense, including administration, labor, interest, taxes, certain items of repair and maintenance; (b) depreciation, physical and functional, including wear and tear of property by use, the constant destruction of property by earth's relentless processes, and supersession and obsolescence of machines and structures by progress; (c) fair return upon the present fair value of the property used and useful in public service."
In Galveston Electric Co. v. City of Galveston,258 U.S. 388, 399 (42 Sup. Ct. 351, 66 L.Ed. 678), it was held that income taxes were properly chargeable as an operating expense. The court there said:
"The remaining item as to which the master and the court differed relates to the income tax. The company assigns as error that the master allowed, but the court disallowed, as a part of the operating expenses for the year ending June 30, 1920, the sum of $16,254 paid by the company during that year for Federal income taxes. The tax referred to is presumably that imposed by the act of February 24, 1919, chap. 18, §§ 230-238, 40 Stat. at L. 1057, 1075-1080, which for any year after 1918 is 10 per cent. of the net income. In calculating whether the five-cent fare will yield a proper return, it is necessary to deduct from gross revenue the expenses and charges; and all taxes which would be payable if a fair return were earned are appropriate deductions. There is no difference in this respect between State and Federal taxes or between income taxes and others. But the fact that it is the Federal corporate income tax for which deduction is made, must be taken into consideration in determining what rate of return shall be deemed fair. For under section 216 the *Page 715 
stockholder does not include in the income on which the normal Federal tax is payable dividends received from the corporation. This tax exemption is therefore, in effect, part of the return on the investment."
See, also, Georgia Railway  Power Co. v. RailroadCommission of the State of Georgia, 262 U.S. 625
(43 Sup. Ct. 680, 67 L.Ed. 1144); Oklahoma Natural Gas Co. v. CorporationCommission, 90 Okla. 84 (216 P. 917).
The excess profits tax is somewhat similar to the income tax in that it is a tax the amount of which depends upon a certain net amount arrived at in part by deducting certain operating costs from gross revenue. The excess profits tax is a tax on the income over and above some specified minimum set in the law providing for the tax. It is a tax that the utility is required to pay and necessarily a part of the costs of operation of that utility. In our opinion the commission has no discretion in excluding these taxes in determining the operating expense of the utility. The commission found that in 1942 the earnings, derived from the rates approved, represented a rate of return of 4.75 per cent. If the price of electricity can be reduced and still leave a reasonable return on the fair value of all property as required by 2 Comp. Laws 1929, § 11099, then the commission has a duty to make such reduction in rates.
The order of the commission should be affirmed. No costs are allowed as a public question is involved.
WIEST and BOYLES, JJ., concurred with SHARPE, J.