Court Opinion

ID: 9666368
Source: CourtListenerOpinion
Date Created: 2023-08-24 01:11:59.377341+00
Date Added: 2024-06-11T14:56:42.130039
License: Public Domain

*443ON MOTION FOR REHEARING
WALLACE, Justice,
dissenting.
In this rate hearing, the Public Utility Commission disallowed $166,000,000 of the cost expended by Houston Lighting & Power in preparation for building the Allen Creek Nuclear Plant. The effect of the Public Utility Commission’s order was to declare that the $166,000,000 was not expended for utility purposes.
Houston Lighting & Power, Inc., is a wholly owned subsidiary of Houston Industries, Inc., which consists of business operations other than public utilities. The effect of the Public Utility Commission order disallowing $166,000,000 cost was to transfer that cost item from Houston Lighting & Power to the shareholders of Houston Industries, Inc. Thus, the $166,000,000 was no longer a factor in determining Houston Lighting & Power Company’s rate base.
Public Utility Commission’s Substantive Rule § 23.2(2)(B)(I), codified at 16 T.A.C. § 23.2, requires all large utilities to maintain their books and records in accordance with Federal Energy Regulatory Rules. The FERC rules require separate allocation of utility and non-utility financial data. This is to assure that only those costs reasonably necessary in providing utility service to the customers will be included in the utility rate base. If the utility is a component of an entity with other business interests, as is the case with Houston Lighting & Power, it may not use utility rates to subsidize those other activities.
The cost of utility services includes Federal Income Tax on the taxable revenues and the tax deductible expenses incurred in providing service. PURA § 41(c)(2), and PUC Substantive Rule § 23.21(b)(1)(d). When a corporation such as Houston Industries, Inc., and Houston Lighting & Power produce taxable revenues and deductible expenses they must be segregated on the basis of whether they are attributable to utility service or non-utility service.
FERC regulations provide that if expenses which generate tax deductions are included in the cost of service, the deduction will reduce the cost of service for rate making purposes. Columbia Gulf Transmission Co., 23 FERC (CCA) II 61.396 (June 22, 1983). In the case before us, the PUC disallowed the $166,000,000 for rate making purposes, so the rate payers will not bear that expense. Therefore, they are not entitled to the benefit of the deduction. The deductions go to the party who bears the expense, which in this case would be the shareholders of Houston Industries, Inc. This is the standard procedure consistently used by the Public Utilities Commission, but rejected by it in this case.
The PUC’s action in this case could result in a substantial cost to Houston Lighting & Power rate payers. The Internal Revenue Code provides accelerated depreciation on certain items of equipment and machinery to integrated companies which comply with FERC regulations. However, the Code requires that deduction permitted must go to the entity incurring the costs, i.e., utility rated versus non-utility rated. I.R.C. § 167(Z)(3)(G), 168(i)(9) (West Supp.1988); see 1 Fed.Tax Reg. §§ 1.167(Z)-l(h), 1.167(a)-ll(b)(6), 1.167(Z )-3 (West 1988). If this is not done, then all the depreciation must be on a straight line basis. This means that not only the non-utility operations of Houston Industries, Inc., but also Houston Lighting & Power could lose the substantial advantage gained on accelerated depreciation. Should this occur, then Houston Lighting & Power would be entitled to an increase in rates so as to make a reasonable rate of return on its investment.
Our opinion in this case relied on the “taxes actually paid by its shareholders” language used by this court in Suburban Utility Corp. v. Public Utility Commission of Texas, 652 S.W.2d 358 (Tex.1983). That case was considered in an altogether different context. There, this court held that the tax actually paid by the shareholders should be included in the utility rate base because it was a Subchapter S corporation which passed all revenue on to the shareholders who individually paid taxes. The utility paid no income tax. Here, the utility pays its own taxes, so the corollary should be that the taxes paid (or deductions claimed) by the utility should be credited to the rate payer. This is not authority for *444the rate payer to be given credit for tax deductions earned by expenses paid by the shareholders.
To permit the PUC to disallow $166,000,-000 as non-utility related expenses and then to deny the shareholders who must bear those expenses any tax deductions arising from that expense is tantamount to permitting the Public Utility Commission to fine the shareholders for poor management. The majority expressly holds that the PUC has no authority to do so. I would reverse that part of the court of appeals’ judgment which decrees that any tax benefits resulting from the $166,000,-000 expense must be passed through to the rate payers.