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In re Revision of Rates Filed

Decided: September 29, 1977.

IN THE MATTER OF THE REVISION OF RATES FILED BY LAMBERTVILLE WATER COMPANY INCREASING THE RATES FOR WATER SERVICE LAMBERTVILLE WATER COMPANY, PETITIONER-APPELLANT,
v.
NEW JERSEY BOARD OF PUBLIC UTILITY COMMISSIONERS, RESPONDENT



Halpern, Larner and King. The opinion of the court was delivered by Larner, J.A.D.

Larner

This is an appeal from the determination of the Board of Public Utility Commissioners (Board) of an application for a rate increase by Lambertville Water Company (Lambertville). Lambertville limits its appeal to two issues: (1) failure of the Board to include in the revenue calculations an allowance for federal income tax expense at the statutory rate of 48%, and (2) the refusal to effectuate the rate relief retroactively to April 1, 1975.

The question relating to the income tax expense arises because Lambertville is a subsidiary of General Water Works Corp., which in turn is a subsidiary of I.U. International. This parent company is a multinational conglomerate with approximately 200 subsidiaries consisting both of regulated and unregulated companies.

I.U. International has elected to file a consolidated income tax return for all of its companies pursuant to 26 U.S.C.A. ยง 1501. In its relationship with its subsidiaries it has adopted a policy of requiring each subsidiary showing

taxable income to pay to the parent 48% of that income. Part is utilized to pay International's tax to the Government while the excess is distributed to the subsidiaries with negative tax incomes.*fn1

Lambertville contends that its revenue picture should be computed by allowing a full deduction of 48% of income as paid to I.U. International. The hearing examiner and Board disagreed with this position on the basis that the payment to the parent company at the maximum corporate rate is not truly a tax expense in view of the tax benefits gained by I.U. International and some of its subsidiaries by virtue of the filing of a consolidated return.

We agree that Lambertville is not entitled to a deduction in the amount of 48% of net income merely because that is the amount paid to its parent company as a result of inter-company policy or agreement. Such payment does not truly represent the tax payable to the Internal Revenue Service. If Lambertville is part of a conglomerate of regulated and unregulated companies which profits by consequential tax benefits from Lambertville's contributions, the utility consumers are entitled to have the computation of those benefits reflected in their utility rates.

It is only the real tax figure which should control rather than that which is purely hypothetical. See In re New Jersey Power & Light Co. , 9 N.J. 498, 528 (1952). And the P.U.C. Commissioners therefore have the power and function to take into consideration the tax savings flowing from the filing of the consolidated return and determining what proportion of the consolidated tax is reasonably attributable to Lambertville. See F P C v. United Gas

Pipe Line Co. , 386 U.S. 237, 87 S. Ct. 1003, 18 L. Ed. 2d 18 (1967). In Re Mechanic Falls Water Co., supra , a similar tax deduction by an I.U. International subsidiary was modified by the Maine Public Utilities Commission. The Commission correctly observed:

Amounts allowed for federal income taxes in rates should, to the extent permitted by law, be based upon the realistic expectation of the taxes actually to be paid to the federal government. [13 P.U.R. 4th at 354]

Although the Board of Public Utility Commissioners in this case had the right to reject the 48% tax factor and arrive at a reasonable adjusted figure comporting with realism, nevertheless it chose to arrive at a tax factor of 38.9% through a formula which had no relevant foundation in the record. We are unable to find any basis in the evidence for the utilization of an artificial book formula derived from SEC regulations. In fact the testimony was uncontradicted that such a formula is wholly inappropriate for consideration in rate applications. For that reason we cannot accept the factfindings of the administrative agency on the traditional ground that it is supported by substantial evidence in the record. See Mayflower Securities v. ...


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