# Appendix — FPC v. United Gas Pipe Line Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0076%3A10 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1967 - **Citation:** 386 U.S. 237 ## Text ps Segre Court of the he PoE s > Oorosze Tznm, 1966 FILED |. woe "No. ta7>«Y «OCT 2.01966 : Feperan Powzr Ooraasx0f, JON FODANIS, CLERK Ww. vs P) | o Untrep Gas Prez Linz Company, Narurar Gas Prez Linz Company or AMERICA, AND - Taxas Easteen TransMission Corroration, , . Respondents. -* No. 128 } Memenis lous, Gas anp WATER 7 ena i v. - Unrrep Gas Pree Love Compan, Natura Gas Pres-Line Company or AMERICA, AND pee Texas Eastern TransMission CoRPoRATION, — ms ; _ Respondents. | \ On Waits or Cre TIoRarr To THE Untrep States Court oF APPEALS FOR THE F'rTH Cmourr APPENDIX TO BRIEF FOR ae _ UNITED GAS PIPE LINE COMPANY 5 Se6Cee3xeossSs—sesSSSSS Se Of Counsel: . ; W. O. Cram 2 THomas Fusrcnie: General Counsel ===—-—>—s« 2025 First City National P. O. Box 1407 ; Bank Building. Shreveport, La. 71102 Houston, Texas 77002 si ;- x W. Kose Attorney for United | -, ' 2 Rector Street | Gas Pipe Line Company - New York, N.Y. 10006 . | ah Pe Lyyw R. Coreman 2024 First City National | Bank Building . Houston, Texas 77002 . ° October 20, 1966 o —— inc., :-, MOUSTON por, ¢ . b of 2 ; ad - . ~ at é y 4 "Ths “Je 1d APPENDIX A : eneeigi from the Natural Gas Act, : . _ -the Internal Revenue Code and Regulations _ “NATURAL GAS ACT ye Section 1(b) The | provisions of this ont shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale — _ for ultimate public.consumptien for domestic, commercial, ‘industrial, or any other use, and-to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas or to the- "local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of ~ natural gas. [52 Stat. 821 (1938) ; 15 U.S.C. $717 (1946) ] CODE (26 UsC 1 et seq): _ TAX ON CORPORATIONS en | oh. Tax imposed . em (a). Corporations in general.— A tax is hereby imposed for each, taxable year on the taxable income of every cor-." poration. The tax shall consist of a normal tax computed. . under. subsection (b) and a surtax — under sub- : section ‘(ae i ees . (b) Normal taw.— The normal tax is equal to the fol- lowing percentage of the taxable-income: | - (1) 30 percent, in the case of a taxable year begin- “ning before January 1, 1964, and (2) 22 percent, in the case of a taxable year begin- ning after December 31,1963. é | (c) Surtax.— The surtax is equal to the following per- centage of the amount by which the taxable income exceeds — the surtax exemption for the taxable year: ~ :: (1) 22 percent, in the case of a taxable year begin- ‘ning before J neal 1, —_ | . a ae oy “* 2a ° me (2) 28 percent, in the case of a taxable year begin- ~ ning after December. 31, 1963, and before wera 1, 1965, and ) (3) 26 percent, in, the case of a taxable year begin- ning after December 31, 1964 (as amended by: 1964 Revenue - 1 SS : te - « L&e 7a ~ - - (iii) . Minus, in n the case ner an afliliated group induding as members one. or more corporations subject to the, tax | imposed - by’ section ‘831, the combined additional: capital ‘loss deductions of such corporations authorized by ‘section 832 2 (c) (5) (but in an amount not in yin of the consoli- ~ dated net capital loss). | - §1.1502-81(b). Computations. In the case ‘of affiliated egrporations Which make, or are required.to make, a con- solidated return, and except as niet ces — in | the reigulations under section 1502: 9. (1) Tawable income. “The taxable snsbaie of each cor-— poration shall be computed i in accordance with the provi- sions covering’ the determination of taxable ineome of : separate corporations, except: 4 (i) There shall be eliminated unrealized Site 0 and °° _ losses in transactions between members of the affiliated . . group and dividend distributions from one member of the group to another member of the group (referred pate to.in the regulations under ‘section 1502 as inter- company transactions); (ii) No net scsi, loss deduction shall be taken “into. account ;, . (iii) “No capital gains or * losses shall be taken into account; — F . (iv) There shall be Ponca ee all gains and losses | from involuntary conversions subject to section 1231, and from sales and exchanges of property subject to section 1231 ; (v) In the siianeiithel of the edinshion under sec- tion 171, relating to amortizable. bond premium, there - shall be disregarded the bonds of one member of the wh group owned by another er of the group during the taxable year; *(vi) In the computation of the taxable income of - a corporation for the taxable year in which it became the common parent’ corporation of the affiliated group filing a‘ ‘consolidated return, the aggregate deductions ‘of such corporation for such year otherwise allowable in exces#of the gross income of such corporation for such year shall be excluded to the extent that such © excess is attributable to that portion of such year pre- ceding the date upon which such corporation became the common parent corporation of the group. Any amount excluded under this paragraph shall, to the extent that it constitutes a net operating loss within - the provisions of section 172 or a net capital loss within the provisions of sectidn 1222, be considered as a net operating loss or a net: capital loss, as the case ~ may be, separately sustained by such corporation and subject to the ‘provisions of paragraph (a) (3) (ii) or (11) (ii) of this section ; | (vii) In the case of a corporation hich became a member of the affiliated group after January 1, 1954, common parent corporation or subsidiary, as the case ‘may be, allowable deductions shall be determined sub- ject to the qualifications prescribed in eles (9) of this paragraph; (viii) No deductions under section 170 with adults to charitable or other contributions shall be taken a , Rabies _ ° (ix) In the cape of the deduction provided i in sec- . tion 615 (relating to mine exploration expenditures), the allowable deduction shall be determined subject 9a to the qikttienthons prescribed i in subparagraph (12) © ' of this paragraph ; (x) In the case of a distribution of inventory to which section 311(b) is applicable, or in the case of a distribution of property to which section 311(c) is ap- plicable by one member of the group to another men- | ber of the group; the gain recognized under such sec- tions shall be eliminated; ; (xi) No deductions nbn section 243, 244, 245, or 247 (relating to deductions with respect to dividends received and dividends paid) or under section 922 (re- lating to the special deduction for Western Hemisphere trade corporations), shall be taken into account; (xii) No deductions under section 175 (relating to soil and water conservation expenditures) shall be taken into account by a member of an affiliated group _ to which the consolidated section 175 — is applicable; (xiii) In the case of a bank: for taxable years begin- ning after December 31, 1958, there shall be disregarded all gains and losses from sales and exchanges of diel erty described in section 582(c) ; and (xiv) ‘No deduction under section 181 (relating to deduction for certain unused investment credit) shail be taken into account. ‘halsiillaiala profits and losses which have been realized by the group through final transactions with persons other than members of the group, and intercompany transactions which do not, affect the consolidated taxable income shall not be eliminated. For the purpose of this subparagraph, gain includible in income pursuant to section 357(c). with respect to transfers of assets other than capital assets and eon . The vari-. ous other computations required by the regulations under eo section 1502 to be made by. the several affiliated corpora- tions shall be made in the case of each such corporation in’ the same manner and under the same conditions as if a '- separate return were to be filed, but with the sane sexceptions: © . . 3. (i) Taxable income. ‘The taxable income used in * any ‘such eomputation shall bé the taxable income of the corporation determined in accordance with the pro-' “visions of this section. ‘ (ii) Dividends received. In the computation of the * dividends received, there shall be excluded all dividends | received tux other —— of the affiliated ‘group, a ai “ 3 , : e ae n ° : ‘ . | taxable income shall apply. a ad e a . ‘lla me eae Sab fee (iii), ‘Capital 9 gains and. losses. Capital gains an’ . losses, short-term capital gaits and losses, long-term pital gains and losses, and the additional capital loss “Geduition authorized by section 832(c) (5) § shall be de- $. termined. without regard to: — ; (4) Gains or losses arising in bieieiipaay transactions (other than gains described i in section | 357(c)) ahd gains recognized to the distributing cor- °. - . ‘poration pursuant to section 311(c) by: reason’ of distributions by one member of. the group to another - member of the group, - (b) Gains of losses:frém involuntary conversions ~~ and from. sales. or exchanges of property subject to .. the provisions of section 1231, , Ww (ce) The net capital =~ carryqvers apesbied in section 1212, ~ (dq) In the case 2 of a corporation whigh bitame a member of the affiliated group subsequent: to Janu- ary 1, 1954, common parent corporation or subsid- iary, as the case may be, capital losses to the extent _. disallowed pursuant to the provisions of subpara- graph (9) of this paragraph, and {e) “In the case of a bank, for taxable years esis | ning after December 31, 1958, gains or losses from. "~ gales or exchanges of property described in section ‘* 582(c).. Faas | Rae _ (iv) Net operating loss. In the sininititieen of the net. operafing loss, as defined in section 172, the provi- -sions of this section pertaining to the determination - | (¥)- Dividends paid, In the sitniphaiion of divi- sw _— paid,.there shall. be excluded all dividends paid 5 . 4 ee eer e _ 12a =, ae ‘one mamber of the. group .* sein except as provided i in paragraph (b)(4) of §1.1502-30. (vi) * Federal income taa. In the computation of the Federal income tax, there shal] be used the con- solidated tax, or a proportionate part thereof, if the -tax payable is properly computed’ on a the rs of the - + .gonsolidated return. §.1.1509-34. Sale of stock; iain tai Aeheenalitng iesia oe loss.— (a) Scope of ‘section. This section prescribes the basis for determining the gain or loss upon any sale or other disposition . (hereinafter referred ‘to as “sale”) by a cor- poration which is (or has been) a member of an affiliated — group which makes (or has made) a consolidated return’ for any taxable year, of any share of stock issued by another member of such group (whether issued before or during the . period that it was a’ member of. the group and whether issued before, during, or after the taxable year 1929), and held by the selling corporation during any part of. a@ period _ for which a consolidated return is. made or required under ‘the regulations under section 1502..For the basis in the case . of a sale of bonds, see § 1.1502-35. - (b) Sales made. while selling corporation is sania of. . affiliated group. - ¥f the sale is made within a period dar- ing which the selling corporation i is a member of the afiili- ated group, whether or not during a consolidated return” eriod, and whether or not, as a result of such sale, the issuing corporation ceases to be a member of the group, the basis shall be determined as follows: | (1) The aggregate bases of’ all shares of stinate of the | issuing corporation held by each member of the ‘affiliated group (exclusive of the issuing corporation) immediately prior to the sale, shall be determined separately for each x § 13a. : | member of the group, and adjusted in accordance with the other, provisions of .subtitl&A of the Code, but without _ regard to any adjustment under the last sentence of sec- tion 1051 relating to losses of the i issuing corporation sus- _ tained by such corporation. after it became a member of the group. | (2) From the combined aggregate ree as determined. in subparagraph (1) of this ‘paragraph, there shell be. deducted the sum of — (i) All losses of such issuing corporation sustained a = N . 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Z 7 Ks 2H 0 | Zo Hitt feyeer a7 ' y "4 4444 Ea nanan . % a poe Seatac al SRO REID 4 ~ ges ae ship: oo geeeyenne: me =e. % ASrar ae > Leena {SRE TET Hes TE oo - Schaal ai eae - meer PERS ON Nae wie eS Fe oe ea ie z 235 es + ° . ‘ ‘ ° le APPENDIX Cc’ : 2 Since the test year 1958 showed a » constiidatedoas, the Staff. used - : - the three year period in order to reach a more representative . 7 result. : | . any saving from the non-utility operations they belong to. ae ratepayer, who hin paid no obligation of the non-jurisdic- tional subsidiaries and has not contributed to their losses. The staff’s proposal, the companies say, would take away ‘from the investors a Portion of the incentive provided by * Congress to: ‘encourage exploration for oil, domestically ‘and abroad, would put the company at a competitive dis- advantage with other oil companies, and would -penalize the Parent Company for its form of corporate organization. Cities Service claims that the staff’s consolidated effective’ - . tax rate is a clear deprivation of property without due process: of law, because it takes the benefits of the large . tax deductions from the -jurisdictional companies and passes them along to the gas customers i in- ‘the form Tr. reductions. woe -In his decision isshel April 23, 1962, the Examiner. agrées with Cities Service. He holds that the staff’s posi- tion is basically wrong because it would thwart the true congressiondi intent of the tax law permitting the filing of a consolidated return, which was to encourage holding - companies to expand their overall businesses for the better- _ ment of the national and international economy. He cannot ‘ gee the justice f permitting Gas Company’ s customers to receive. what M cose a windfall from losses occurring - _ in bdsinesses pnrelated to that of the regulated natural gas. ‘company merely because ’ Gas Company and the corpora- ~ tions having the losses happen to have a common corporate _ Pf owner. Thé Examiner adds that the regulated businesses ~ should not héve the right to take away from the non-regu- lated entity any part of the losses it utilizes for tax pur- poses. The Examiner thinks that, if driven to it, the Parent Company could rearrange its system of corporations in such, manner as to eliminate tax losses, and there would fen be no tax saving to allot to the gain companies, . including , Gas Company. Exceptions were e filed by the staff and a ~ | a : large Municipal Qicup* which had intervened an the i ing is before us for decision: = _¢_ The authoritiés do. not. give us a otter answer to: the question of whether the tax allowance: for ‘the regulated company should take into account the “losses: of affiliates. Some authorities appear to support the “actual taxes” con- ; cept as advanced here by the staff. City of Pittsburgh v. Pennsylvania PUC, 128 A. 2d 372, 385-387 (Pa. Super. Ct. 1956) ; Re New Jersey Power & Light Co., 9 N.J: 498, 89 : A. 2d 26, 41 (1952). Other authorities eliminate the losges . . lof affifiated companies or“of separable operations of the same company. Southern Union Gas Co. v. New-Mewico PSC, No. 31074 (D. Sarita Fe County, June 9, 1961) ; Rates and Rate Structure, 29 PUR a) 391, 481-482. (N. Y. P.S.C., 1938). - The: starting point in resolving the sonsolidéted tax issue - oe is the amount of the consolidated tax payment: This is the . only reali cost which was incurred by Gas Company in eon- * junction .with the other Cities Service affiliates. The task ‘is then to determine the proportion of the consolidated tax ’ which is reasonably attributable-to the Gas Company vis-a-". vis the other Cities Service affiliates. The basic error in | . the position of Cities Service is that it ignores this point | and claims an ‘amount. of Federal i income taxes in Gas Coni- pany’s cost of service on,the basis*of a hypothetical figure — . which Gas,Company would have paid if it were a separate company. The simple truth of the matter is that Gas Com- pany paid no ‘Separate Federal i income tax but participated 8 Consisting of the Kansas Cities of Altamont, ‘idebiin: Chanute, - Cherryvale, Downs, Erie, Gerard, Grenola, Howard, Iola, Mel- vern, Meriden, Osage.City, and Perry; the Missouri Cities of. Carl Junction, Carrollton, Carthage, Clinton, Independence» Joplin, Kansas City, Marshall, Neosho, Nevada, € Oronogo, Pierce, "* Platte City, Springfield, St. Joseph, Waveriy’and “Webb. City; rsa td — of pines aan Missouri. a a le 2 : : ie ? ‘ ° t PORE OO Nt LE OGIO LLL LLL EG LIANG ERGO SED OLIGO SOT IEG CT IN PE ELIE LO, . Pe Pe Ene So SIG rt Bown nn EN, r ee . oe Ses a Nt ne Aa 4 POL ak Se aes = eee Epa . : bs : , . : , te een a - in the filing of _ consolidated return with the other Cities Service affiliates. To accept Cities Service’s position would be to approve fixing of jurisdictional rates on the basis - of cohverting a. hypothetical tax payment into a prudent | |. operating expense. In effect, Cities Service argues that Gas ' . Company ratepayers should make Cities Service stock- | ' holders whole for the tax losses of nonregulated enterprises __ et even though this means an allowance for taxes over and = | beyond that which the consolidated system as a whole ac | tually paid. We reject this view as neither ‘just nor reason- . able. Tax allowances i in a-cost of service are for the purpose of permitting the regulated entity to secure a rate which, after taxes, will provide a reasonable return on jurisdic ~ tional investment, not to insure that other components of a ' + complex corporate system are enabled to” “cash- in” on their . tax losses. . However, we agree, ‘with Cities Service that the’ *funda- _— - mental rate making principle governing oar disposition of - | thi. issue requires a separation between regulated and ' unregulated costs and revenues, This principle controls our allocation of other costs which are jointly inourred by regulated. and unregulated companies, or departments with-. in the same company, ‘and is controlling here.* If we were to allocate the consolidated system tax return among all Profit companies including those in whole or part engaged >2 °° in "unregulated. activities, there would be;no sound reason ' for refusing to fix jurisdictional rates at a level sufficient - to make up any real losses these companies might suffer. Staff's azipconeh possesses ‘a quality: of artificiality and ‘instability which renders it unsatisfactory for ratemaking ~ purposes. In effect, staff's effective tax rate 1 is derived by “As shown above; this principle i is sehbiiaianaa. with Cities Serv- ice’s position that Gas Company’s tax allowance eangones be com- maar agar oars cane el me. taking the Ratio Gas Company’s insoahl 5 heed to the total c income of the profit malsing companies, and applying this percentage to the system tax paid.. It weuld be easy for Citieg Service to. escape from this onerous assessment by rearranging affiliates, mergers or. intrasystem pricing ar- rangements in‘ order to eliminate all or most of the other '. profit entities and. thus increase the effective tax rate of -_» the Gas-Company. Significantly, the record shows that, Cities Service: could accomplish this result. | There are three preliminary matters to resolve before ‘computing Gas Company’s tax allowance acéording to the , principles stated above.. First, we must decide the period -of time to be used in the computation. The Parent Company . ‘paid no federal income tax for 1958, the test year. If this -test_period * were representative, we would include no- tax allowance in Gas Company’s cost of service. However, the tax liability of a complex such as Cities Service-for-a-single’ _ year is not apt to be representative. -As stated above, the record shows extensive tax‘data for each of the companies of the Cities Service system’ for the years 1957 through 1959. While. data for a longer period of time might be ‘useful: for normalization purposes, in our opinion the de- tailed data for this three year period of.time is sufficient to determine the tax rate applicable to Gas Company.' _A second preliminary matter. ‘requires us to cinhipate taxable income by normalizing deductions for accelerated ' amortization and liberalized, depreciation, consistent with. 5 We recognize that the record contains limited information for’ earlier years, i.e.,-1954 through 1956. However, thé information - for the earlier years in this case is not sufficiently detajled ‘to be- used in computing. the tax allowance for Gas Company in ‘the manner determined appropriate herein; and to the extent that - it indicated. a different: profit and loss picture may have obtained ‘earlier, the subsequent history of Cities Service indicates that such earlier. periods could not be considered as — for rate making — ee --the taxable income of Cities Service Oil Company, "(which > ° ~ > 9ce ; ; ; e * : : . Pi our treatment ‘in Aiubinia: Tensioots Natural Gas Com- . pany, 27 F.P.C. 1180. This is done in Appendix A. How- _ever, here as in other rate cases following Alabama-Ten- nessee, the Order herein will be made dependent upon our The third problem is that ‘din are deltaia compaines in the Cities Service system a portion of whose business is | subject to ‘regulation. The taxable income of these com- .- panies should first be allocated into regulated and: nonregu- ; lated categories. Cities Service, however, has failed ‘to . determination in: that proceeding regarding the propriety *-' ” of normalization for rate making purposes. In the event °” the so called flow through approach is adopted, the rates -. - herein approved on a tentative —_ will be Sppropriately os - modified. 3 present any evidence upon which to make such an alloca-. ; tion. We can,-however, make an appropriate allocation of represents nearly 99% of the total taxable income of the Mixed companies; i.e., those companies having both regu- : ‘lated and niaregelated income), by taking official notice ~ of. certain evidence presented in the Oil Company’s rate. case in Docket No. G-9519, et al. This evidence (taken - directly from the Oil Company’s own. books), shows that 6.28% of Oil Company’s S gross investment in net plant is ~ __devoted ‘to regulated activities (production, of natural gas).¢ The data relative to the production of casinghead gas is not. included in this figure. Inasmuch as casinghead _ gas represents 13.51 pércent of Oil Company’s gas reve- _ nues,’ we will adjust the 6.28 percent figure to take this . 4 "additional investment into account. Applying _ arsed e * s Bue +e 6 Dockets No. G-9510 et al, Exhibit 38, Schedule 3. ‘TIBID, Exhibit t 85, Schedule 3, Sheet 2 pelea Seer t are 10¢ 7.13- ‘plains to Oil usein total taicable income” of $51,252,182 Produces regulated incomé for Oil Company of - $3,654,281.° A ‘similar allocation with: respect to Cities Service Production Comipany results in 24.16 percent or sie $6,464,235 of that. Company’s tax — oe to aye lated activities.° = en ‘Hive made thises adjustments, we can now allocate the * tax cost of the Cities Ser ce system between regulated.and ~ “‘nonregulated companies. “For the. three year period under a ‘consideration, the nonregulated affiliates, including non-° © regulated income of Oil Company, had no taxable income. In fact,.the record shows they had a substantial tax loss. . It is therefore inappropriate to assign any tax liability to this group of companies. Accordingly, we conclude that’ . the actual tax paid by the Cities Service system, as normal-_ a is reasonably allocable among the regulated companies. In é sum, the proper method: to be applied i in computing the — Federal income taxes to be included in the cost of service __ of a regulated company-where that-company has joined in a consolidated tax return with affiliates is (1) jeparate the . “companies into regulated and aa uaa grOupe, (2) . - 8 This figure was obtained by siiedetlitas $29,77 5,181 (investment ' ° $n gas plant excluding casinghead) by 1. 1351. The resulting ° * figure of $33,797,808 is divided by. total plant investment of $473,788,545 which produtes 7.18%. .- ° We wish to make it clear that a simple matmer of allocating the taxable income of mixed companies should be used_in any future 7. eases involving this issue. Obviously, it is administratively in- - feasible to compute a detailed cost of servicg-for large integrated ~ . corporations to determine one element of a regulated cbuapany's 2 cost of service. . 10 $12,970,608 or 17.46 percent of Production Company's average “ _ net investment of $14,276,476 relates to gas production, exclusive _ of easinghead gas, Casinghead gas represents 38.34 percent of the Company’s gas revenues, and the 17.46 percent figure adjusted . to take this further investment into account produces 24.16 t. (Docket, No. G-9510, Exhibit 32, Schedule 2, Soot a - _ percen “and Exhibit 35, Schedule 2, Sheet 2). erred FT TTT Ree ye ee ‘ote a Bee hone : ilo } ; dstermine the net. aggregate thxable i income of each group, | 3 — ad o* sd ° hy . P » 9 ; and (3) apportion the: net total consolidated tax liability — - over ‘a representative period of time between the two -— _ on the basis. of their respective. taxable _incorhes; provided” - that the allowance so cpmputed for the regulated company —“~ p . ing purposes, if computed ona separate a basis. - mee should bd disgHowed: (3) Gas Company should file tariff t sheets and inake eT groups, and among the companies in the regulated group, shall not exceed what its tax liability would be for rate mak- The. computation of Gas Compatiy’s nay allowance is... computed in Appendix B. As this Appendix: shows, we. . based this computation on the ratio Gas Company’s taxable one bears to the total taxable income of the regulated _ ‘group. This, of course, is similar to staff's approach which we consider sencuaiiiia when the nonfegulated affiliates ; have been excluded: ; ie ee : +i : ts eee : The Commision further fas Oh i ee ae (1) —Gas- 7's proper tax allowance i 18 $5,866,847. (2) The rates filéa by Gas Company filed pursuant to . the Settlement Agreement and our order of March 27, 1961,. subject to the reservation of the taxi issue are excessive and Pal funds in accordance ee : ‘The Commission orders: ves SAS ' (A) The rates filed by Gas eae pursuant: to the s Settlem t Agreement and our order of March 27, 1961, ‘a ) Gas Giaianty Shall, within 45 Ai of the. date of is order, file appropriate substitute tariff sheets to its FPC Gas Tariffs except for Rate Schednles I-1 and 1-2 : — rates satisfactory to the Cofimission based. ¢ on ves Hieth. vite eae multe eet on oeeet ae ee ee te ae © — _ A , _ . SS ES TIE PRI OED YR rege RN SS Sk SY Nace Be NT LE ot CERN, Bap kta eee nore op cd ve DG ORTS NT NR: LOL ATS AE .& — a a tax ‘gDlowanes of. $5,966,947 for the test weak; found: to le be. appropriate in this opinion and. order. Gas Company shall accompany its. rate filing with supporting cost. of: - " service- and allocation’ data persented in the samé form — and manner as that contained in the éxhibits attached to ‘the stipulation approved’in our order of March 27, 1961,_- / _ revisett only, to reflect the change in the allowance’ for _,. federal inconte taxes. Gas Company shall further furnish, "-qwith ‘its filing‘a statement setting forth the method of pete of Fass ace thereof on all purchasers under the rate — ‘involved, intprveners in this procéeding, and. . ae state commiésions. Comments by such parties - ‘', shall be submitted to the Commission within ten pie after bs] computation of such-.rates and showing the. derivation thereof.. Gas Company shall also accompany its 5 tariff sheets and supporting data with a cer tificate showing serv- service by Gas 3 Company as required herein. — (C) Upoh acceptance by the Commission of the tariff sheets filed by Gas Company pursuant to paragraph (B) above, the rates, charges and classifications set forth therein shall become effective for the period sstettceaartl 23, 1959, through December 22, 1961. q,, (D) Gas Company shall, within 70 ag of the date of ; ae this order, file with the Commission a statement showing _ the distribution to its jurisdictional customers: of appre- ° ‘ Cae nage > priate amounts to be refunded with interest at 6 percent. - With respect. to "Rate Schedules. F-1, F-2, O-1,-C-2, E, P . and X-5 the refund shall ‘represent the differences between (1) the amounts collected under rates charged in accord- ‘ance with. the stipulation of October 21, 1960, and our order of March 27, 1961, and (2) the amounts that would ig & have been collected. under the: rates filed pursuant to this’ opinion and order, from November 23, 1959, to December 22, 1961, with interest at 6 percent. With respect to Rate . , ‘ = R * rm ; > x e : . ° a “. 9 ge . Oe a ; ~ 5 r - ee of) 5 2 ° ; : 2 ad ° n° o a ° . _ Ss ra e ‘ ~ TT ey ah Oe Se ee Te a a LO Oe pa . \ PE OES PE OER PT SE. e st . ; f s Pa 27k « f — % Lo » . > e e -* . oe CrP 18¢e x e a . e. a4 ~ re 52% of utility income pers Ps Scot” fas 9s Mormallized oo... 7,229,498 442,588 ° 7,108,570. 14,780,656 54% of non utility ine aes ee | | - Come nermalized ...... 9,759,851 = — — « °9,759,851 ~. 257% of capital gains... 202,081. 562,183 __—«621,551 «1,385,815. 6 Total cannennnnnme 17,191,480 1,004,771 7,780,121 25,926,422 | | Lees surtax exemption ... -. Se: ; 5,500 _._- 5,500 ——-16,500 Tax assuming straight Fen Sauk ‘line. depreciation ‘histo $17,185,930 * 990.271 $ 7,724,621 $25,909,822 Appendix :B Docket No. G.18799 ‘ 6 CITIES SERVICE GAS COMPANY j COMPUTATION OF GAS ree. F.LT. Income (Normalized) ~ 957 ‘1958 1959 Total - Qities-Service GagCom- " ys ee are ce TENSE eecunetitchatiadays gif 290,88 $12,256,412 $18,340,470 $41,877,714 | Cities Service Gas Produe- sea pe ee bee ie Geen ee ing ell . 2,158;402 2085416 ~ 2/183,609 6,427,497 : Citiés Service Pipe Line . eg gee se eS cee et Co. 2? 2,622,047 . 2,686,669 _ 3,093,433 _ 8,802,149 ' . * Lafitte Oil Traders, ine, a. 22,562 ° 125,455° 275,155 423,172. Kansas Gas Supply Com- Pali echine te soo ARR al 215,128 - .839,359* 318,433 867,919 Gities Service Oil Co.—" pea ee ae Del. (Regulated Portion) 1,499,006 _ 1,259,798 _ — 895,477 _ 3,654,281 - % of Cities Service Gas Co. to Total regulated companies* iaaeeanid &. 67.93%: Consolidated Tax Allowance for Yéars 1957-1959 (Appendix an 25,909,822 . Average'Uénsolidated Tax Allowance ($25,909,822 + 8 years) .. 8,636,607 _ ag ae for Cities Service’ Gas _ a 937 x $8,636,607) 5 5, 866,847 * No esthin of ‘the consolidated tax is allowable to Cities Service Production Compas because that Company trad no taxahle i income. f MORGAN, Commissioner, concurring: Oni the basis of the record before us it appears that, by : _ virtue of filing a consolidate@}Federal income ‘tax return for the years 1957 through. 1959, the Cities Service System. . - companies collectively enjoyed a. Federal i income tax saving * in the order of some, $48 million. * : 3 _Tt also appears from the record before us that with few exceptions, one of which is discussed below, the parent a eompany allocated = enormous Sax x aniong the mem-.o A : 7 ae st avgipataiaian nia picunidtiabes OMe lek big Ie ; ~~ *- = = . baie of its corporate family on the volbpeitianale basis of .. Gee taxable insoeie each of them produced.’ This appears * eminently fair, and this, moreover, is the method the tax . ‘regulations suggest, for. distributing’ these savings among the. a family. Fah It is the “few exceptions” that concern us — most par- ticularly, the Cities Service Gas Company. We: are con- - eerned with this “exception,” first because that company sells a commodity vested-with a public interest, at rates having thé force of law, to consumers whose ratepaying — welfare we are charged by. Congress with protecting; second, because on the basis of allocating this saving which “parent has chosen for its unregulated cqmpanies (that is, in proportion to taxable’ income),, this particular public utility should have enjoyed savings of about $17.7 million during the period mentioned; third, because ‘utility regu- latign traditionally and. without ‘detectable exception has always required savings in-utility tax costs to flow through in the form of reduced rates to the consumers who alone and by law must bear the utility’s entire tax burden; and fourth, because the. parent in this. case has refused to i) apportion, distribute, allocate or grant a ‘single penny ~ . of the entire tax saving to the public utility that has been placed under what should be the: watchful eye of the Federal Power Commission. id - ; The vociferous legalisms and cries of vileiaai that the company has raised’ as a result of staff’s suggestion that this utility, like its sister. affiliates, should share fairly, equitably, and, proportionately i in the tax saving in. ques- - tion —a tax saving made possible in large part by the . utility’s taxable i income — have created a _™ and to some _ degree confusing record here. But the company’s cries of fart are no more facts . n felt than the cries and suggestions of “outrage,” “fraud,” “sf 18 *. “fictitious,” cdiahiotest “indefensible,” “ginfal” and other . expletives that were uttered in the [nited States Senate | atid House of Representatives when, despite the’ same - _ defenses offered there as here, the details of the selfsame "practices ‘by the selfsame company were made -known to the Congress during its consideration of the bill that be-- came the Public Utility Holding Company Act of 1935.1 The practice was not, then and there outlawed because “. —and it is safe to say only ‘because —.that very practice had been. “enone for any and all corporations, ‘epoogt a Specifically, see pages 417-482"of Volume 72A, “Utility Corpo- ratiqns,” setting forth the results of certain | cial _ Practices , uncovered in the course.of the Federal Trade Commission’s mas- -sive investigation in this utility area from 1928 to 1935; see the hearings on the bill before the House Commerce Committee at pages 153-155; Senate hearings at pages 234-255 and 514; the . debate-on the bill in the Senate at 79 Cong. Ree. 8392 and 8525- _ . 26; and in the House at 10323. —_ The comment of Senator Norris was typical: | “Practically all the systems I have shown on.the. various charts, together with others not shown, made what the law __ formerly permitted — that is, returns for taxation purposes _ on agonsolidated basis — resulting in a great saving of taxes . to the holding-company groups, although, as a matter of fact, operating groups as a rule.were subject to a tax. However, a the holding com es, taking advantage of the law permit- on ting consoli aun collected the taxes from " Op- erating companies, and then, by setting off losses ined by some of the operating companies, it was ewer ty in this . way to-retain these taxes by balancing losses of some operat- ing companies against profits of other operating companies. Thus it has often happened that operating egmpanies have — paid taxes which ordinarily would have been dué the Federal Government, and the holding companies by balancing off losses from other operating companies paid no tax to the _ Federal Government,-but retained the money tlit operating | company had paid as taxes. So some ‘operating companies. - actually paid their taxes, expecting the money to go to the ; Federal Government through the olding companies, but by _ . the process I have just described the holding companies kept . anybody can square, that with — I should like to have him doit” * 7 ‘ e . . : ‘ , : oo. ‘ snmeenwnevmnninete . Se ea a ae ‘ _. the taxes and paid nothing to the Federal Government. If .. © 19¢ railroads owning 95% of their operating subsidiaries, by .. the Revenue Act of 1934. But, with the imposition of the wartinie exeess profits tax, Congress by the Revenue Act - of 1942 allowed the practice to he resumed. The matter is . now before us, a Federal: public utility commission, for - disposition in the light of the basic tenets of the public utility law we are charged with administering. _ If this ‘were a matter of tax law, a8 company and the | dissenting opinion would have .us treat it, we, like the Internal Revenue Service, -wonld only be ‘interested in checking the accuracy of company’s arithmetic. . But this is a rate proceeding, not a tax audit. The problem here _ is only the problem of détermining how the utility’s share. of the system’s actual tax liability should be determined ;. _ or the extent to which a regulated, utility’s tax and rate- paying consumers should realize or be deprived of a saving in tax cliarges which in utility law are imposed upon and _ chargeable exclusively to utility ratepayers.? * 2% Consolidating the income of several wholly-owned- corporations. for the purpose of determining system income is especially ap- propriate in ‘the case of public utillity systems, because ‘ment often chooses to organize those systems into a series of . separate corporations to facilitate doing business in each of the states in avhich the utility system operates: This is the reason - * used to justify the.use of the consolidated return by utilities before Congreks; and this also is the reason Congress removed the 2% penalty tax for public utilities that: file consolidated‘ returns (see House-Ways and Means and Senate Finance Com- mittee hearings on H. R. 8400 in the 84th Congress, the bill that — became the Internal Revenue Code of 1954). And in removing that penalty*tax,.as well as in making the privilege of filing consolidated returns available to public utilities as well as to. other taxpayers, Congress was aware that from the time of the ie Supreme Court’s opinion in the Galveston case, 258 U.S. 388, (1922) if not earlier, where the law-of public utility regulation _» Operates it requires utility consumers to pay the full amount,- but not more than the full: amount, of the utility’s actual tax liability, or its allocated share of the system’s actual tax liability. BREE GEE GON NS NN, OSE TR, Biede Mey Skat et RE RRS 7 Beg Ps - ‘The difficulty i is not in Gaerinining whether this tility’ © ‘share of the tax saving should benefit the consumers who "pay its taxes: the difficulty is im-estimating this utility’s - *» proper share of the saving. Many methods for allocating © .. that saving or estimating the utility’s share thereof have been explored, but each has been found wanting by my colleagues. Speaking for myself, I must say that the method - used by Cities Service for allocating its total tax’ liability and tax saving among some of its subsidiaries, and by the staff for allocating that total liability and saving among all _ Of Cities. Services’ subsidiaries, i is the most logical method . _ _ and the one which best meets the: standards and require- \ ments of utility regulation. Further, it alone of all methods . considered here is the one which reflects those vigorous expressions of Congressional: intent. in this particular '- matter which should guide the exercise of our discretion. _. .. Briefly, the facts in this case relating to the three-year period under review are these: The system of which Gas company is a part consists of 37 separate corporations, about 6 of which are regulated; and the tax’ losses of - some of.the systeni’s companies reduce the taxable profits .° of its regulated and unregulated companies and thereby _ reduce the system’s over-all actual tax liability. The amount of the system’s actual liability—or its tax saving (ie., the difference between the total tax that would have been "paid if each company in the system had been taxed sepa- me rately; and the tax: actually paid on the profits of those . companies as reduced by the losses of the other companies) — properly should be distributed or apportioned over the . 8ystem’s profit-companies on-the basis of the.separate tax- ae -. able income each profit company had; and the record ‘be- fore us is totally barren of any sensible reason for differ- entiating between regulated and unregulated companies. At least it is barren of any reason which will stand gana in the — "= the public _— ee ~ - . 7 e . ° prea rentninceteescnsen ce Ba LED AE I EI ERE ARO OLS Sage ° : N ‘ ie. . ‘ * 2le Here ne total profits of the’ system’s iia companies for the three year period were $123.4 million; other .sys- - . tem companies had tax losses totalling $100 million ; taxable _ system income thus was $23.4: million; and consolidated system tax liability for. the three-year period was $11.4 million. The tax saving thus realized was the difference ~ ~ . between the $63.2 million that the profit-making companies would have paid if they had been taxed separately, and the $11.4 million that the system actually paid, or (exclud- ing a $4 million refund in _—, of 1955 taxes) roughly" .$48 million. . - Taxable profits of Gas company alone ¥ were > 42 million; . and it would have paid a tax of about a million éf it had been taxed separately. | If the system’s over-all tax liability or-taxa Saving had oa -. been distributed among the profit companies proportion- ‘ately on the basis of their separate taxable incomes, sitice Gas company’s $42 million of taxable income was about — 35% of total system‘taxable income ($123.4 million), Gas company should bear about 35%..(or $4 million) of the. system’s actual $11.4 million tax liability; and should bene- fit by.about 35% (or $17 million) of the — S48 million tax saving. . But Gas company did not éharge ite consumers $4 mil- '_ lion for taxes. It charged them the $22 million Gas company .. "would have had to pay éf it-had been taxed separately. Gas company turned over thé $17 million saving to the __ parent company; which, the record shows, used these funds to subsidize its non-regulated activities. s. : 8 We are only’ concerned with Gas dabianess $17 ata share of the system’s $48 million tax saving, because that 417 million was | actually paid in cash by Gas company’s consumers who pay its “taxes.” We are not concerned with the other $31 million. -To _. the extent it is attributable to the system’s unregulated com- - panies, it belongs to the stockholders and management who must see that the taxes of those aeateaes are paid. Fi Raat: 22¢., ~ ‘ 4 . = 9 ‘ Gas company says this is all right. It says it really did - have a “tax” bill of $22 million, because the parent company on its books did not allocate any of the system’s $48 million . -tax saving to Gas Company. The parent company purposé- fully assumed that. its tax losses wiped out the taxable’ income of its unregulated companies (only), and that the 3 whole 37-company system’s tax liability was chargeable to the regulated companies alone. The result of this “alloca- tion theéry” — to use a.very dignified term —is that Gas . ‘company’s consumers were charged an‘amount for “taxes” that was larger than the. actual tax liability of the. entire 37-company system.4 Moreover, Gas company did. not re- duce its “tax” charge to its consumers even in years when the ‘amount of system tax loss was so large that, after “oa wiping out all unregulated company profits, it should have reduced Gas company’s separately computed “tax” charge. — The.parent company did not give Gas company’s consumers the benefit of Gas company’s share of the tax savings as - computed, even under its own arbitrary | allocation method. ' The position of Cities Service ‘gompany i is that none of the . System’s tax ‘savings should be used to-reduce Gas com- pany’s hypothetical “tax” charges to its consumers, because _ those consumers did not finance the tax losses that gave rise to those savings. But, as we shall see, that is’ exactly i what the consumers did, although involuntarily. , This entire practice i is in complete conflict with the estab- _ lished principle that because a utility’s consumers alone _ ‘Inust pay its entire tax bill under rates having the force of law, a utility cannot charge its consumers more for taxes than the actual amount, estimated where necessary, that the | ‘utility actually paid or contributed to the U.S. Rreaery, | 4 During the three-year ) period i in ‘alates, iil total system actual tax liability ¥ was oo teu) $11.4 million, Gas omypeny’ 8 consumers were charged $22 $22 million for “taxes.” ' the tax thereon is paid by, utility consumers. so that thefair _ return will not be reduced by taxes. Once the utility or its _— '. stockholders have received that return, they may notobtain more by claiming higher, fictitious, er hypothetical costs -they. might have. incurred if they’ had. been organized or operated in somtie other, wnreal manner. To allow additional — return — over and above a fair return as defined by the. ' courts — is to countenance unjust enrichment of.the utility or its owners at the expense of the seepeyee. : oe 3 My solleagues, perhaps unwilling to chart aial es tory. policy amid the consolidated: tax legalisms raised herein, prefer (a) to separate the system's business into its regulated and unregulated portions; (b) to apply all of the system’s tax losses (which normally stem from some of _ its unregulated activities). to reduce the profits or tax lia, bility of its unregulated profit companies first, and then (c) to use whatever loss deductions may remain to reduce the _, liability that the utility or utilities would have had if they were separately taxed. This, it will be noted, gives the ’ priority of use of the system’s tax loss benefits primarily or even entirely to its unregulated profit companies.® P * eye 5On the basis of Gas company’s average “tax” charged during: the three-year test period used herein, Gas company here claimed. an average annual “tax” allowance of $7,055,981; on the basis of an allocation of the system's average actual tax during that period, staff claimed, properly, in my opinion, that-Gas com- °. -. pany should receive a tax allowance of $789,082; the majority opinion herein (after normalizing tax deductions for liberalized’ depreciation and accelerated amortization and making other refinements) grants Gas company $5,866,847. This is not regu- lation at its best. My reasons Sac — this result are set | forth hereinafter. ? or more than the utiljiy’s proper rund satiate ities of the ae . system tax actually paid: In the utility field, ‘stockholders are entitled to a fair, constitutional rate of return, ‘and - ° r ae ee In passing, it may be noted that if this policy is equitable “_ if “turn about is fair play,” the priority could and perhaps should be reversed for regulatory purposes... That — is, if preference i is to be given either group of subsidiaries, _ regulatory authority might properly apply the tax loss benefits first, towipe out the tax liability: of the regulated. subsidiaries. (which almost invariably operate at a taxable _ profit), and then to use whatever loss .deductions.may ~ remain to reduce the tax liability. that the unregulated subsidiaries would have had if their‘ taxes had been sep- arately computed. This would not alter the system’s over- | all tax liability. But it would produce significantly. larger tax reductions for the regulated companies, which would ' eventually be translated by regulatory authority into re- “ “+ duced rates and gross revenues. it would likewise.greatly. reduce the expendable funds, generated . in the guise of - “taxes” paid by utility ratepayers, which the parent’ com- pany now disburses across the face of the earth to operate the speéulative ventures of its various non-regulated cor: ' porations.® It is these: specific corporate operations, in large part financed. and underwritten by-“taxes” extracted from ratepayers, which give rise to the tax loss benefits . . "which the parent company claims it has the exclusive right . to'enjoy on the ground — the ratepayers had nothing to do with them! ae | naturally Sillows that icine of the. priorities herein approved would produce another barrage of legalisms and redoubled screams of rage and pain from the parent com- pany. The reader, whether’ he is a judge; a corporate law- yer or a utility ratepayer, can reach his own conclusions: as _ ' 6 That the great bulk of ‘ins far-flung speculative sialic. are -* of no benefit or advar ‘age to consumers who are served. by Gas company — and wh’ y its “taxes” — is made shemeantiot clear by oe majority op: ion in the second perseraph thereof. . iti to the. validity of such protests. For if he has followed the © . discussion this far he can see.clearly what has been happen- ‘ing and he imows exactly to whom it has been happening., In any event, it is clear that the policy adopted here gives priority and. favored treatment to the non-regulated com- ‘panies. rather than. to ‘those whose rates are subject to ~. _. - regulatory control by this and other commissions. I should . ~ _. have preferred. that no priority or favored treatment be ~ given to either, group; and, speaking only for myself, I . therefore believe that the actual tax and actual tax alloca- ' \ tion method here urged eck the staff i is the eric — | | . to this problem. Eye tie 1. ‘ : z a Most reluctantly, however, and solely for the purpose of énabling a decision to be reached in this ease, I concur in _ the policy adopted: by my. colleagues . of ‘the. majority. © f Though far from perfect, it is a discernible iniprovement : _over the situation that has existed here and in numerous other corporate families for Imany years. The.approach of * _ the majority, which is moré in the nature of an assignment than an allocation, will serve at least to limit the tax liability | of Gas company’s ratepayers. to tlie actual liability of the | entire system as a whole. It at least will prevent them fro having:to pay a tax charge. that-is larger than the. actual toy Yo A liability of the entire system of which Gas company is a bf - minor part.’ This is no small matter, for Gas company’s ' lawyers ‘have been unable to. obscure the fact that i in 1958, when the tax liability of the ‘total system was zero, the parent company nevertheless’ imposed a “tax” charge upon ~~. oe the ratepayers of-the regulated utility in the amount of lw” $6,367,534, not one penny of which was paid tothe Federal r 1 Gas anaiat jurisdictional revenues represent about 5% of ‘the — 8 gross revenues. \" g — \ ; roe 2 z ‘ ¢. > ‘ Pe - ‘Int sum, this method of apportioning the tax saving and tax burden has the limited virtue of accommodating, to a very small and unsatisfactory degree, the two irreconcilable ’ eoncepts at war with one another here. That.is, it permits - company and stockholder to enjoy an overly generous por- tion of the benefits which they erroneously claim are entirely theirs by virtue of the tax law alone; and it goes - - some small way toward producitig a more equitable charge to ratepayers for the estimated amount of tax liability actually incurred by or ' attributable to the regulated utility that. serves them. : I should have preferred that we face our ssinieiiiiiitilen : squarely and discharge them fully. Regrettably, that is not possible; and without my concufrence:the little that has been accomplished herein will be lost. It is only on that account that I concur in the result nenehey by my colleagues of the majority. : /s/ Howan- Monoam, Commissioner 0 huned . ° Howard Morgan, Commissioner — WOODWARD, Colimissioner, joined by. - CONN OR, JB, Commissioner, dissenting: This is ‘a major rate case in which the Commission must decide a fundamental and critical question: While the Com- mission,-in the past, has properly insisted that certain tax advantages to be obtained from filing a consolidated return © for groups composed entirely, or predominantly, of regu- ~ lated companies, be passed on to consumers, it has not held that business losses of unregulated and unrelated corpora- - tions — in & consolidated return should be uti- : % ‘27 ' lized for the benefit of the consumers of a regulated natural gas company. The latter issue is before us for the first time. The majority concludes that the proper method to be applied in computing the Federal income taxes to be in- cluded in the cost of service of a regulated company where that company has joined in a consolidated tax return with affiliates is (1) separate the companies into regulated and unregulated groups, (2) determine the net aggregate tax- '. able income of each group, and (3) apportion the net total’ - consolidated tax liability over a representative period of . time between the two groups, and among the companies in .. the regulated group on the basis of their respective taxable -incomes:. If each of the resulting groups shows a net tax- cable income, this formula would fairly, allocate the total tax in accordance with the respective amounts of taxable income. But where, as here, thé unregulated group has a net loss for the test period, the formula appropriates that loss which was the result of expenses and losses finance by’ the stockholders and deducts it from the tax allowance to - - be charged the ratepayers, thereby granting to them the entire benefit emanating from the tax loss. As applied. here, the $2.4 million net taxable loss of the unregulated group is handed over to the ratepayers by deducting it\«— from the taxable incomé of Gas Company, thereby reducing its tax allowatice by $1.2 million. a : oY The Opinion and Order adopted by the majority is based ". on the false premise that, as to industries regulated by it, the Commission has the authority to limit the effect of a: mandate of Congress as expressed in Section 1501 of the Internal Revenue Code. Depriving Gas Company of a tax allowarice which would be routinely granted to it by. the Commission if it were not for its having a common owner with an unregulated ahd unrelated petroleum’ business, should not be done without’ some very persuasive reasons y Fak - ; | 7 a 28 . @ : . based: upon sound rate-making policies which impose no confiseatory rates, which balance equitably consumer and investor interests and which take fully into consideration ~. the impact of such action upon national econemic policies. At: the root of regulation is economic policy: The problem of econdmic growth in the United States is crucially i impor- . tant and inseparably related to economic growth is invest- ment. Under the majority view, the consolidated return would not result in stimulating investment and. growth begause it has*the effect of converting hon-jurisdictional ‘losses within the»parent company’ . system into a rate. reduction for gas consumers. The majority opinion is-not ... ~ “supported by persuasive reasons based on sound policy: Since this Commissién” possesses only the legislative .. powers which the Congress has granted to us, clearly we _ have'no power to-amend Section 1501 of the Code. . Apart _ from the fact that there ‘are no tax savings attributable to the inclusion of Gas'Company in the ‘consolidated return, ‘the majority view is unlawful. because it has the effect 5?. regulating non-utility enterprises beyond the Commission’s - _ jurisdiction; it would strip the parent company of con- ae gressionally-conferred rights to tax deductions of its, non- jurisdictional subsidiaries. ~The —" is in error and ' I dissent. . oe: . The Cities Service. per is operated oxindipaily ‘asan integrated petroleum operation. The jurisdictional reve- nues of Cities Service Gas Company, a ‘wholly owned. -, sub ry.of Cities Service Company, comprised approxi-. . mately 4.88%, 5.14% and 6.16% of the .total system reve- nues in 1957, 1958, and 1959. respectively. ,Only 3% of the gross revenues of two other companies in the system are | subject to Commission jurisdiction." . 1 Cities Service Prodiietion Company-and Cities Service 94 Com- 3 pany (Seawer). o sminslodgnibe So sists . sib ibeanaabinysait a Te MA gi ee ete DEAS cont be BIS AM aT . —y 3 of 52%. a o> “In this pitinsding, the Cisnintasinin § is ‘ etnbites the, proper Federal income .tax allowance, to be. included in: _- the cost of service of Gas Company, one-of. 37 subsidjaries .. . joining the — Sompeny in Be filing of a consolidated return.” ‘Chapter 6 of the Stacia Revenne Code, “Consolidated Returns,” Section 1501, “Privilege to File” Consolidated ' Returns” gives to “an‘affiliated group of corporations the privilege of making ‘a consolidated return with respect to ‘the income tax imposed” on corporations of. which ‘the parent company owns 80% or more of the ontstanding : stock. When corporations join in such returns, the Code, Section 1503, levies an additional 2% -tax upon all includ- oe able taxable income except that of utilities such as Gas “ote Company whose tax =m remains at the ere rate | -- > The precise intent of: Congress i in granting the privilege — of the consolidated return to an affiliated group of .cor-,: porations was to encourage companies to expand their » overall businesses for the betterment of the national and international-economy and to eliminate any tax disadvan- tages of doing such through subsidiaries. ~- . ec The parent company here owns, ‘directly or indizectly, Ms 100% of ‘the stock ef every a which —. | - 2 Consolidated simetne inertial on the ulnitinlts of having a tax -on the true income of a single enterprise even though the: waa ness is operated through more than one corporation: _ The primary advantages of filing a consolidated. return may ~ be summarized we in pow e offsetting o operating losses of one company against the profits of another. _. (2) The consummation ‘of. inter-company transactions without the recognition of income. . (3) The designation of the parent —— AS | agent of the — croup. for = tax purposes. | ; % way street. *¥ _ As Examiner Kelly has eile declared, “The Code does not contain the criteria for rate ‘making. in this ca Under fhe Code, one only considers whether the corpora- tigns involved are qualified to participate in the consoli- dated return, whether-such qualified corporations have law- _ fully computed their respective tax labilities, what’the con- a « bad S & “ 3 : Zw . ~~ one ee 826 solidated tax should be, and ‘whether all other tax laws or regulations have been met’... The Commission determines the proper return to be allowed upon the rate base and the proper income tax allowance to make the return net to the investor, and no tax law or regulations should interfere with the performance of this function by the Commission ‘, The Commission has the full right to examine all figures © —— in om consolidated tax return, and to ascertain from what situations or circumstances they may: have resulted. There considerations are demanded by the public ‘interest. The. . publie interest demands that a petroleum business receive, at the hands of the Commission, at least as much encour- agement and incentive in the conduct of its exploration and — development activities as the national policy particularly as expressed in the income ‘tax laws, dictates.” " ‘The uncontroverted evidence of record conclusively es- tablishes that for each of the test years selected, ‘the inclusion of Gas Company added a cost to the consolidated "return in an amount equal to 52% of Gas Company’s tax- able income. In 1957, the parent company paid a consoli- dated tax of $12 ,251,639 on the income of its subsidiaries of which $5,860,398 was attributable to and equal to 52% of . -Gas-Company’s taxable income. In 1958 the parent com- - pany received a tax refund of $6,367,534, but it would have . received a total refund of $10,224,666 if Gas Company had not participated in the consolidated return. Thus, the parent company, in effect, paid a tax of $6,367,534, repre- ; senting 52% of Gas Company’ s 1958 taxable income, by ‘ .foregoing the additional refund in that amount. In 1959, . the parent company paid a tax of $2,965,014, but it would - have received a refund in the amount of $6,566,531, if Gas ee Company had not been included in the consolidated return. Thus, the parent, in effect, paid $9,531, 545 in payment of the tax at the rate of 52%-on Gas Company’s taxable income. The record: shows that Gas Company’s taxable income. was not necessary td produce tax savings in the test years. me oro sey are : There i is no. ahi that: Gas Company would pay a 52% | _. tax had it been considered on a separate basis. The parent, ~° eee - ae by including Gas: Company in the consolidated return, ———— gdded a cost thereto equal to 52% and allocated a 52% cost to the Gas Company. I fail to see where the inequity of such an allocation lies. ‘The parent company obtains no tax ‘or other advantage from including Gas Company in its consolidated ‘return. Owning 100% of: the stock of Gas Company, the law requires that it includes this subsidiary in its.consolidated return. Gas Company, being a regulated 7 monopoly with a practically assured net income each year, is not among the subsidiaries with losses to offset against . the total net taxable income of all subsidiaries having such - losses. Therefore, no tax saving wh&tever results to the” | parent company from the inclusion of _ Company i in the consolidated return. The examiner noted further, “Any imnediate but per- haps temporary tax saving accomplished by the filing of a | _ consolidated return is not in any sense comparable to a real and permanent tax saving effected by taking a lawful | deduction and passing on ‘the benefit thereof to-consumers. * “The tax saving effected by proper deductions is a definitely known and fixed saving for the tax year, which is certainly not true of any. temporary saving effected through the . offsetting of. business losses against business gains. It is" not the mere filing of the consolidated return but the fact of business losses having been sustained in ‘the particular witich permit the temporary tax savings. The . distinetior mus at be acknowledged between the fixed and g i eS 2 gh ont, a ee) eee 2 & ee PERERA ihe tet AN et aay Mey be IS SATE A Fae 0h a RAE IRE I EE e certained } accomplished by- utilizing ieiineie losses in a cans¢lidated return. The latter should not be used to lowe 4s allowance in a cost of service.” a j . ' ce AO AEE LIE FLT TIN cent on Fe ee: eam Ore neteetene s ‘ pnts : is ee Completely ignoring the fact that Cingriens has seisribad ' .-that-tax payers may lawfully ‘use their tax losses to offset their taxable income in the manner provided by statute, the majority imparts its own preemptory economic and regula- | tory philosophy to strike down an act of Congress. The majority cites no authority of the Conimission o or the -. Courts to sustain this onerous theory. This proceeding cannot be resolved on the basis of an imagined rationale which is in fact'contradicted by the record or by the recit- - ' ing of an appealing slogan. This is a clear deprivation of property without due process of law since the majority proposes: to take away from the non-utility subsidiaries and the parent company valuable property rights which ‘ belong to those companies. The tax deductions given by Congress-as incentives to-non-utility investment should not | be taken away in such manner. No company owes anyone a duty either moral or legal to incur, or to continue to incur, losses in non-jurisdictional business so that jurisdictional Fates can be reduced.- Following the theory of the majority, how can an integrated oil company, which also has a nat- ural gas pipeline company within its corporate structure, compete on equal terms with an oil company not having similar“pipeline operations, if the latter can use all of its tax savings in its oil business but the former cannot? Clearly, it cannot | so compete. I ‘would Teflect on a point that deserves serious consid- eration. All but three of the 37 corporations involved in this proceeding are, in some way, connected with the petro- ‘ leum business operated by the parent company. Conceiv- ably,.the parent’s business could be conducted: by a depart- mentalized single corporate entity. If this be true, there would be no losses to offset against taxable income since . . the single’ corporation would show an overall profit al- though some of its departments would lose money.’ Under ee : , er Oe eA PEMA TEY Neer oe SaaS = Stas ehh ihaier OREN 7 Aa Sheets EUS are . 856° > ea ; . ‘such. circumstances: no. consolidated return would be filed ~“gid“the~Commission would routinely grant to the Gas : Company a tax allowance based on the statutory rate of 52%. In the instant proceeding, thé-majority places a pen- alty on the parent company because it has lawfully chosen to operate its world wide business through subsidiaries. 7 Such a regulatory policy is unsound and inequitable. - The fact remains that Congress has given the parent — company, not this Commission, the right to decide whether or not it will take advantage’of the consolidated return and the benefits and obligations accruing thereunder. The Com- mission cannot interfere with this lawful decision of man- | agement so to conduct its business. The tax laws recognize this and they have given companies the opportunity to so operate without sustaining a tax loss becatise of their bus- . iness activities. Congress did not commit management judgments to an administrative agency; this is the line past — . which a regulatory commission such as ours may not go. _ If the economic advantage arising out of the filing of a . consolidated tax return is to be passed on to Gas Company’s ~ _ yers, which is the effect of the majority decision, the of Congress will be defeated. Here, the language of re statute is plain and unambiguous and it must be given effect according to its obvious meaning. By allowing the taxpayer. the full advantage provided by the consolidated — return, no attendant harm results to the ratepayers. This method does not. result in higher rates to the consumer, it simply does not operate to reduce them. This, view is in harmony with Section 1501 of the Internal Revenue Code, is fair to the ratepayer yet it does not constitute an eine priation of the constitutional powers of Congress. The majority decision results in glaring defects. and _ inequities; they have not offered any valid and compelling 36c reasons for their decision. Oiatirery 1 to the views expressed by the majority, I believe every effort should be made to afford all legitimate and necessary incentives to private enterprise while, at the same time, —_—— the consumer ratepayer. | ” The ian who heard the testimony in this Se caiailiae correctly concluded, upon the basis of the record evidence and the pertinent law and.regulatory policy, that the Fed- ° eral income tax allowance included in the cost of service supporting the settlement agreement approved by the Com- mission in its, order of May 27, 1961, computed at the . statutory rate of 52%, is not excessive or in any “way im- proper, and should be approved. In my judgment, the — examiner’s decision should be — 4 fj, Hania Wetwvise /s/ LJ. O'Connor, Jn. o: : _ Harold C. Woodward, Commissioner - L.-J. O’Connor, Jr., Commissioner . 4 of . x if 1d- : | APPENDIX Bit TAXABLE NET INCOME OF. UNION aimee eatycssicas COMPANY rie adele aide Bo bjpdeettons sl Net - and Non- (100% Non- ; Year ‘ Income Jurisdictional) Jur ) oa A). "@) i: me | Senne ‘ $(2,269,975) $(1,486,211) $- (783,764) « a Seana 4,852,736 3,430,415 1,422,301 _ nn sre” (1,958,898) - (461,366) . (1,497,632) 1960 pssserreeenee (4,833,704) (1,486,232) (2,897,472) - A) ne (160,285), 460,648 . (620,933) - ie Total .... Ia coc $ 507,254 $(4,376,880) Col, (1) —Ex. 36 (Revised) (hrm) id en Col. (2) — Ex. 14-1, Sch. 2; line 12, ol. 4 (RB I'6) a Col. (3).— Difference. between Col. (1) and Col. (2) | ‘Note — Gas operations of Union do not reflect income of $180,131 ‘for amounts received for prepaid gas (Ex. ” 1, Sch. 7, p. - 1, L. 10, Col. 10) alarien --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0076%3A10. Public record. Not legal advice.